Good morning, and welcome to Taylor Morrison's First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce Mr. Jason Lenderman, Vice President, Investor Relations and Treasury.

Thank you, and welcome everyone to Taylor Morrison's first quarter 2017 earnings conference call. With me today are Sheryl Palmer, President and Chief Executive Officer; and Dave Cone, Executive Vice President and Chief Financial Officer. Sheryl will begin the call with an overview of our business performance and our strategic priorities. Dave will take you through a financial review of our results, along with our guidance for the next quarter and for the full year. Then Sheryl will conclude with the outlook for the business, after which we will be happy to take your questions. Before I turn the call over to Sheryl, let me remind you that today's call, including the question-and-answer session, includes forward-looking statements that are subject to the Safe Harbor statement for forward-looking information that you will find in today's news release. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission. And we do not undertake any obligation to update our forward-looking statements. Now, let me turn the call over to Sheryl Palmer.

Thank you, Jason, and good afternoon everyone. We appreciate you joining us today as we share our 2017 first quarter results. Before I get to those, I want to take a moment to acknowledge our Chairman Tim Eller who recently announced his retirement from our board effective May 31. Tim has been an integral part of this company's success and I want to personally thank him for his leadership, counsel and friendship and on behalf of the board I would like to express our collective appreciation for his service and his immense contribution he's made to Taylor Morrison these last five years. Now let's turn to our impressive results for the first quarter of 2017 which I'm extremely excited to share with you. For the three months ending March 31, we met or exceeded all metrics to which we guide, our average community count was 298 and in line with our guidance to be relatively flat on a sequential basis. Net sales orders is a tremendous story for the quarter and it's important to appreciate the effect it has in showing up the balance of the year. We totaled 2425 net sales orders representing a year-over-year increase of more than 30% and a two year growth rate of 40%. Our orders growth for the first quarter was very encouraging and was something that we saw across our portfolio, it wasn't just one or two markets that delivered, it was a collective effort of each team, this was driven by our strategy to better prepare ourselves earlier in the year as we know the labor environment will be increasingly pressured as we move into subsequent quarters. We must ensure our customers have seamless delivery process throughout the entire year which is best accomplished with a plan production cadence and avoiding in…

Thanks, Sheryl, and hello everyone. For the first quarter net income was 35.6 million a year-over-year increase of 37% and earnings per share was $0.30 an increase of 43%, total revenue were 759 million for the quarter including home building revenues of 750 million. Home closing gross margin includes about capitalized interest was 18% and inline with guidance. We believe our first quarter closings gross margin represents the lowest quarterly rate for 2017 as we expect our rate to be sequentially accretive as we move through the year. Moving to mortgage operations, we generated more than 40 million of revenue during the quarter representing a 48% increase over the prior year. Gross profit was about 4.5 million with a marginal rate of nearly 39% 660 basis point improvement over Q1 last year. Our capture rate for the quarter came in at 74%, our mortgage teams once again delivered an outstanding quarter. SG&A as a percentage of home closing revenue came in at 11.8%, which represents 50 basis point improvement over the prior year quarter. Last year, we spoke about the investments we are making back into the business and people and systems to drive greater scale today and beyond. We are pleased to see these investments begin to deliver leverage. We will continue to make investments going forward, but we believe these will be less material and we should continue to driver leverage year-over-year and into the future. Our ability to drive more efficiencies throughout the next few quarters will be largely based on the timing of closing and certain expenses. We remain focused on prudent cost management, which as, you know, has been one of our key priorities for many years. Our earnings before income tax is totaled 54.5 million or 7.1% of total revenue, which is an increase…

