Good day, and welcome to the PulteGroup's Q4 2017 Quarterly Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jim Zeumer. Please go ahead, sir.

Great. Thank you, Michele and good morning. I want to welcome all participants to PulteGroup's fourth quarter earnings call. Joining me today are Ryan Marshall, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior Vice President of Finance. 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 pultegroup.com. We will also post an audio replay of the call later today. I want to highlight that as part of today's call we will be discussing our reported results as well as our results adjusted to exclude the impact of certain significant items. A reconciliation of these adjusted results to our reported results is included in this morning's release and within the webcast slides accompanying this call. We encourage you to review these tables to assist in your analysis of our results. Also I want to alert all participants that today's presentation includes forward-looking statements about PulteGroup's future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. With that said let me turn over the call to Ryan Marshall. Ryan?

Thanks, Jim, and good morning. I'm extremely pleased to report the PulteGroup's strong fourth quarter results completed a year in which we realized significant gains across a number of key operating and financial metrics. Gains that I would note were realized despite the significant challenges created by two massive hurricanes and one multifamily building fire in the Northeast. From double-digit growth on the top and bottom lines to significant improvement in the company’s return on equity, we clearly continued to make meaningful progress against our strategic goals. Before I hand the call over to Bob for a review of our fourth-quarter results, let me make a few comments about where we want to take this company going forward. I believe that our decision to focus on returns at the outset of this recovery has driven better operating discipline and financial performance, while helping to lower the risk profile of our business. As such, we will directionally continue along the same strategic path but with clear acknowledgment that we want to continue growing our business while driving greater efficiency in support of strong cash flows and high returns. Consistent with our favorable view of overall housing demand, we have begin investing to began expanding our business at a measured pace. Our 2017 results again demonstrate that success of our approach as we grew home sale revenues by almost $900 million, or approximately 12%. As we remain positive on the housing cycle, we are continuing to invest in our business with a view towards growing volumes, while delivering high returns. Embedded within this approach is a sustained focus on growing volumes as we work to expand local share across all of our buyer groups. We and the entire industry continue to see strong demand gains among entry-level and first time buyers. That…

Thanks Ryan and good morning. As noted in this morning's earnings release, PulteGroup's fourth-quarter results were impacted by several significant items. While we have provided non-GAAP reconciliation tables as far as the release and in our webcast slides, I thought it would make sense to start my comments by providing a little more detail on these items. First, we recorded a land charge of $57 million in home sale cost of revenues. This charge relates primarily to one project where we realized significant increases in our estimates for future land development and house construction costs. The project is in an area where competitive conditions limit our ability to offset our cost increases through higher sales prices. I would note that this action is different from the charge we took in Q2 this year when we made the strategic decision to exit and sell select non-core land positions. As a quick update, we have already disposed of more than half of the 5000 lots included among those assets at prices consistent with our expectation. Offsetting this land charge, we recorded a $66 million benefit in SG&A that is primarily associated with the reversal of construction related reserves. This benefit was largely driven by continued favorable trends in the development of our construction claims compared to actuarial estimates. I would note that we recorded a similar benefit in the fourth quarter last year. And finally, our fourth-quarter tax provision includes $181 million of charges primarily related to the reevaluation of our deferred tax assets resulting from the Tax Cuts and Jobs Act enacted in December. Clearly the dramatically lowered corporate tax rates included in the new law will lower our future tax expense. More importantly, given that we expect to be a cash taxpayer in 2018 and beyond, the new tax law…

