PulteGroup, Inc. (PHM) Q1 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. My name is Ryan and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup Inc First Quarter 2015 Financial Results. All lines have been placed on mute in order to prevent any background noise. After the speakers remarks will have a question-and-answer session. [Operator Instructions]. I would now like to turn our call over to Jim Zeumer. Please go ahead.

Thank you, Ryan, and good morning to everyone participating today. I want to welcome you to PulteGroup’s conference call to discuss our first quarter financial results for the three months ended March 31, 2015. Joining me for today's call are Richard Dugas, Chairman, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Vice President and Financing Controller. A copy of this morning's earnings release and the presentation slide that accompanies today's call have been posted to our corporate website at pultegroupinc.com. We'll also post an audio replay of today's call to our website a little later today. Before we begin the discussion, I want to alert all the participants that today's presentation may include forward-looking statement about PulteGroup's future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. This risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now let me turn the call over to Richard Dugas. Richard?

Thank you, Jim, and good morning, everyone. During our last conference call we commented about seeing a strengthening of demand starting midway through the fourth quarter and carrying into the first few weeks of January. I’m pleased to report that the momentum and demand which began building in Q4 continued through the first quarter and has gotten the spring selling season off to a good start. Since the housing cycle turned positive several years ago we’ve stated our belief that unlike recoveries in the past we didn’t expect to see a rapid V shaped rebound. Our expectations were that this would be a longer more gradual recovery with periods of faster and slower growth but with an overall upward bias consistent with the sustained rebound in housing demand. The early read on the industry's 2015 spring selling season it is that we’re now in one of those periods of improving demand. Having participated in a number investor meetings over the past couple of months, one of the questions we’re often asked is what has been the catalyst for the improvement in the country’s housing demand. In the absence of a single dramatic change in any of the underlying demand factors it is likely a culmination and continuation of market dynamics. First, with Boomers and Millennials acting as powerful bookends certainly the demographics are favorable and supportive of an ongoing rebound in demand. Millennials maybe doing things later but their desire for home ownership is well documented and our strong Centex results which Bob will discuss shortly support this thesis. Turning to active adults with the youngest boomers just now passing 50, this group remains a tremendous source of future demand and our Del Webb brand is unmatched in its ability to serve these buyers. Second, interest rates remain low and with recent cuts in FHA fees the monthly payment has become a little less expensive for many potential homeowners. The mortgage market generally remains tight and we don’t expect any material change in credit availability anytime soon but every little bit helps as our Centex results suggest. And third, consumer sentiment and the job market trends have certainly been positive with more than 3 million jobs created over the past year. While these numbers jump around from month-to-month there are clear signs that point to an improving economy and a rising number of household formations. Looking ahead along with more jobs we’d like to start seeing more wage inflation which should make it easier for would-be home buyers to afford a mortgage. Given the acceleration in US housing demand in the early stages of spring selling season our expectations are that the strengthening of demand is sustainable and should drive better new home sales for all of 2015. Like the overall industry PulteGroup experienced strong demand in Q1 and is well positioned to deliver yet another year of strong operating and financial performance in 2015. First quarter sign-ups of 5,139 homes were up 6% over last year on a 5% increase in community count. I am pleased by the fact that we were able to increase sales while maintaining high absorption paces without pushing incentives meaningfully during the period. Consistent with our value creation strategy having strong sign-ups per community at high margins is a more efficient business model for PulteGroup in trying to drive volume aggressively. Our continued steady improvement in return on invested capital these last several years indicates our strategy is working. One of the things we have emphasized during this housing cycle is the need to focus on better located properties which typically mean staying with the better closer end locations and within established areas of buyer interest. For the most part buyer demand in the secondary locations throughout our markets remain tepid. So even though the land may be cheaper, it doesn’t necessarily make it a good investment for us. The strong margin performance we continue to enjoy is partly the result of sticking to our land investment discipline. Speaking of land investment the 5% increase in community count that we reported understates the amount of activity actually taking place in terms of getting new communities open. In the first quarter we grand opened almost 60 new neighborhoods which keeps us on track with previous guidance that we expect to open upwards of 200 new communities in 2015. Turning over 10% of our communities in a quarter is a lot of work especially in today’s environment were entitlement and land development delays grow increasingly common. We of course track the progress and performance of our communities in relationship to their original project plans and a number of the communities end up running behind schedule in terms of when they register their first sign-up. Still through a lot of hard work for our land teams we are getting the job done and I am optimistic we can reach our community count guidance for this year. We are encouraged by market conditions during the closing months of 2014 and through the first few months of 2015 and remain positive about expected housing trends for the next several years. Now, let me turn over the call to Bob for a detailed review of our first quarter results. Bob?