Thank you, Dave. I will wrap up by proving a couple of quick insights into the business and some specific market dynamics. Each of our California divisions are doing well, and we expect to continue the robust sales we have seen earlier in the year. When recent headline out of California that has got some attention is the proposal [indiscernible] assembly bill 199 regarding a potentially broader application of prevailing wages, its not clear if the bill will pass, and if to sell in what form. It is important to bear in mind that many residential projects in California including several of our projects already requires payment of prevailing wages for certain trades. Quite the rest of the industry, we will continue to monitor the status of the bill in the state legislature. I have mentioned the impact from the excessive rainfall experience through our California. It did set us back a bit with some land development activity and foundation start. But, we anticipate by year end, we should be okay assuming that they into extreme weather. In exciting milestones for us, is the opening of our Taylor Morrison brand in Dallas similar to Houston we know operate under both of Taylor Morrison and Darling brand within the market. This will allow for enhance consumer segmentation and strong business synergies that should only get stronger over time. Under the Taylor Morrison banner, we have acquired selective high quality land positions in Dallas and we are already seeing strong traction with more than 20 sales through March. I would like to add this expressive team from just two communities sales activities in just the first few weeks. During our last call, we provided an update on Chicago with the first quarter under our belts I am happy to report that Chicago has outperformed our expectations. Although it's the smallest division in our portfolio, it's been nice to see the success we have had with our product reposition and pricing strategy. The market appears to stand from a long awaited momentum and its certainly moving in the right direction. Let me clarify saying I believe we are up to a very good start in 2017, and I am optimistic about our markets, our focus on being return group in business and in our team ability to drive our results. I am convinced by sticking to our four colored strategy and capital allocation philosophy, we will position the company for meaningful success in the short and long-term. With that, I would like to open the call for questions, operator please provide our participants with instructions.

Thank you. [Operator Instructions] Our first question is from Ivy Zelman with Zelman & Associates. Your line is open.

Hi, guys good morning. First of, I will share congratulations on the extra role care [indiscernible] very impressive. My first question is just on the volume side, and you know, very strong order numbers continuing into April, which is great to see at the same time you maintain the absorption guidance for the full-year and scarcity could talk through a little bit how you see that playing out doesn't by a fairly significant deceleration even about normal seasonality in the back half of the year. And I am just curious is that more supply driven meaning, you know, either you plan to slowing sales pace little bit to make sure that you, you can build a home focus on consumer experiences as you have highlighted or is there something on demand-side that, you know, led you to believe maybe this current level of sales activity might not be fully sustainable and there are some [indiscernible] going on.

Yes, so you hit on I think a couple of key points. First of all thank you. And you did hit on the couple of key points. So, first we definitely plan to call some, you know, [indiscernible] forward that just start to year of late. And we release that up the cadence as I set in my prepared remarks for 2017. So, we don't back end the year from the delivery standpoint. And, you know, some point you just have to draw lines, understand and begin, you know, most plan production cadence. Part of that success also, we will have, you know, play a little bit [indiscernible] but the timing of the community of closing out through the balance of the year. So, as we look at, you know, the trend as we get into the back half that would put us somewhere in the low 2-1 case and to maintain our Q3, which isn't, you know, unusual if you look at third and fourth quarter historical trends. So, its nothing that we really see on the demand Allan, it really is more about cadence and what we have actually from the sales standpoint to offer.

I appreciate that Sheryl. Thank you. And second question on the balance sheet a lot of really good things going on there. I think the most interesting was the strong cash generation you guys have this quarter, which is pretty unusual for first quarter. At the same time, I look at your inventory balance down year-over-year in spite backlog being up and I think that all ties into you guys discussed on driving return hiring and inventory turnover higher. I guess my question is how sustainable is that if you are growing the business call it, you know, double-digits annually, you know, at some point I would think that inventory [indiscernible] needs to creep higher. I am just curious where you see that playing out over the course of the year. Is there any unusual claiming of land and [indiscernible] I missed the number you gave but it sounded a bit low for the first quarter of land spent. So, just curious how you are planning out? Thank you.