Thanks, Bob. Before opening the call to question, I'll provide some comments on market conditions and broadly what we're seeing in the marketplace. With the 14% increase in orders supported by 5% increase in absorption phases for the quarter, I am showing appreciate why we are positive on the demand conditions we saw across the industry. Even though interest rates had started to creep up and the tax plan is thrown a few wrinkles across the landscape, there remain many positive forces continue to push demand higher. The underlying economy looks to be gaining speed and the tax cut has the potential to add fuel to this engine. Employment trends are certainly favorable and wages are showing some signs of growth which would also be a positive. Given the strong underpinnings, the potential for demand to expand further particularly among the big book and demographics of millennials and boomers is certainly very real. Specific to our business in the fourth quarter, demand trends in the East were generally strong for Massachusetts down through Florida. There was some uncertainty as to how the Southeast and particularly Florida would recover following the hurricane season but it's clear that demand has rebounded very quickly. Looking out to our mid-West and Texas markets, we are very pleased with the traffic and demand conditions we experienced in the quarter. Again, post hurricane in Texas we saw quick return of buyers to our communities. In the mid-West, we experienced stronger buyer trends and are working the balance sales paces against lengthening backlogs. And finally, the demand out West remain very strong over the quarter with Northern California, Arizona and Nevada continuing to show exceptional results. Through the first few weeks of January, traffic to our communities and buyer interest has generally been positive as is always the case. It'll be another week so until we are really into the spring selling season and have a better read on demand in 2018. Before handing the call back to Jim, I want to thank all of your employees for their efforts over the fourth quarter and the entire year. Your hard work is reflected in our financial results but more importantly in the quality of our homes and the service we delivered to our buyers. Now let me turn the call back to Jim Zeumer. Jim?

Great. Thanks, Ryan. We'll 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. Michelle, if you'll explain the process, we'll get started.

Thank you. [Operator Instruction] And our first question we'll hear from Nishu Sood with Deutsche Bank.

Thank you. First I want to ask about the buyback. Obviously very strong indications of confidence, the $500 million for fiscal '18. I wanted to ask about the thought process behind that clearly reflects confidence in the business. How much did the tax reform windfall affect the thinking of that? Were you planning on $500 million already in the tax reform windfall just to support that thinking or did the tax reform windfall enable let's say a larger share buyback than you might have otherwise planned?

Yes Nishu, its Bob. I would tell you it did not influence our thinking. It certainly will influence our capital planning over the next few years because to your point it will yield fairly significant cash savings when we are a cash tax payer. But we were the dialogue we had been having with the board around this didn't really change as a result of that action in December by the government.

Got it. And then secondly, I wanted to ask about the closings guidance. The 5% to 10% anticipated closings growth in '18, obviously it's in line I think with a lot of folks in the industry expecting. But in your case in particular, obviously you had a very nice end to the year in terms of orders, the 14% order growth. Also, your closings in '17 were depressed to some extent by hurricanes et cetera. And you would normally expect some rebound from that and especially since you wouldn't anticipate those types of events to happen again. So, how do I reconcile that the 5% to 10% versus the year-end and maybe some catch up on the deferrals?

Hey Nishu, it's Ryan. Yes, great question. I appreciate the question. What I would tell you is we did have a very strong end of the fourth quarter; we are very pleased with that. I think the fact that we delivered 14% year-over-year growth, some of that coming from community count growth and a big chunk of that coming from true absorption growth was something that we were very pleased with. We like where our backlog is at at the end of the year and it's really reflective of a couple of things. One, we've had heavy emphasis on increasing the size of our still not started backlog. We believe that helps us with our overall production models; number one. Number two; we're not building a lot of spec inventory. And so, with the strong fourth quarter we have a lot of those sales came in November and December but given our built to order model, those deliveries will not be in the fourth, in the first quarter of 2018. So, we like how our production pipeline is moving. We like where demand is at and frankly we think the 5% to 10% growth is very competitive and is demonstrative of the great year that we had in 2017.

And next we move on to Michael Rehaut with JP Morgan.

Thanks. Good morning, everyone.

Good morning.

First question I had is kind of regarding more strategic I guess or over the next two to three years. One area of work that we've done recently is on return on equity and kind of in recent report looked at the DuPont approach and analyzing margins, leverage, and asset turnover. And I think for yourselves along with a lot of other larger cap names, you are clearly from a margin standpoint at a pretty high level. Your leverage you are at a little bit above the higher end and I wanting it to decline or decrease over the next year or two. And I think a lot of the builders are in general trying to maintain a pretty conservative balance sheet. And so as a result, asset turnover really becomes the focus I think in the next couple of years in terms of driving higher returns. So, with that said, how are you thinking about in particular, there are two areas I think that that could drive that and if you have additional thoughts, I'd love to hear it. Specifically, the lot option, the land position and also the sales pace. Two areas where we can really drive improve the asset turnover. So, how do you guys think about that? Are you thinking about that over the next couple of years to drive higher returns and if there are any goals that you might share particularly around again like the lot option or the sales pace to achieve even higher returns and you're already kind of at the top of the heap already.