Thanks, Richard, and good morning. Against the backdrop of improving conditions that Rich discussed, our first quarter operating results were in line with our expectations and with the guidance we provided on our last call. More importantly our Q1 results have well positioned to deliver another year of excellent operating and financial results. Looking at our first quarter numbers home-building revenues were $1.1 billion which is consistent with last year. Our current quarter revenues reflected 2% or $6700 increase in average selling price to $323,000 offset by 2% decrease in closing the 3365 homes. Our conversion rates in the first quarter dropped from the prior-year as the production was negatively impacted by a number of factors including weather in certain markets which hindered land development and house construction, a continuing challenging municipal entitlement environment, and tight labor resources. We expect that we will be able to get our production related closings back on schedule over the balance of the year with the majority of the delayed closings occurring in the third and fourth quarters. The 2% increase in average selling price for the quarter was driven by price increases realized in each of our brand with Centex being up 2% to $208,000 and Pulte and Del Webb each increasing by less than 1% to $387,000 and $325,000 respectively. On a year-over-year basis, we saw a continuation of recent trends in our mix as Pulte continued to increase as a percentage of our total closings. More specifically closings in the first quarter break down as follows: 45% of closings from Pulte, 30% from Del Webb and 25% from Centex. This compares to 41%, 32% and 27% in the first quarter of last year, but it’s consistent with the fourth quarter of last year. Gross margins for the first quarter was 22.7% which is down a 110 basis points from last year, but it is in line with the 2015 outlook we provided on our fourth quarter earnings call. Our Q1 margin reflects higher land, labor and material costs as well as the impact of acquisition accounting associated with the Dominion transaction which impacted our Q1 margin by approximately 30 basis points. These headwinds were partially offset by lower interest expense resulting from our deleveraging over the last two years. Looking at option revenues and lot premiums in the quarter, we continue to realize higher dollars on both lines. In the quarter option revenues per closing increased 13% or $5700 over the prior year, while lot premiums in the period increased by 3% or $400. Sales discounts in the quarter totaled 2.2% per home which is up about 60 basis points from last year, a little change for the fourth quarter. Given our strong Q1 margin performance along with ongoing opportunities from our value creation initiatives and our positive view of the market we continue to target full-year 2015 gross margins of approximately 23%. As we’ve said in the past there will be movement in margins up or down as we move from quarter-to-quarter and dependent upon the mix of closings. SG&A costs in the first quarter totaled $161 million or 14.8% of home sale revenues compared with $145 million or 13.3% of home sale revenue last year. The higher SG&A spend in the period reflects investments we’re making in people and information systems as well as increased start-up cost associated with the large number of new communities we are opening this year. The overhead spend in Q1 was consistent with previous guidance for 2015 SG&A expenditures to be in the range of $160 million to $165 million per quarter. Our financial services operations reported first quarter pretax income of $5 million compared with $22 million last year. Note that last year’s pretax income included $19 million benefit related to the reversal of mortgage repurchase reserves. Capture rate for the period improved 82% up from 78% last year. Our reported Q1 income tax expense of $41 million represents an effective tax rate of 42.6% which is higher than our previous guidance of 38%. The higher tax rate for the period reflects the charge of $0.02 per share relating to an adjustment to our deferred tax assets resulting from a change in our perspective effective tax rate due to tax planning initiatives. We currently estimate that the company normalized rate for future quarter this year will remain year our previous guidance of 38%. On the bottom line the first quarter net income was $55 million or $0.15 per share compared with net income $75 million or $0.19 per share last year. Note that our prior year results include $0.02 per share of net benefit relating to the reverse of mortgage repurchase reserves which was partially offset by charges in connection with debt retirement activity. Shipping to homebuilding operations the company had 5387 homes under construction at the end of the quarter of which 19% respect. As a percentage construction activity this is comparable with the prior year. At the end of March our finish spec inventory totaled over 345 homes so we continue to maintain a tight control on our spec production. In the first quarter we improved approximately 2000 lots for purchase and finish the period with the 135,000 lots under control. Our lot position includes 39,000 lots controlled under option. This represents 29% of our lots which is up from less than 26% last year. Of our controlled lots approximately 23% are finished with 18% currently underdeveloped. We spent $484 million on land in the quarter of which 49% was for development of exciting position and 51% was for acquisition. That spend rate is behind our full year authorization at $2.4 billion, this is due to the fact that the timeline in a number of land transactions have gotten longer as municipal accruals and/or land development is taking more time, but we still have a lot in the pipeline and are working hard to get deals approved and into production. Even though housing demand in 2014 was up only slightly over the prior year, land prices did not retreat and according to our division President have actually risen in 75% of our markets. As we’ve consistently indicated we intend to remain disciplined in our investment in the business and only fund projects that meet our return thresholds. In support our broader value creation objectives we continue allocating capital consistent with the priorities we articulated most recently at our investment day. First to invest in the business and pay dividends then to opportunistic M&A of any excess funds being returned to shareholders in the form of share repurchase activity. During the quarter we repurchased 4.6 million shares for a $100 million or $21.75 per share. This level of activity is comparable to Q4 and reflects a stated strategy of being systematic in our approach to share buyback rather than trying time to market. We ended the quarter with $1.1 billion of cash and with the debt to capital ratio of 28%. Our debt to cap is unchanged from the prior year. I will note that we're likely to use the portion of our cash to retire $238 million in bonds which mature in the second quarter of this year. We passed the balance sheet with sign-ups in the quarter increased 6% to 5,139 homes. On a dollar basis sign-up revenue increased 6% to $1.7 billion. By brand unit sign-ups increased 13% at Pulte, and 6% at Centex and decreased 7% at Del Webb. The decrease at Del Webb is due to the close out of a number of selling efforts in Del Webb communities. Absorption phases increased 8% at Centex and were essentially flat at Pulte and Del Webb. We are certainly encouraged by the improved sales pace among entry level buyers and particularly in some of our largest Centex communities which are experiencing notable increase in sales phase. For the quarter we operated from 613 communities which is up 5% from the same period last year. We continue to forecast operating from approximately 620 communities in each quarter of the year and are on track to open over 200 new communities in 2015. One last data point we ended the quarter with a backlog of 7,624 homes valued at $2.6 billion which is up from 7,199 homes valued at $2.4 billion in March of last year. Now let me turn the call back to Richard for some final comments.