Hey, Alan good morning. Yes, so I think what you are seeing more is the function of the land spend last year, than as this year. Last year we came in a little bit under what we thought and a lot of that was more or less on the timing shifts, you know, you take California for example, as an example, where we had some plans spending and that continues to push out a little bit. And those are big dollars, so we are going to see us come back a little bit more in lined here in 2017 again we have guided to about a billion this year and you are going to see more of that spend and kind of be inline with our cadence, you are going to see heavier during the second and third quarter. That said, you know, we are razor focused on driving returns and maintaining our inventory turns and assets turns. So, that is going to play a part of this. Where we have our [indiscernible] right now we do feel strong about it, I mentioned in the comments earlier from a land pipeline perspective really what we are feeling right now is that 2019 obliviously 17 is done, 18 is done. For us there is a lot of focus is mainly.

Thanks Dave. Good luck, guys.

Thanks. Your next question is from Michael Rehault of JP Morgan. Your line is open.

Thanks, good morning everyone. And also, I will share my congrats on the recent position on the board.

Thank you.

Its great to hear. You know just kind of working off Alan prior question on sales pace and, you know, I appreciate that additional color in terms of first half versus back half which is helpful in terms of, you know, how the sales pace could move throughout the year. But, I was curious also around this topic if, you know, you have been able to obviously achieve a pretty strong rate and to me and I would be curious on your comment, but kind of feels like perhaps even better than you are looking for. And if you're going to be kind of moderating that down and part of that is seasonality as we kind of move through the middle part of the and towards the end, just curious that year starts around the ability to capture any incremental price, and if that might be a potential source of upside to the gross-margin guidance, and if you've already started perhaps to pull that price leverage here, going to in some ways help push down a little bit the sales rate as we progress in 2Q?

That's a fair question, Mike. So I'd say first you're absolutely right, I think the paces were very strong and where we were most pleased is it was across the entire portfolio. When we look at almost every division I think, there was one flap, one, maybe a unit down and everything else significantly up. So we felt really good about the quality of the locations, and I think I would point there to start Michael is that we're seeing the performance across the markets, and we feel like we're doing really well and it points to the quality of the locations and the drivers we have locally come in execution. On the pricing question as we talked about in the past that's just an absolute community-by-community decision, and I will tell you that a significant amount of portfolio of price increases through the quarter, I think it was 30%-35%.

It's actually closer to 40% of our Communities we saw a price increase.

So, I'm pleased with that. And as we look forward we'll continue to pull those levers in the right places. We are very delighted to have the backlog in front of the business desk to accomplish this production cadence that is of keen importance to manage the market activity we're seeing from the labor side. We've obviously had some headwinds on both the labor and material, but I'd like to see if the market keeps maintaining the strength. Hopefully we'll see price ahead of costs.

Yes, like Sherly said, we like our positioning and there's going to be all kinds of puts and takes with the margin this year, with commodities playing a big factor, but we also have some additional benefits obviously from purchase accounting or our effort to sail through some completed specs last year. So you kind of roll all that together with the labor, with the lumber. We still feel good about our margin guidance and that comes through in our overseeing and our backlog. We have good visibility in Q2 and Q3.

Great, that's very helpful. And I guess just following up on that, maybe asking it a different way, again I just wanted to make sure I understand it correctly that 1Q and perhaps even April, if I can add on to that, the sales pace was a little better than you were expecting. And if so maybe kind of dialing down to different markets, I mean you said that in general the strength was broad based and we see that in the numbers, but in terms of relative to you expectations, again if 1Q was a little better than expected, which it sounds like it was, where was—on a market level which markets were a little stronger than expected?

As I said, Michael, it was really across the board, I mean seeing it was—continues to be strong day, really had to a lot with our product offering last year, and the strength of the Communities all being open. When I look at California, really across the board we saw good strength. To cash this is worth a moment because if we think about Houston last year and look at how the business did this year, having all those Communities perform to budget, was very meaningful, so you saw nice strengths across Texas. We also saw great numbers in Austin and Dallas, and then obviously we had the start of Taylor Morrison. I have to mention Florida and the Southeast, because in these markets we saw great strength that I will tell you exceeded our internal budget.