Hey Mike, it's Ryan. I'll take a stab at the first couple pieces of your question and I will let Bob fill in few of the other components of it. So, first let me talk about land strategy and where we are going there. We made tremendous improvement as Bob highlighted in the script. We are down to 4.2 years of owned land. That is down substantially from where we were just 24 months ago and it's reflective of the hard work that we've done on the asset portfolio, specifically the land portfolio. I have been very clear in articulating our views about our land goals. We want to be at three years of owned and we're taking clear steps to get there as we have analyzed the assets we've bought over the last five years. Those new purchases have averaged right around 2.7 years of owned land which is very much in line with where we want to go. The difference being some of your longer dated Delaware positions which we have talked about in prior calls; we like the return profile we are getting out of those communities. They are just, they're a little bit longer in life. So, we are very focused in improving the land turnover and the asset efficiency as far as your question on sales paces. Certainly, that's the part of the mix. We look at it on a community-by-community basis and we're making the decisions with price and pace that we believe are going to drive the best return on invested capital which we've long stated is our number one focus. So, that's how I'd answer the first two pieces and Bob anything you want to fill in on there?

The only thing I'd add is, if you look I mentioned in a remarks our optioned portfolio is now 37% of our total land portfolio. If you just look year year-over-year, our owns position is down a 11% to 89,000 lots, our options position is up 18% to 52,000 lots. And so, while our lot position is only down 1% at a 141,000, we unbalanced we've changed the flavor of that sets our own position is down, we highlighted from 5.6% to 4.2% over the last two years. And the only other thing I'd add to that is there is a higher cost structure that typically comes with option lots. So, just I offer that people remember when we do this, there is some margin pressure that comes with that.

I appreciate that, thanks for the response. Yes, I guess, secondly, you threw out Ryan in opening remarks $6 million to $800 million free cash flow, I guess operating cash flow number for '18 and also the 500 million share repurchase a billion or the 10% growth in land span. Over the next, again kind of bigger picture over the next two to three years, is this kind of the playbook that we would anticipate in terms of 5% to 10% type of unit volume growth continue little bit of growth on the land spend and remain having the share repurchase continuing to be in the mix obviously not as prominent as the last 18 months or so. But still, all of those pieces kind of that moderate growth continued moderate return to shareholders positive operating cash flow. I mean, is this going to be the playbook for the next two or three years?

Well Mike, it's certainly our playbook for the next year. The next two to three years I think we're going to have to see what the market brings and we're going to make the appropriate decisions that we think are going to give the best result of our shareholders. We like the playbook that we're running right now. We think it's resulting in a very favorable outcome for our shareholders. We're driving good return on equity, its good return, and its great return on invested capital. We're demonstrating excellent earnings per share growth. There are a lot of positive things that we're doing. As I highlighted in some of my opening comments, I think that one of our opportunities is to continue to grow our volumes and continue to leverage the infrastructure that we built to drive even higher operating margin and push earnings growth through not only increased efficiency but also increased top line growth as well. So, we know that we're getting later into the cycle but we remain constructive on it. And thus that view is reflected in what we've laid out for 2018.

And next move on to --.

And Mike, just to -- I'm sorry, go ahead.

Please go ahead, I didn’t know if you were down with your answer.

No. Mike, the only thing I was going to add to that is part of it's going to depend on what we do with the cash obviously. We highlighted that we can invest in the business. We can be lever to a certain extent or at least to our net cash or we can return at the shareholders, all of those choices will influence of the kind of medium term outcome. So, everything I agree with everything Ryan said and again part of it's going to spend on what we decide to do.

And next we move on to Ken Zener with Keybanc.

Good morning, gentlemen.

Hi, Ken.

Hi, Ken.

Solid finish to the year. My first question is on speculative units. Could you comment on the spread between spec and non-spec margins? And my second question is going to be what would change your impact your view of how you use specs to enable a higher land turn. Because obviously, whatever you do to cash relative to taxes, that's going to be a choice you have. But in terms of operations, higher spec tends to lead a higher land utilizations which seems to be one of the elements you're pursuing. Thank you, very much.