Thanks Bob, as I talked about at the beginning of the call for a variety of factors the spring selling season was off to a very good start with improving traffic, manageable inventories and select pricing opportunities across many of the markets we serve. At a regional level many of the trends we have discussed during the number of the previous earnings conference calls continue to develop during the first quarter of 2015. More specifically on the East Coast we saw very solid demand up and down the coast with Florida and the Southeast experiencing strong buyer interest throughout the period while demand improved in the mid-Atlantic and Northeast markets as the quarter progressed. Once again the Carolinas, Georgia and Florida realized the strongest demand some of which was likely people looking to escape yet another harsh winter. Heading towards the middle of the country conditions in the Midwest were generally stable for the quarter although like the East we did see demand improved slightly as the quarter progressed. As I know it’s an area of focus let me spend a little extra time on Texas. In total Texas sign-ups were down 5% in the quarter mostly as a result of the closeout of several large communities in Austin and San Antonio which would be yet to be replaced. Demand in Dallas held up reasonably well while Austin and San Antonio were slightly weaker in the quarter. Specific to Houston sales in the quarter were flat with the prior year although demand slowed as the quarter progressed particularly at the higher price points. So far the impact of lower oil prices seems manageable and with oil prices seeming to a bottom we are optimistic that Texas will continue to be a strong market. Our West conditions held up well during the quarter, but the market, the submarket and the community location all matter as we continue to experienced better demand on a coast of California and we close certain locations around Phoenix, Las Vegas and Albuquerque. On our last call we mentioned our newest Del Webb community called [indiscernible] and Albuquerque. The community comprises 550 homes roughly seven miles from downtown. The community which is open very well is part of an expanding portfolio of projects designed to serve active adult buyers, we want to be closer to a city center and the amenity such locations offer. In the coming quarters and years I expect you will see us open more communities for active adults expanding a variety of sizes, amenity offerings, locations and brands. Overall, we are pleased with our demand developed in the quarter and during the first few weeks of April. We are particularly encouraged by the improved experience in our Centex communities. We are optimistic that this is the beginning of a more substantial recovery in the entry level which is really missing piece of the housing recovery to date. Assuming there are no dramatic changes in the U.S. or globally to have a material impact on employment trends, consumer confidence or interest rates, new home sales should see continued gains in 2015. PulteGroup is also well positioned to see improved operating and financial performance as the quarters progressed given the opportunity for increasing margins and greater overhead leverage as delivery volume increased over the course of the year, particularly in the third and fourth quarters. As the year progresses we will continue to advance our key value creation initiatives and focus on delivering high returns on invested capital. At the end of our formal remarks by recognizing and thanking all of our employees for their tireless efforts to deliver a great home buying experience to our customers everyday. Our success only possible through your passionate commitment. Now, I turn the call back to Jim Zeumer. Jim?

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

[Operator Instructions] Our first question comes from the line of Michael Dahl from Credit Suisse. Your line is open.

Hi, thank you. I wanted to ask I guess Houston being a big topic and a wide range of comments so far from some of the builders that you guys are one of the few to talk about some slowing, but it seems to be very dependent on submarkets, so I was wondering if you could just specify kind of which submarkets within Houston not just that price point but kind of around the area have you seen the impacts trying to get a sense of how isolated it is or broad.

Mike, this is Richard, in talking to our leadership team it's fairly consistent around the whole Metro area of Houston, but as indicated higher price points seem to be a little bit slower. We're very pleased with demand of the lower price points. But I wouldn’t note any particular submarkets has been stronger or weaker than others.

Got it. And I guess if you - the comment on Houston being flat for the quarter, but then demand slowing through, is there any sense if you’d give us in terms of magnitude so that January started up year-over-year and then February and March were down by how much?

No, I think the reason we noted it Mike is that typically you would see stronger demand in March then you would say in February or January and we did not see that through the quarter. I don’t have any specific on exactly how many units it was I would point out that but Houston is an important market for us we go very balanced portfolio throughout not only Houston but also through the state of Texas in the country. So frankly we are not particularly worried about it and continue to like the overall benefit that lower oil prices give a whole country as opposed to the headwinds potentially for Houston.

Right, okay, thank you.

Thank you.

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

Thanks, good morning everyone.

Hello, Mike.

First question I had was just on pricing trends; you noted I believe at the beginning of your remarks Richard that you didn't push meaningfully in terms of incentives to achieve the sales that you were able to book, so I was hoping maybe to get a little more granular if there's any regions that maybe saw pricing power a little better than expected I guess outside of the regional commentary that you gave just specific to prices and incentives if there are any trends that you know maybe surprised a little bit to the upside or downside?

Yes, Mike, it’s Richard again, good question. I think as opposed to regional trends which frankly we felt that the country was pretty consistent what we continue to be pleased with is our ability to drive option revenue and lot premiums higher and this is the multiple quarters in a row that Bob has commented that we have been able to take those numbers up. That’s indicative of a fairly healthy market. As we indicated in our prepared remarks we do have higher input cost land as an example coming through the income statement which everybody does. But I would say we generally believe that the pricing environment is more favorable than not as we go through the balance of the year. So we are optimistic as we indicated we are guiding for 23% margins for the year implying a little bit of growth through the balance of the year so we feel good about pricing.