And Michael, maybe one more thing too, the great success we've had the first four months if that continues that's obviously going to put some short-term pressure on our average Community count just relative to the time, possibly closing out earlier and then just when the new Communities are coming online with that guidance so obviously we're opening and closing about the same amount. So we'll see with that pace strength but obviously we like the trajectory right now.

Great, thanks very much guys.

Thank you.

Thank you. Our next question's from Stephen East from Wells Fargo. Your line is open.

Thank you, and congratulations on the quarter, and of course Sheryl, I had my congratulations to you for your Chairman role.

Thank you.

That is great. So I've got to ask you, you all purposely tried to drive the absorption faster etcetera. Can you talk about how you achieved that, what you all did to drive it and I guess the big question is why wouldn't you carry it after the year or is it repeatable etcetera, what were you all doing to make it happen now and possibly not carry it through the year?

Good question, Stephen. There is not one thing here, there's a number. I think first of it is an absolute focus, the projection cadence, and getting an early start in the year. That has come through some of the discussions we've been having through the last couple of quarters with everyone, regarding our sales focus, our CRM tools, our projection efficiency, our backlog, pipeline management, really giving the sales team more time backing their data, really focus on customers and follow-ups, all of those things with an expectation of really driving to-be-billed sales early in the year, so, one, we don't double down on inventory, and two, to provide our customers a better overall experience. There is no one of those that just proportionately kind of got up there but I will tell you the work that's been done for the last many months and a consistent focus sort of across the entire business is really what's allowed us. And as I said, Stephen, I think we all appreciate that as we continue to see starts move out across the U.S., pan 15% depending on whose numbers you want to believe. The infrastructure isn't moving as quickly, and to the extent that we can be better prepared earlier in the year and really get that production in the ground without having to double down on specs. We think that's a great strategy. So, part of it is having the courage to really even out our production and not let sales ahead of us. We feel really good about where we're at. Could we continue it forward if we wanted to? Probably, but it's really about making sure that we don't let sales get ahead of our ability to start and being able to manage the large inventory we have on the ground.

Okay.

And then I'll just say that I think that we've put in place Stephen are working we're really able to drive this pace actually without changing incentive. We're down on incentives sequentially from Q4.

Okay, yeah, that was one of the things I wanted to understand there. And one follow-up to that and I'll quickly turn to your terms. Does that mean, do you have a red any of your markets have actually under-performing the markets as you go through the year, and then, Dave, we talked about the asset turnover etcetera, can you all maybe outline where your RV goals are maybe for this year, next year and I guess the primary ways you look to improve that inventory turnover?

Yes, let me get the first one, Dave, and turn to the second. The answer's no Stephen, we don't sector under-perform our markets. We might have timing differences but when I look at the full year, if we put some forward and based on Community or our availability it might moderate, but we certainly won't—I wouldn't call that under-performing any of our markets.

Okay

Sorry, as far as the RV, what we've done in the past and hold to that, our plan is to drive accretion to year-over-year without checking out necessarily these specific targets. That's what we're really focused on. We look at—if we look at Q1, it's only 12 months. We're able to increase our RV, by a little bit more than 200 basis points. So, we're going to continue that focus. I don't know if we'll see that level of accretion year-over-year during '17, but we're driving that, we're driving that through some of the things that Sheryl mentioned, production change is that huge aspect of this, just being focused on our inventory and asset levels, operating the productions like a little bit more just-in-time. A lot of it is just kind of the basic 101 on maintaining the balance sheet. And then obviously we worked down our years of supply over the last few years were around 5% now, which is a good level for us—five years. So it's a good level for us and we are going to continue to be very focused on returns.

All right, thanks a lot.

Thank you.