Yes Ken, I'll start. Certainly, we see a margin differential typically in the 200 basis point to 300 basis point range spec versus non-spec and in particular we see it become more pronounced if we have spec final on the ground. We've been working to try and improve the production capabilities of the company and what we call even flow. So, we've been trying to build sold not start a backlog which we've been successful at. Doesn't mean we don’t build spec. our spec production is up about 11% in terms of units year-over-year but our spec final is down 2%. I gave you the number in the release, in the prepared remarks, 637 units out of 790 communities. So, what we're really focused on is making sure we don’t have a bunch of houses on the ground that people come in and say like let's make a deal. It is worth remembering that spec feels great until it doesn't. And if you get to a point where you have too many years on the ground and the market gets -- in the current mortgage timeline. So, I'll let Ryan answer the question more strategically but I think in general we're going to be pretty disciplined around this.

The only thing that I would add to what Bob shared with you, Ken, is we're not afraid to use spec. we're using it in the way that I think smooth out our production pipeline. Beyond that our view is our profitability on builder order units is quite a bit higher and we eliminate the risk of potential we have in the unit that we've got a hold on to and discount to sell or pay the caring cost associated with caring the finished house. So, it's all worked into our model of driving the highest returns possible. They're certainly multiple strategies out there in terms of -- how speculative units are used. We happen to be partial with one that we use which is working for us.

And next, we move on to Mike Dahl with Barclays.

Hi, thanks for taking my questions and nice results. I wanted to start with a question around sales pace. And I think Ryan, Bob, just given the focus on asset efficiency, if we look at obviously option trends over the past couple of years. It seems like that's been an area where there's still clear opportunity as we move forward through the cycle. I think you've articulated in the past that there's been some mix effects that are depressing what we're seeing a bit but you saw a nice return to growth in 4Q. Based on the closings guide for 2018, it doesn't seem clear that you expect that growth in absorptions necessarily persist through '18. So, I was hoping if you give us a little more color on how to be thinking about absorption for this year and then also if you have any color on community count growth expectations?

Well, the community count growth, we've often suggest that it's not the best measure of volume and since we introduced both annual and quarterly guidance, we weren’t going to provide any commentary around that. In terms of our expectations for pace, I don’t think we're expecting significant increases in pace in fiscal '18 relative to '17. We did enjoy a pretty solid fourth quarter. As Ryan has said, the first quarter has started off pretty well but it's still early going. We haven’t yet really got to the selling season.

Yes. And the only other thing that I point out on the absorption pace side is mix and buyer mix certainly matters. I think it's no secret how we're positioned relative to the three buyer groups that we serve. We saw a nice increase and absorptions in the entry level which I think the entire industry continues to enjoy. We're very pleased with the performance there. We saw nice increase in absorptions in our active adult segment. We were slightly down in the move up. So, in totality across our entire platform we saw an increase of 5% in the quarter which is very robust and we're happy with it. And then I think when you look at the absolute number of our absorptions, they're very respectable, they're near the top. And so, just see outsized percentage gains given where we're operating, I don’t know that I would necessarily expect that to happen unless the market was to significantly change.

Okay, thanks. Then my second question is just around the impairment taken in the quarter on land and you mentioned that it was related to one project and an increase in development and construction cost. Could you give us some more detail on what exactly or where that land was and what was driving that uptick that makes it one off versus substantially broader issue?

Yes Mike, it's a fair question. Certainly this is an asset that's in the South East. It's a big asset, it's got more than 2000 lots. We're going to be there for a while. And what we've seen is the market around us in -- it is in Georgia specifically, has been very active. So, the Georgia construction markets really working pretty hard right now. We're bringing trades down to that particular site. And so, what we've seen is because of the strength of the market, our land development costs are going up, our house construction costs have gone up. And interestingly, this happens to be a community where it's positioned against some pretty inexpensive product we're priced, it's really price sensitive. So, we haven’t seen much opportunity to increase prices, then in fact we've seen prices actually move backwards a little bit in 2017. So, although things contributed to over the last couple of years as the market has improved, our costs have gone up and we just haven’t seen the price opportunity.