Great, no, I appreciate that. I guess the second question, you highlighted the sales pace by brand and Centex kind of standing out there a little bit. Bob we talked about in the past kind of your focus on exploring opportunities for building the Centex brand or building that out a little bit potentially to the extent of that market appears to be a little bit more favorable and I know that absorption was a big component of whether or not the economics might become more favorable. I was hoping maybe you could talk about the – kind of where you are in the process of exploring greater opportunities for Centex, obviously there was also a slide on the Investor Day about kind of looking at that brand in 2015 for land opportunities and obviously the economics have to work. So any thoughts around that would be helpful.

Yes, you are exactly right, Mike, we are focused on it as a buyer group in the whole of the Millennials and so we are doing some strategic work around how to approach that marketplace. In terms of how we buy land around that – that hasn’t changed, we are still focused on returns and what we're seeing still to this point is that closer in is where people are choosing to live and so we are seeing better opportunities to drive paces at prices that make sense in that move up space and in the active adult space. I think if we continue to see absorption rates increasing with solid pricing in the first time I think it will make more land available or attractive for that buyer group. So certainly we're focused on it because it is such a big cohort I wouldn't say we've seen a change in our buying patterns around that, but we are looking at ways to serve that group more specifically.

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

Yes, thanks very much guys. Stephen Kim from Barclays. Let me just follow-up if I could on the margin trajectory improving over the course of the year comment. I think you are talking about gross margins as well as SG&A and I just wanted to ask about how margins typically progress through the year, I mean generally a lot of builders first quarter gross margins are generally lower just by the virtue of the fact that you have some marketing expenses associated with community rollout but you don’t have as many deliveries and that kind of thing. And I was wondering if that dynamic was actually going to be at work this year also and if that is kind of what is giving you confidence about your gross margin maybe improving sequentially from what we saw this quarter? Or if there is something else at work?

Well, I think Stephen the commentary was actually around gross margins, not operating margins, so SG&A wouldn’t be part of that, so our SG&A we’ve confirmed that we still think that 160 to 165 a quarter is a good number. And in terms of the gross margins itself as we look at the backlog and as we look at the overall housing in market and the fact that we will no longer have kind of suppression that came from the purchase accounting that we see opportunity and candidly we’ve obviously guided to a higher annual rate that we have in the first quarter. So we think that the margins are actually going to be a little bit higher through the balance of the year; mix always matters to that so if there was a larger proportion of first time closings that can move that a little bit, but I don’t think it moves it much on the whole. I don’t know Richard if do you want to…

No, I think that’s exactly right. I just wanted to – you already said it Bob, clarified that we were speaking to gross margins, not operating here.

Okay, that’s very helpful, so you’re [indiscernible] incorporating very much mix in that, but you are assuming that you are going to see some lift from the abatement of the purchase accounting, that kind of stuff. Okay, my second question relates to a comment you made about land prices being up in 75% of the markets I think you indicated that your folks are telling you. I was curious if you could give a little more color around that, is that a year-over-year comment, if so, how about sequentially, what are prices done in land because I think that you know land prices probably aren’t that seasonal I would think, and which markets are you seeing that and I assume that’s consistent with what you are buying also. So just some color around the land price comment.

It certainly is year-over-year and certain degree – I mean its what folks are telling us they are seeing as they got negotiate land transaction, three quarters of the country our footprint in the country I would tell you is most of our markets and so I wouldn’t want to call one out versus another. I guess the point being really and we’ve said it for a couple of years now land doesn’t move quite as quickly down as it does up and there is I think again for the types of land parcels that we're interested in a competitive landscape. So we are working hard to make sure we buy in terms of that make sense and can support the returns that are – has set out as being requirements due to transaction and for those attracted parcels it’s a competitive set.

And Bob I would just add that we clearly believe our land buying discipline is very, very helpful to returns its also one of the regions that our margins not only are among industry leader several 100 basis points higher than many in the space, but also the reason that we continue to guide for a more positive margin trajectory versus the industry and we believe at the land discipline serves as well. For it’s not about a lot of unit volume although we are pleased with the volume performance it’s about higher returns the combination of the appropriate volume and strong margins.

Your next question comes from the line of Bob Wetenhall from RBC Capital Markets. Your line is open.

Hey, good morning.

Hi, Bob.

Good morning, just wanted to ask you in terms of ASP trends it seems like decelerating and I was trying to understand is just more a function of a mix shift or is it function that’s you had really strong pricing gains in 2014, so the comps are tougher.

Bob, this is Richard. That’s a great question, two things there. I think it’s fair to say that the comps are little bit tougher, but we did have an unusually core mix of closings in Q1 relative to ASP and frankly we don’t think we did it great job highlighting that last call. So the numbers were down pretty substantially simply do to mix. So as I indicated earlier one of the earlier questions we are pleased with pricing trends and you see that through premiums and options trends overall. So it’s a little bit about but we did have a particular weak Q1 mix.

Is that makes reverse then.

Hey, just would find point on that – think about the way the closing sequence works we are going get more closing from warm weather places which typically at lower ASP so its not mix by brands its really geography to drive that. If you look at our backlog you know ASP in the backlog is consistent year-over-year today. So March versus March and it actually up from December.