Thanks. And next question is from Nishu Sood of Deutsche Bank. Your line is open.

Thanks. The guidance for closings in the second quarter 1750, I think is the midpoint. Can you look at your history of the cadence of closing because usually a much bigger step-up from 1Q to 2Q. So looking at the 1630 in 1Q to 1750 normally they would have been a bigger jump. I'm just trying to reconcile that with the comments about being more focused on the construction cycle and managing it through some of the labor and supply chain difficulties. With those efforts shouldn't we have expected a greater jump in closing, maybe there is some pull forward effect there? I mean, I know you obviously raised the year closings number but why not a bigger step also and to get closings?

So, a couple of things there; one we had a little bit more here in the first quarter than we thought and then you know, with a little bit of that weather issue in California, so with all that rain the impact started, so there is a little push out from the closing standpoint. Obviously, you have an impacted sales but it is impacting closing. Then probably lastly I take it just a year-over-year increase that we saw in Q2 of last year was a pretty big step-up because around 23 or 25% somewhere in that frame, so just from a comparability standpoint, it's a little bit cover, but a lot of this just really comes down to timing we obviously still focused on our annual number, which we did take up -- with redundant point up by 100.

Got it, got it. Yes, and definitely that was the message you got from the annual guidance, the actions that you are taking to counter the supply chain, the labor difficulties, so I'm wondering if you could dig into that a little bit more specifically on spec management perhaps how you are managing your start scheduling et cetera. What are some of the specific things you are doing and is it going to result in an improvement in construction cycle times, if so over what period. I was wondering if you could just dig into that a little bit, please.

That's a fair question. Once again, you see there is a number of things there is not a one magic bullet here. What we are trying to do is get back some of the cycle time that candidly we've lost as an industry over the last couple of years. We have markets that are probably two to six weeks be hot you know, off of what I would call ideal schedules from what we were building to three years ago. The part of it is calling some of that back. From a spec management standpoint you are absolutely right as we talked about to the last, I think Dave for the last three four quarters just talked about are just in time on spec delivery. We like specs; we just prefer them to be sold early in the production cycle. Obviously, that makes a improved margin profile and so when you look at our specs today, it's just the total number out about for community we like but not we like more, we just don't really have any aged inventory. From a production standpoint in the way we are working with our trade. There are I mean I just can't be more pleased with what the work that teams are doing, it's really division-by-division, community-by-community looking at how we release the level of communication production part really working with the trades to understand the resources they had, so that when we guess them within our job sites, we keep them, it's being prepared and for every trade that shows that every day, it's just a heightened level of communication; the heightened level of scheduling. And then, it's all the things we've talked about in the past issue, it's you know, the safety of our job sites, the respect that we give our trade partners. It's the way we pay our builders, all of those things really make a difference, but we are finally starting to see the impact in the field.

Got it. Thank you.

Thank you.

Thanks sir. Next question is from Mike Dahl of Barclays. Your line is open.

Hi, this is Anthony Trainor filling in for Mike this morning. Thanks for taking my question. So my first question is that on the gross margin guidance, so now versus two months ago when you gave the guidance, it's maintaining at the same, so I just wanted you to - wondering if you could add some color on the puts and takes of higher expectation shift over the last couple of months, seems like there is some pockets of price and power, but this gives the some more incremental inflation on materials. So I was wondering if you could walk through kind of how your expectations have evolved over last couple of months there?