And next we move on to Alan Ratner with Zelman & Associates.

-- To be in the spring selling season to get to that full year number. It's amended to the count guidance but I was hoping you could just help us a little bit.

Yes Alan, I'll do the best I can to who maybe answer that question again. We grow in the size of our still not lengthening the duration of operation. It's been a work in process over the last two years and we still got some ground left to cover but we like the position that we're in. We I think reflect, we're typically not into the official spring selling season until Super Bowl time. And we're I don’t think it's a great proxy for providing expectations about what 2018 or the full review is going to look like closing guide which we think is reflective of our current production expectations for 2018.

I appreciate that last comment, Ryan. Thanks for that. And then the second question, this year obviously to but the current metric when they think about underwriting that ultimately that excess cash is going to get competed away because you're going to be able to effectively spend more on land to hit the same type of returns threshold given the lower tax rate. So, I was curious if you could give a little bit of insight into how you think about underwriting land, whether it's an after-tax metric you focus on or a hybrid of pre-tax after-tax and ultimately how you expect those dynamics to unfurl in the industry in 2018 and beyond. Thank you.

Yes Alan, we've been asked that question off and on since the prospect of tax reform has been raised. We do not look at returns after-tax. When we underwrite transactions, we're looking at pre-tax returns. I don’t expect that we will compete that away. I'm not aware of anybody that would look into this after-tax. Time will tell but certainly it hasn’t been part of the dialogue with tellers at this point which is where you would probably expect the first year. So, not thinking that's an issue at all, honestly.

And next, we'll move to Susan Maklari with Credit Suisse.

Thank you, good morning.

Hi, Susan.

Hi, Susan.

Obviously you've made a lot of progress on the SG&A front over the last year. So, have you sort of look out and think about the next kind of course of this cycle and Ryan you kind of talked too. So, what are you thinking about the next round of efficiencies that can come through. How should we think about where you can get SG&A and maybe what are some of the levers that can come in there?

Yes Susan, great question. We're so proud of what our organization has done in getting more efficient. We think we still have some room to grow. But as Bob highlighted in some of his comments, we're 200 basis points more efficient today than what we've been in a long time. And we wouldn’t have been able to do that without the really hard work and diligence that our field teams have put into making our home building operations more efficient. So, a lot of good work behind this. As far as where we go in the future, it's really going to be around the volume growth. And so, part of what you heard from me in my prepared remarks was around our opportunity to increase revenue and grow or near to grow market share within the footprints that we currently operate in. That's where I think we can probably get some of our biggest gains. Certainly, we're always looking for opportunities to do things faster better smarter and we'll do that. But I think the majority just come from revenue growth.

Okay. And just kind of building on that a little bit. How do you think about technology I guess and maybe some of the changes that are coming through across lots of different areas of home building from mortgages to maybe some of the supply chains and differences that can happen there? How can that maybe over time and not necessarily in the near term but thinking further out. So, what have helped and maybe take some cost out as we think further out?

I think the opportunity is huge and some of that we have already taken advantage of. The efficiency that we have got on the marketing spend side is been extraordinary. We haven’t talked about it as explicitly as probably what we could have or should have. But the improvement in what we spend as a percentage of revenue on our marketing dollar from just five years ago versus today is a night and day difference. We've spent significant amount of money on our websites and the way that we communicate with and market to consumers. It's helping us spend the last drive more targeted traffic that converts at a higher rate and not all works into a lead, the pros spec and prospect to sale conversion ratios that are significantly improved and more efficient. Our marketing teams have done an extraordinary job in making that happen. On the systems side, we continue to invest a lot of money to make our systems more efficient. Helping us understand our cost better, communicate with our trades in a more efficient way and the really pull waste if you will out of the production system. There is a number of new technology platforms that we're dabbling with, that interface with and disintermediate with the sales side that I think have the opportunity to take some cost out were certainly those technologies are early in their development. We're testing some of them and we'll see where that ultimately goes. And then we're doing a lot of testing right now with virtual reality which is another thing that is showing early, strong early returns in our ability to help the customer ultimately envision what their end products going to look like. So, I think the industry is right for innovation. It's something that we're focused on, we're putting investments into and we'll see where it goes.