Okay. So I am thinking you are saying that’s going to reverse as we move forward correct or start to improve.

Right so that the backlog ASP today as I think 335 or $6000 versus the ASP that we actually printed at 323 in the first quarter. Again, geographic matters and were the closings are coming from.

Got it, got it that’s really helpful. And just a follow up you guys got out construction delays negative impacted deliveries. Some trying to think through that and Richard also mentioned the commentary about the difficult you permitting, which I think it lead to extension deliveries, from a timeframe standpoint. Does that me that some of the product you expected to bring online in 1Q actually is going to role in the second calendar quarter instead. So it sound like demand destruction so should we see benefit in 2Q as you are able to result construction delays no it just look in for little granularity what kind of delays you guys are mentioning in it sounds like a transitory problem is suppose to something recurring. Thanks.

Bob your are exactly right and its related to just being an able to get the homes close, no change in overall demand trends overall there we simply missed some units below our expectation in Q1 and most of that make up is going to be in Q3 and Q4. We will get about what we expected in Q2 but the make up unfortunately just given sort of the push and timing we are expecting the vast majority of that in the second half of the year. So it is transitory your timing issue having nothing to do with overall market demand.

Your next question Ivy Zelman from Zelman and Associates. Your line is open.

Hey guys good morning.

Hi, Ivy.

Hi, Ivy.

I understand on Centex product offering in terms of your 200 I think you get 208,000 average price with FHA available at pretty reasonable underwriting 580 if I go you talking about 3.5% down in the back end ratio at plus 50%. Richard you mentioned tight underwriting I guess what you think its tight about that and then secondly as you think about the impairment to extending the Centex brand and getting more absorption is it more impairment because your land doesn’t pencil to the return or what actually happened because I don’t think you are going to see anymore favorable underwriting to FHA right now [indiscernible] about it.

Yes, Ivy we agree with you on that FHA is clearly accommodated for the Centex brand. It is more land underwriting criteria kind of to one of the earlier questions it’s about pace coming back strongly enough to support the kind of returns we want. I will say we are optimistic with what we’ve seen in Q1 and our markets are really watching that and the potential to invest further in that category I think is rising. One of the thing I know as Bob indicated earlier in the middle of studying this category in detail, we are actually breaking that study into two different portions. One, we’re calling the urban millennial buyer and the other we’re calling sort of the suburban value buyer and we do think that both of those categories behave a little bit differently. But later this year we are going to have more color on what we believe drives those of course we are watching the market overall, so we're optimistic that we could see a change in our investment portfolio over time we have not yet and we are still seeing vast majority of our land transactions at Pulte, but yes we agree that FHA is accommodated for the inter-level buyer. With regard to the comment around tight underwriting criteria however it is very, very clear that credit in our opinion is two types in general and we are also and we put in our prepared remarks don’t think you are going to see much change in that regard, but that has to do with QM and QRM just being a very tight underwriting box overall and that’s why we are making that comment.

And I appreciate, thank you for that. On the tightness, can you be more specific because even within QM I think that the question is, is it really tight or is it just a self employed barrowers and for a national, what specific about QM would you say that’s tight [indiscernible] 3% down, 6.25 go backend ratios. I think people when everybody talks about tight it’s hard for us to understand what that really means?

Yes, Ivy I think you are right the construct of the offering is good, it’s the underwriting discursion or lack there I think we are talking about, so whether it’s credit overlays or just an inability for the people who are underwriting loans to say I see a blemish and I understand it and I can document around it. People aren’t really willing to do that yet and so the rep and warrant issue that has been sort of an overhanging the industry we believe still impacts loan generation. So that tightness we are talking about isn’t around the product or how affordable it is or how accessible it is to a particular buyer group, it’s really that – it’s tough to get a mortgage approved.

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

Hi, good morning guys. Looking at the – the cadence of buyback so I think we are running what’s call it 50 million in the first three quarter of last year and kind of stepped up to $100 million number through the first quarter. I am just thinking say systematic is because the question is systematic the 100 going forward or 50 how do we think about that on a go forward basis.

Hi, I think we haven’t given any forward guidance on that and we look at candidly as we go through the year. I think the fact that we now done a couple of quarters that $100 million is indicative of what we are thinking for 2015. Because the only thing offer on top of that is as we look at our cash position and we look at our cash generation and what we are going to utilize our cash for we will adjust that over time. So as we for instance go through our reforecasting process each quarter here we look at what is our cash position. How much we are going to be investing in the business what we are getting need to run the business and obviously $1 billion in cash still higher than we would like to carry.

Heard I thanks.

Here just talk about that will use cash actually to likely pay down the debt that matures in the second quarter. Again we are looking at ways to trying utilize some of the cash.

Okay great. And then just to confirm there is no more go forward – impact in the gross margin.

Yes we work through the - with that we acquire which is what has really challenged margins.

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

Thanks good morning guys. It like follow up on Jack question just a little bit. Associate with capital allocation in your ROI see target first on the ROI see do you all have target out there you are willing to share maybe or at least that progression of how you expect this is to go over the next few years and then given what’s you all have been taking about seeing much higher land costs, probably not running – probably not getting out over year skews on community growth et cetera. Are you starting to is you cash allocation starting to the [indiscernible] starting to move away from reinvestment toward that that pay down and return to shareholders are you still where are you still pretty much in the same type of the mode if you will.