Sure, Anthony happy too. Yes, so for the year we guided low to mid 18% and that should result some modest improvement year-on-year when compare to last year's GAAP rate. We have good visibility in the backlog and the Q2 and Q3 like I mentioned when you look at kind of the puts and takes we are going to anniversary for accounting as well as our effort around the selling of each specs. We are going to get some modest benefit from our strategic procurement instruction efficiencies that Sheryl has been talking about, we are going to see those start to roll in a little bit more you are going in late Q2 and early Q3; obviously, benefiting from lower capitalized interest with the increased units while interest expense stays flat. And then, of course we believe pricing stay ahead of cost from our pressure standpoint probably comes down to three things continuing to see higher land cost roll through as we burn off the lower cost land and probably some of the mix shift as well. And then, from the labor standpoint, we continue to see labor pick up, but it's that much lower levels than we saw last year. And then, obviously around the commodity to talk a bit from a lumber perspective but we think a lot of that was anticipated when we look at starts already having the ground those prices or those costs are locked in a way and we use price locks as we look out. So that provides us a little bit of protection as well, so I think when we look at overall community -- sorry, commodities, there is going to be some movement but we also anticipate we are going to see a little bit of offset from a cost perspective there as well. So I would say that's the list of things that we took into consideration when reassessing our guidance.

Thanks. That's really helpful. And then, my second question just looking for a little more color on this segment realignment; can you -- I guess explain a little more kind of what happened with the segment alignment, what drove it? And then, is there any implication for lower cost given the temporary alignment or was it just more of an accounting treatment change?

Yes, more along the latter, we were just trying to better align geographically versus where we were before. So it makes a little bit more sense when we are looking at the map. And I would also say that the way we try to group them economically, they operate in a more similar way with this new grouping. That has evolved over the last couple of years. So, few of those factors led us to think in that. That was the right time to realign them.

Great. Thank you.

Thanks. Our next question is from Jack Micenko of SIG. Your line is open.

Hi, good morning guys. This is Phil [indiscernible] for Jack. Sheryl, I think everyone acknowledges at this point that the first time buyer has arrived. Just wondering, I build this sort of shift their focus on to that buyer. What are you seeing in terms of pricing specifically for land parcel on a year-on-year basis and what's your expectation for margin profile out of your JEH and earnings buyer?

And so, as far as land parcels prefers to have buyer that's a very difficult question because it really does come down to land parcels in certain markets and certain locations, so it's different ways to serve that buyer as we've talked about in the past. So for example a significant part of our first time buyer comes from the bay. And if I think about the land residual in our bay holding those could be somewhere. Those could be in the 40% range because those are core locations and that could be AFPs as 700,000-800,000 that would be very, very different than something that's a little bit more suburban and so it's a very we don't really look at land parcels by consumer group, really it's more the overall land experience and where we are buying it and then just all consumers. Sorry, I don't have really great deal on that one for you.

I guess it's just a margin profile on the JEH in Orleans…

Yes, go ahead, Dave.

Yes, absolutely. So, I will take JEH [indiscernible] in there. That margin actually is above our company average. And then, from the Orleans market I am going to exclude Chicago from that. Obviously, we kind of reset the bar there a little bit. But if you look at the Carolina as I would say that one is in line with Company's average.

Okay. And then, Dave just wondering if your appetite for share purchases has changed in anyway given that, you know taken measures to increase your both after the recent transaction?

For us, it always comes down to the best use of cash what kind of drive the best return. So, we are going to continue to be opportunistic, always trying to balance that with the plan, landing developments then we want to make back into the business. Obviously, you know, the last 90 days been in the market selling shares did play a factor. But, we are going to continue to evaluate the capital allocation strategy and share repurchase that's going to remain a key lever in that.

Okay, thank you.

Thank you.

Thank you. Our next question is from Will Randow of Citigroup. Your line is open.

Hey, good morning. Congratulations on both the quarter. You guys mentioned AB 199 and I believe there maybe certain curb outside for our market rates housing. Is it possible that potential changes may actually favorable the impact you are waiting too prevailing veg communities. And could you share any latest updates do you have on AB 199?

Yes, you know I don't think there is a lot of new news. And what we know that the language that full size have come to our favorable. And they would not be negatively impacted the residential market. At this point, well, we are not counting on any AB 199 to produce when that our back. We are hoping that we don't get any wind in our face. And I think based on our work that's been done. That's hitting with the assembly where, you know, we will wait and see we have probably about another four to five weeks and before that the cut over date, I think its June 2.