And we'll move on to John Lovallo with Bank of America.

Hi guys, it's actually Pete Gabo on for John. Thanks for taking the questions this morning.

Hi.

Hey, Ryan. Bob I was wondering if you'd be able to give any color around the cadence for the share repost in 2018 or whether or not that's just going to remain opportunistic?

That will remain opportunistic. We will not will be reporting the news as opposed to previewing it for you.

Got it. And any update, guys, on the Boston community that have the fire from last quarter, just where you guys are in the steps of remediating that?

Yes. It's we're in the process of rebuilding that building. It's already well underway and the build time on that building is about a year. So, it will be that building will be rebuilt and delivered toward the end of this year early 2019.

And we'll move on to Jack Micenko with Susquehanna.

Hi, can you hear me, guys?

Yes.

Okay, Jack. And we know your name too.

No, this is actually Salem on for Jack.

We know.

No worries. Can I, actually want to start with an ROE target. I mean, do you guys have in our retarget you guys could speak to and maybe just talk to through some of the levers to get there?

Yes. We've not historically provided a target. We've talked about it. I think, given the size of the repurchase efforts over the last couple of years, it didn’t make sense to set targets because of the magnitude and we didn’t know where the equity price would be. As we've said before, we'll think about that and probably give you some color, my guess is that later this year.

Okay. And then, the second question was on gross margin. It looks like you guys are guiding to flat to slightly down gross margin on an adjusted basis, if I heard that correctly. Could you just maybe talk through some of your assumptions there embedded in there and is there an assumption of any greater shift to the first time buyer in that guidance?

Yes. This is Ryan, I'll take that one. And I think where I'd want to start with this is first we highlighted that our margins are expected to be 23 to 23.5 for all of 2018. That margin's likely still among the highest in the space and I don’t think we should gloss over that fact. So, it is slightly lower than where we operated in 2017. Mix change is certainly can drive that but the biggest thing that's driving the change is we're continue doing till you incur lot labor and material costs. We're seeing increases. Not all of that are we able to pass on to the consumer. So, we're going to continue to focus on it. Our expectation is that we're going to continue to enjoy a fairly attractive margin profile in 2018. We need to keep an eye on where the lumber and concrete specifically go given that they're at very high rates at the current time.

And next we move to Stephen Kim with Evercore ISI.

Yes, thanks guys. Ryan, I have heard two things in the call thus far that surprise me, I mean, didn’t contrast to what I'm hearing from the heads of the your two largest competitors. The first was your desire to manage down specs when D.R. Horton have been really pushing towards and extolling the virtues of standardization in their go to market strategy. And I believe in respect to that, you mentioned, I mean or as you and Bob mentioned the danger of having too many specs when the cycle turns down. But even there, I thought the lesson were in from the last down cycle was that the builders did best to able to blow through the land inventory quickly by building out their communities. So, I actually didn’t think the lesson learnt from the last down cycle that having too many specs was the problem, rather I thought the problem was builders who's tried to tow the line on price and maximize margin and that reeled in a lot of bad land holdings due to down cycle. The second thing I heard that was different was leverage. Both the heads of the other two companies have expressed a serious desire to operate with the leverage significantly below historical net, got the cap level. And so, I was curious if you could sort of talk a little bit about leverage specifically and why you don’t think maybe delivering operating with a significantly lower level of leverage than you start with, is a good idea.

Stephen, thanks for the questions. I'll take the first one on specs, I'll have Bob handle the leverage question, other than I'll reiterate the range that we've said we believe is most attractive for us to operate within. But let me start with the spec question and specific to standardization. I'd ask or at least admit that we not confuse standardization and the ability to be more standard and efficient in the operating production cycle with the use of spec. Part of our work with our commonly managed plans with our zone operations, with the lot of the work that we did to drive value engineering and should cost in gains. All of those gains and part of the reason that our margins are where they're at is because of the fact that we are standardized. Certainly we have room to go and room to improve but we don’t believe we have to use speculative inventory to take advantages of those gains. As far as the adjusted cap range we've said for the last 3+ years that our optimal range is to operate within a 30% to 40% band. We have talked fairly openly that because of the very large share repurchase in 2016 and '17 combined that we are going to naturally accrete slightly higher than 40% but we would give guidance's to when we would come back within that range which we expect to do in 2018 through the normal course of operation. So, I'll let Bob pick it up from here and share a little bit more.