Stephen this is Richard. I would say a couple of things. We clearly intend and optimistic that we can drive returns higher in the coming years. We don’t have a particular target out there other than that is crystal clear throughout the organization that our view is to our number one goal financial is to drive higher returns. With regard to allocation we are very consistent we go we said our December Investor Day our first priority is to invest in the business and we are pleased with getting our communities open and we’re pleased with the ability we believe to hit our targeted committee count for the year. That’s our number one goal. Second is to continue to fund an increasing dividend, third is any opportunistic M&A and then residual cash on a very systematic basis back to shareholders. So that last one is going to fluctuate depending on our ability to invest in the business and as Bob indicated we stepped up here in the last couple of quarters. So we feel like we're doing exactly what we said we would we're very pleased with our performance we’re pleased with the environment, we’re pleased with the quarter we feel like we’re doing exactly what we said we will be doing.

Okay, that’s fair enough.

The only thing I would add to that Steve if you would focused on the debt repayment we got a maturity here in the second quarter I think it's $238 million not really a big enough bite for us to say let’s refinance it so I think what we’re looking at is we got cash we’ll pay it down, we’ve got a bigger maturity stack next year, it’s little bit under $500 million. And so I think if you think us, you’d see us looking at structuring leverage sometime over the next six to nine months – market conditions that were some activity this week that price pretty attractively. So the markets are still accommodative, so we will be looking at that over the next call it year, but for this maturity it just seems to us, we got the cash, we will use it and then be opportunistic and then we access after that.

Okay, yes, thanks. And then just one more time on Centex you did push it a little bit more you said you saw some better demand out there, is maybe if you could talk a little bit about that the demand which you are seeing and this Centex really become much more of a 216 and 217 type story versus later this year. And if I can squeeze one other, do you mind ranking on the cost you said land, labor and materials. I assume the pressure on the gross margin is in that order, but if you could clarify it.

Yes, so from a Centex perspective Steven, we are pleased with what we’ve seen I think it’s a little too early to say whether it’s a 16 or 17 story more than this year, we have some large communities that are absorbing nicely throughout Texas, throughout the Southeast and in the Midwest and number of markets so we're feeling good about that. And with regard to margins just you know one comment over there we feel like land pressure is definitely coming through. But in terms of the comment that you are making we are very pleased with the margins you are right in the guidance range that we have they continue to be among the industry leaders, and we're guiding for flat to up margins from here. So we’re very pleased with that there is a lot of commentary out there about margins down. But we are right where we want to be and we intend to stay at or near the industry leaders. And then just one other thing on Centex just to be clear, we have not invested a lot in Centex over the past couple of years. So the likelihood of Centex continues to be a smaller portion of our deliveries in the coming quarters is still there and that’s okay. It will take some time to invest in Centex in the current timeframe reported manifest itself and we are watching the markets clearly to see when that happens.

Your next question comes from the line of Susan Maklari from UBS. Your line is open.

Good morning.

Good morning Susan.

Can you talk a little bit about material cost and any trends that we should be expecting as we go though the year especially given the decline that we’ve seen in some of the prices?

Yes, we obviously keep tracking everybody else and the good news is that for the significant majority of our material input cost, we see either flatter even in some release as number gets talked about a lot of the packages are trending nicely maybe the one out layer that is concrete where we would see some price pressure. So all in all I think we had talked about coming into the year maybe 1% increase in pricing and we’ve certainly see that or maybe even a little bit better I don’t know I think it was backwards, but it’s not working against us in a large sense so a positive results there.

Okay, that’s great. And then in terms of the mortgage market there is some big changes that are coming later this year in this summer and August, can you just talk a little bit about how you are working with your lenders to just make sure that some of them – there maybe a potential forward of the short-term bump that we see from that the avoided?

Yes, it’s a great question, so [indiscernible] here talked about August first is the date goes live and there are lot of people and lot of companies working really hard on this. It’s kind of a complete reboot of the documentation process and we don’t use a lot of outside lenders obviously so our mortgage company has been diligently working on this for months since they announced it last year. We feel good about our ability to serve under the new guidelines, so I would tell you it should be business as usual for the Pulte mortgage company. If you are looking for things that could happen the possibility exist that not everybody is going to get there because it is a big undertaking and so for instances if we got a consumer that’s trading out of another home that has to sell their home, if their buyers lender isn’t able to close. So you might see some ripple through the industry around that. So I think we feel good about our ability to meet and serve under the new trader rules and regulations but this is a big deal. I've had a characterized me as it's more disruptive to the mortgage industry than the cumulative Dodd–Frank impact. And think about all the Dodd–Frank encompass so this is a big undertaking. I would read certain survey I don’t know if there is a right or wrong that close to half of the mortgage then might not be ready to do this. So we are will be ready to land but it’s a big undertaking.

Yes, okay that’s great color thank you.

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

Thanks first question I want to ask was about SG&A. You mentioned the 160 to 165 range persisting, the typically with your closing rising as they year went on you would expecting other various components to drive a little bit higher. So how should we think about that the investments you mentioned the community turnover. Although going to decline at rate that with an offset closing is driven variable component of that because you mentioned obviously that your community is you are going to open 200 I think 60 is in the first quarter. So how should we think about all that?