Thanks for that. And lastly, how are you guys handle ton thinking about the potential listening mortgage underwriting standards today. Just given transaction and new administration and not a whole lot of news flow out of it, but it sounds like they are bit favorable towards listening?

Yes, you know there is a lot of news. You are right, but I would tell you at least the flow that's come in has been pretty favorable. I mean we have had a few new announcements just this week. And a couple came out Fanny May earlier in the week that were affective immediately and I think that will be very helpful, and helping customers qualified the first was on the student loans or installment debt, you know, today. If somebody the current policy would allow their borrowers to exclude -- debt. If the borrower wants to provide avenues to the debt within the satisfactory pays with 12 months with no late payments. But the new policy basically would say that, you know, you don't have to count bad debt against the borrower if there is prove and for the last 12 months has been paid by somebody else. This second one really some [indiscernible] will calculate the monthly obligations on student loans. So, I think both of these really do help the overall. The third announcement that we have heard, we don't have clarity on it, and that's the choice act and I think the first hearing was yesterday. And that new legislation would allow the president authority to fire it will to CFPB director and that the new legislation will also allow for the deputy director. So, I think all of these things, you know, are going to be helpful. I don't think to your point we have seen early any significant change to lender guidelines. But what has changed is at the refi business has been reduced. And I think the machines the lenders have filled up will likely make them more competitive and think harder about, you know, the self imposed overlays that we have seen over the last, you know, couple of years. And you know, probably change the overall lenders appetite. I think I will find they are very encouraging, Will.

Thanks for that. It sounds very interesting especially the third point to be quite favorable, which you just mentioned. Congrats again, guys.

Thank you.

Thank you. Our next question is from Alvaro Lacayo of Gabelli. Your line is open.

Good morning guys, and then, congratulations Sheryl.

Thank you.

So, just I wanted to touch on cost again and expectation now versus where they were before, I mean, you guys highlighted the purchasing accounting the age specs, the lower capitalized interest which is all sort of in plan and driving the benefits. But then if you look at the quarter you will see strength pretty much across the board and deliveries, orders, pricing and absorption. But, you know, you sort of reiterate that gross margin balance, which is better year-on-year, you know, the slightly better just wondering if you could just talk about put some numbers behind the cost inflation expectations now versus where they were at the beginning of the quarter. And if there is any sort of variability and if you think about that might be a little more conservative in terms of how you are guiding going forward?

Yes, from a cost perspective, you know, say Q1 as an example, direct cost were probably up about a quarter percent number being the biggest factor that was 10% up of probably up at the beginning of the year we are looking at more like 3%. So, clearly, that kind of played a factor. But, again, we have price so that helps to defer, you know the impact. So, for us we are going to see more of this impact late Q3 and into Q4 assuming the prices still stay high and it's obviously the possibility that they could start to turn back down at some point. So, lumbers probably the biggest season of that, outside of that, you know, concrete is up, also copper; those things were largely anticipated most of other commodities are general flat with the few that are down. You know as we go forward, you know, looking at all these puts in takes and what we have from a pricing perspective. I don't know if I would say our guidance conservative as much as it is, you know, more prudent. And I think there is always puts intakes s we look at the different challenges and lumbers is really no different. I mean it's the commodity business at the end of the day and our job is to manage through the type of challenges and we are just do that.

Got it. And you mentioned that pricing was across 40% of the footprint, you know, on a normal quarter or just a normalized level. I mean, how significant was that versus what you have seen over the last quarters. Is that a meaningful update from a percentage standpoint?

Well, having a look at the last three or four quarters, we are probably somewhere in the 30% or maybe a third, so it is slightly up.

Yes, we have had some quarters higher, we have had some quarters lower, but it's not meaningfully different. I think to Dave's earlier point that we are still raising prices we are still getting the sales, so we actually feel good about, you know, the portfolio.