Yes. Certainly, as we talked about, we target a range that we're very comfortable with. If you look at our capital structure on top of that, we've got $3 billion in debt right now. A $1 billion of it has tenured longer than 14 years. The other $2 billion only $700 million is in three years. The rest is eight, nine years out. So, we have a very long dated capital structure at very attractive financing rates. So, to think through that, our interest coverage is very strong. To sit on cash and think about net debt, to me we got an unproductive asset on the balance sheet and we've talked about as we're going to use that either to invest in the business or to return to shareholders. Doesn't mean we would never hold cash, doesn't mean we wouldn’t think about our leverage structure. But where we sit today, we feel really good about. And Ryan said exactly right, it's not for the share repurchased activity. We have a very low net debt to cap and a low debt to cap. So, we feel good about our balance sheet. And the business generating this $6 million to $800 million of cash flow this year, we talked about it earlier and even in the prepared remarks highlighted, we can think about leverage is part of that. Because we're going to have a lot of choices to make with the cash flow we're generating. So, I don’t like to comment on what other folks are saying but I can tell you we've been pretty consistent and our capital structure is pretty sound right now.

And we'll move on to Stephen East with Wells Fargo.

Well, thank you. Good morning, guys. Ryan, you gave some lot of good information in your prepared remarks. And a couple of things stood out that I was hoping you could talk a bit more about both on product side. One the active adult, the second the entry level. You're talking about really going through a big process. It sounds like with your active adult repositioning product et cetera. Could you talk a little bit about how much of this is driven by the efficiency side of the world and how much is driven by the demand side where your acknowledgement that the competitive landscape is definitely changing is everybody or a lot of builders are trying to pivot toward active adult. So, just trying to understand what's really driving it and what you think the outcome is on where you want to get to on the active adult. And on entry level, maybe I've missed it but when do you see entry level was obviously your better performer just on a year-over-year performance. When does that start to grow meaningfully versus the rest of your business? I know, '17 and '18 weren't the targets but I didn’t know if '19 we should see that as a percentage of total accelerate?

Yes Stephen, good morning. This is Ryan. Let me start with your first question around the active adult floor plans. And where I would take you back is the beginnings of some of the work that we did around our 12 step process back in 2012. One of the very first product lines that we attacked through our 12 step process and our consumer validation and all of the research that we did was with that active adult floor plan line up. It also happens to be the line-up that we get the most leverage out of throughout the entire country because we're able to use those floor plans in a very high percentage of our active adult communities. One of the things that we said with our focus on the consumer and getting feedback from consumers as they change what they want and how they live is that we would update those product lines very similar to the way I think you see the auto manufactures do. There are changes to designs and the features as technology improves, as the consumers desires change and that's exactly what you're seeing, that's to do with this active adult floor plan. We're really excited about it. And we have the communities that we can readily deploy these new and improved floor plans into. So, I think it’s part of our process. It's opposed to saying that its demand or there's something else that's driving it or the competitive environment. It's part of the strategy that we laid out and we think that we're going to like the results that we get from it. And then, as far as part two of the question.

Entry level.

Entry level, sorry I was I drew blank there, Stephen. As far as entry level goes, we're running the playbook and the strategy that I laid out about 18 months ago that we would start to see a shift of some of our investment in move up go in two entry level. As we sit in the land committee and we see the transactions that are coming through, we're seeing it. We've said that it wasn’t going to be a dramatic overnight shift but you would see it slowly start to filter into our business as we appropriately index to what the market demand was in the individual market that we operate within. So, we like where we're going, I think we're already seeing more of that business in 2018. And I think by 2019 and beyond you would see this be for the most part right size to where we want to be.

And that will conclude today's question and answer session. At this time, I would like to turn the call back over to Mr. James Zeumer for any additional or closing remarks.

Okay. Thank you, operator. We appreciate everybody's time this morning. And we're certainly available for questions throughout the day. And we look forward to talk speaking with you on the next conference call.

And that will conclude today's call. Thank you for your participation.