Yes, so if you look at the increase in our SG&A year-over-year about third of that increase we would contribute to community count opening. On top of that you’ve got the other two thirds being for people that characterize of that way. Some of them are community oriented so its in relation to opening new communities and other are so we talked about we made investments in IT training quality and so I would I think you will heard to say over time is that hour SG&A spend is not as variable as many. So this is something that we have pretty good visibility into the people and the processes that we are investing into improve and to enhance the value creation this is we have underway or largely going to be fixed going forward. So the people that we are hiring should work on the projects in IT that example to work on the training will be ongoing cost. And obviously we have pretty good visibility into our planned openings in the spend on community so we think we have pretty good inside to what’s happening in 2015 going forward obviously depending on how many new communities we have we will give you some color into variability of that expense each year.

Got it. That’s very helpful. Second question you mentioned Richard some weather effect in the first quarter on closing so I mentioned there would be a little bit of get back in the second question you mentioned Richard some weather effect in the first quarter on closing. So I mention that would be a little bit of give back in the second quarter, my question was around demand though was there any effect related to weather as you saw it and demand for the first quarter I guess in that context it might be helpful also if you any comments about April and whether is any snapback or rebound.

Just two comments there we did indicate we miss some closings in Q1 and you referenced and coming back in Q2 we have been clear on this call most of them are coming back in Q3 and Q4, just FYI. No there was no demand impact from weather in Q1, we are very pleased with demand it exceeded our expectations. We are pleased with the sales volume we had and we are also pleased with April. April appears to be unfolding at a normal seasonal rate which is a good selling month.

Your next question comes from the line of Will Randow from Citigroup. Your line is open.

Hi, good morning and thanks for taking my question.

Hi, Will.

On the number of homes in control near develop or developed lots. Can you talk about that’s trended over the past 12 months and how that might impact community count going forward?

I would say I had hard time hear you actually well.

I think he was asking what happened to control lots over the past several quarters and how that’s going to impact community count side.

I think I can answer the first part. Community count we still feel very good about our ability to be between 600 and 620 for each of the fourth quarters this year. I think Bob has got a little commentary on control lots.

Yes, our control lots have been [indiscernible] its relatively flat for the last couple of years when we have been replacing lots as we deliver them. We are up about 8,000 lots and in terms of – if you think about what’s happening inside that we are working through some older Del Webb community and we saw our Del Webb community count drop a little bit and we’re replacing and essentially with Pulte community, so you see that community count increased over the last several year. But again 8,000 lots in last 12 months. And I would characterize that as largely flat.

Thanks for that and just one follow-up with option revenues reaching 13% in the quarter what do you think that can go over the next year particularly as a mix of closing changes.

Yes, will that’s tough to put a number on candidly, we do track every single market and every single community and we still have an emphasis in that area. And I would say we still have some opportunity. I can’t give you specific number. I will just tell you that it’s crystal clear around the organization that we are doing our best to drive returns. And clearly option revenue and lot premium revenue help.

Your next question comes from the line of Jay Mccanless from Sterne, Agee. Your line is open.

Hi, good morning everyone. First question with the incentives going up on a year-over-year basis do you guys expect that to continue through the year?

We are talking about this probably 18 months now Jay, we have gotten incentives down to I think the one point was made here 1.5% or 6% which might be the comp working year-over-year and we’re at 2.1% last fourth quarter, we’re 2.2% now running between $5000 and $7000 a unit, we are not seeing anything I think you heard Richard talk about the current sales environment, we are not seeing big increases in incentives. So our expectation, since we are not doing spec business is that you really see that material.

Okay, great. That’s all I have, thanks.

Thank you.

Your next question comes from the line Megan McGrath from MKM Partners. Your line is open.

Good morning, thanks. Just wanted to get a little bit more clarity on this Centex comment to be better for us I just wanted to clarify you did say that absorptions were flat year-over-year in the quarter in Centex?

No, I said they are up 8% Megan.

Up 8%, okay.

They were flat for Web and Pulte.

Flat for Web and Pulte. Okay, and then could you talk about that a little bit more was there any sort of geography that you saw that tickup or whether really nationwide that you saw that incremental improvement?

Well, we don’t have Centex communities in all of our markets from where we did we saw a pretty robust change. Texas was good, the Southeast was good and that where a lot of our Centex product is, so it wasn’t isolated to anyone market.

Great, and then could you just for clarification give your cancellation rates for the quarter.

11%.

Your next question comes from the line of Mark Weintraub from Buckingham Research. Your line is open.

Thank you, just on the material side where we have seen pretty dramatic drops in lumber and structural panels pricing in the last couple of months, what would that show up in your cost of goods sold, is that going to be six months from now or is it really third quarter, fourth quarter where you would potentially see the benefits of that?

Yes, typically you are going to see what we are contracting today we’ll deliver in six months and so I think that’s – and based on what we buy, we have kind of a trailing pricing grid. So you would see benefit for current sales I should say changes in commodity pricing.

And then how much of an offset if any might the tightness in labor that you were talking about factor and relative to where your expectations are been, it does seem that materials maybe lower than you thought, but is labor potentially going to be an offset or do you have any view on that.

Yes that will be market-by-market candidly so in markets that are busier you are going to see more labor pressure, you know obviously we still, we are one of the biggest builders in every market we operate in. So we got leverage capability with our trade, but if there is a lot of activity out there, sometimes we have to pay to get them.

Your next question comes from the line of Buck Horne from Raymond James. Your line is open.