You can keep in mind the level of price increases, they are modest. We are not, you know, making big increases each family go out there and do that. So, there just a little bit more meter maybe then what it was done a few years ago.

And then, finally, maybe just an update on how you guys see M&A activity in the industry. There is a recent deal announced that, I don't know if there is anything but from a momentum standpoint, but how do you guys seeing the environment?

You know, I think the environment is healthy. I would tell you that as we seem [indiscernible] the activity and there seems to be, you know, a fair number of smaller transaction that's out there. And we are seeing some small local market regional, don't know yet if there is anything makes sense. But at least there are bucks, you know, we will see it.

Yes, you know, its part of our capital allocation philosophy. We always reinvest back in the business, and we kind of turned the M&A and I would say that its encouraging thing probably is the gap between buyers and sellers starting to close again to be more so then we have seen in the past. But, you know, it comes down to finding the right deal at the right time that accretive for the business.

That's the deal. And the cultural attributes…

Great, thank you very much, and congrats guys.

Thank you.

Thanks. Our next question is from Alex Rygiel, FBR. Your line is open.

Thank you, good morning. And thank you for taking my questions. Could you expand a little bit more up on the labors shortage, are you seeing any meaningful impact on your cost or is it more sort of a delivery delay?

You know I think it's both. I mean it once again it vary market by market specific Dave went through some of this just specific areas but it's actually as you travel through the business you feel that crunch in either ability to get on size or the cost increases at different points in the cycle, it seems like every market experiences delays at different times maybe the exception to that is Houston where we've actually seen some robust energy backed into the trade base from what happened in couple of years ago with the energy sector. But it is very hard to paint a single brush across the portfolio, I would tell you we have finished trade challenges in some markets and we have framers in others.

And then could you also expand upon your spec strategy a little bit and have there been any kind of recent changes to spec strategy per given market size?

I don't know that I would call it change in strategy, what we've done is really focus the division on the right specs and the right house on the right and get with the right selection to give us the greatest opportunity to sell early in the process. Once again as I said earlier, we really like specs are an important part of the business or important part of our production cadence and really build the quality of community and actually have a lot of you know empty lots, so they are really important, the only thing we have really tried to continue to focus on from a balance sheet and a consumer delivery standpoint is when we sell those specs in the cycle.

Very helpful. Thank you.

Thank you.

Thank you. Our next question is from Jay McCanless of Wedbush. Your line is open.

Hi my questions have been answered. Thank you.

Thank you, Jay.

Thank you. Our next question is from Carl Reichardt of BTIG. Your line is open.

Hi guys, thanks for taking the question. On the incentives I think David you mentioned that they were down as I think we are expecting to be from Q4 to Q1 year-over-year were they up or down and about how much?

They were slightly up.

And then when you guided flat community count for this year, can you tell me what openings versus closings are likely to be, and then in this particular quarter was there a significant difference in sales rate on stores that were open say in the last year versus older stores?

Yes, so on the first, we are opening approximately 90 and then closing approximately 90 and then to your second question yes what I would say is the existing communities one that are opened more than a year we did see a higher pace there, a lot of that is due to bringing on the new markets as well as just high community count growth, so these have kind of all ramped up now on and are definitely hitting our strides. As we always saw when we come out with our guidance, it is really based on how it rolls up from the field and you are just seeing kind of the maturation of these communities really starting to come through.

It's really an important step Dave and I was just talking before the call about probably somewhere close to 1000 basis points different in the sales that we had coming through the business now, it has been over a year or more, so you are getting some efficiency and that is part of what you are seeing in the numbers.

Okay, thanks very much guys. I appreciate it.

Thank you.

Thanks. At this time there are no other questions in queue. Turn it back to Ms. Palmer for closing remarks.

Thank you all very much for joining us today. Thanks for your kind remarks and wish you a wonderful day and we will talk to you next quarter.