Thanks good morning. Let me just talk a little bit about Del Webb just wondering why you think the biggest impediment is to improve absorptions at Del Webb right now. I am little surprised given the demographics and the weather patterns and just a strength of Florida and some other markets, why you are not getting a little bit more improvement there, what’s – can you guess a little more explanation with what you think going on at Del Webb.

Buck, again absorptions have been steadily increasing throughout the last couple of years there and they were flat this time. So we are not disappointed in Del Webb overall we did have quite a few communities absorption selling efforts that rolled off as Bob indicated. And we do have some coming in the future. So its very difficult to say not exactly sure what’s happening in Del Webb collectively other than that, it continues to be a good performer we just didn’t particularly see the outsized performance this quarter.

And the pricing there is still strong, the margin generation and the ASPs that we are getting from that buyer group were – they are still healthy and if and when they start to buy more actively it would really be beneficial.

One other comment there Buck, in talking to some of the operators in some of our strong Del Webb committees we do limit lot sales quite a bit. We don’t want to get too far out of our ability to produce and protect our ability to drive price forward and there is a number of communities where we had excellent performance that were holding the lines. So a little bit of this is self induced, just to ensure that we don’t get say a backlog that’s out of year as an example versus say six or seven months.

All right, thanks. And I wanted to follow-up on Nishu’s question a little bit on the SG&A because anyway we were getting with this question about your variable cost is on commission should be increasing as you have more closings in the back half of the year. The component you said about your community openings you are certainly planning on continue to open a few number of communities later this year. So I am trying to understand is implicitly are you forecasting that – the people cost you described are actually going down in the back half of the year to hit to that 160 to 165 number or people cost…

Buck you have to remember we actually run our commissions through margins. So cost of goods sold, so that’s not a variable from SG&A.

So I think that's the difference between what you're asking.

Your next question comes from the line of Ken Zener from KeyBanc. Your line is open.

Good morning gentlemen.

Hi, Ken.

Looking at gross margin the interest that you are capitalizing is out about 80 bps year-over-year. And I am just wondering if you could give us kind of a view on structural elements in gross margin that you know about, so you are going to be doing about 23 gross margin this year, you know there is a tailwind of in 1Qs case 80 basis points from interest expenses is that what you would expected to be for the year. And then could you maybe talk about other factors that, that’s tailwind, could you kind of highlight with some of these factors are that you are kind of seeing or thinking about I mean are you saving more in commissions or commissions cost any more, is land, does that change as well as given the 1Q prices. Are you going to – I am sorry if I missed it but did you give a fiscal year ASP or year end ASP that you would be willing to guide us towards. Thank you very much.

Yes, Ken, we did not give any total year or forward looking ASP number, we are going to continue to get the interest benefit through the year with regard to margin and then you know all the other components collectively obviously add up to that 23 number, so component of price or component of cost et cetera, I don’t know Bob do you have any more granularity that you want to share.

No, you know we don’t give quarterly views on the interest but we talked about the fact that we’d have 40 or 50 plus million dollar benefit this year in expense versus last year. And so you will see that come to the income statement and will vary by closings on a quarterly basis.

I mean I guess one question I have and then a follow-up as you move towards the common plan which I think you guys have obviously highlighted a lot of the benefits there part of that being cost, is there a way that you could kind of quantify how much the adult is benefiting you guys in terms of vertical costs or something?

Ken, this is Richard, there is so many moving parts there mix between costs between price, between all of those components, it’s difficult to give an exact number. I’ll just leave it with this, we are very, very pleased with our margin performance, we are at or near the top of the industry and we are very confident in our margin trajectory from here. I terms of exactly which components are driving the March performance it’s up to put a hand alone given the quarter-to-quarter variability.

Your next question comes from the line Jim Krapfel from Morningstar. Your line is open.

Hi, good morning thanks for taking the question. As you mentioned challenging entitlement from early part of your remarks I am just curious to hear which markers are you seen us mostly, what you think the underlying drivers are for the more challenging entailment process and then what you expect, the course of this trend say over the next several years.

Yes, Jim entitlements are incredibly difficult in every market, they tend to be a lot tougher on the cost and they are saying Texas as an example which is an easier entitlement market but the trend continues to elongate across the country and that’s likely to continue. It’s simply a combination of lack of folks at the municipality that are available to approve both zonings if you will as well as land development approvals along with the fact that municipalities in general are being conscious of smart growth and the hit rate for entitlement for new communities continues to be very, very challenging. This is not a new story this is something that I think the industry has talked about a lot we’ve talked about a lot, so again it’s having some impact on our ability to get our communities open and get our land spent on time. So it’s more of a transition problem in terms of timing and it is a big picture issue but I doubt the entitlement market ever gets better candidly.

Thanks for that. And then second question, what were the commonly managed plans as a percent of closings this quarter, do you still expect that to get to 70% and if you could get all ballpark how much incremental margin you could get remaining from getting to more commonly managed plans holding other factors constant?

We delivered 54% of our closings through commonly managed plans in the quarter and we feel very good about our ability to get to 70% in a timely that we indicated over the next 18 to 24 months. End of Q&A

We have no further questions in the queue. I like to turn our call back over to our representer.

Thanks Ryan. Thanks everybody for your time this morning. We will be available for the remainder of the day if you any follow up questions, otherwise we will look forward to speaking with you on the next call.

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