D.R. Horton Inc (DHI) — Q2 2015 Earnings Call Transcript

Thank you, Kevin. Good morning and welcome to our call to discuss our financial results for the second quarter of fiscal 2015. Before we get started today’s call may include comments that constitute forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in D.R. Horton’s annual report on Form 10-K and our most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. For your convenience this morning’s earnings release can be found on our website at investor.drhorton.com and we plan to file our 10-Q in the next few days. Also after the conclusion of our call we will again post supplementary historical data on the investor relations section of our website for your reference. The supplementary information includes historical data on gross margins, change in active selling community, product mix and our mortgage operation updated for this quarter’s results. Now I will turn the call over to David Auld, our President and CEO.

Thank you, Jessica and good morning. In addition to Jessica, I am pleased to be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer. The spring selling season is in full swing at D.R. Horton. During the second quarter housing market conditions were healthy and relatively stable with new home demand growing moderately across all our markets. Our sales absorption improved significantly during this quarter as our homes sold increased by 30% from a year ago on a 4% increase in active selling communities, with double-digit percentage sales increases in all three of our brands. This reflects strong performance in our core D.R. Horton communities and growth of our Emerald Homes and Express Homes brand, enabling us to expand our industry-leading market share. Compared to the year-ago quarter our number of homes sold doubled in our luxury Emerald communities and tripled in our entry level Express communities. Our homes closed increased by 33% and we delivered another solid quarter of profitability with $230.1 million in pretax income on $2.4 billion of revenue. We had a great first half of 2015 and expect the second half to be even better, with a sales backlog of 12,177 homes at March 31, and a well-stocked supply of land, lots, and homes. Our continued strategic focus is to leverage our operating platform to generate double-digit growth in both revenues and pretax profits on improving cash flows and increasing our returns.

Net income for the second quarter increased 13% to $147.9 million, or $0.40 per diluted share compared to $131 million or $0.38 per diluted share in the year-ago quarter. Our consolidated pretax income increased 14% to $230.1 million in the second quarter compared to $201.9 million in the year-ago quarter and home building pretax income increased 9% to $208.6 million compared to $191.7 million in the prior year quarter. Our second quarter home sales revenues increased 38% to $2.3 billion on 8,243 homes closed up from $1.7 billion on 6,194 homes closed in the year-ago quarter. Our average closing price for the quarter was $281,300, up 4% compared to the prior year, primarily driven by a 3% increase in our average home size.

The value of our net sales orders in the second quarter increased 33% from the year-ago quarter to $3.2 billion and homes sold increased 30% to 11,135 homes on a 4% increase in active selling communities. Our average sales price on net sales orders in the second quarter increased 2% to $284,400. Cancellation rate for the second quarter was 20% compared to 19% in the year-ago quarter. The value of our backlog increased 27% from a year ago to $3.6 billion with an average sales price for homes of $293,500 and homes in backlog increased 21% to 12,177 homes. Our backlog conversion rate for the second quarter was higher than our expectations at 89%. We expect our third quarter backlog conversion rate to be in the range of 78% to 80%, up from 76% for third quarter of last year.

We are experiencing strong growth in profitability in the heart of our business in our D.R. Horton branded communities, which accounted for the substantial majority of our sales and closings this quarter. We are also pleased with the progress and performance of our Emerald Homes and Express Homes brand. Emerald Homes, our brand for higher end move-up and luxury communities is now available in 41 markets across 16 states. Our Emerald product offering has been well received by home buyers and we plan to continue expanding our footprint of higher end communities across the country. In the second quarter, homes priced greater than $500,000 accounted for 15% of our home sales revenue and 6% of our homes closed. Our Express homes brands, which are targeted at the true entry-level buyer, focused primarily on affordability, is now being offered in 44 markets and 13 states with the significant majority of our Express sales and closings to date coming from Texas, the Carolinas, and Florida. Customer response to our affordable Express product offering has been very positive and we expect to have Express Homes communities open in a substantial majority of our markets by the end of this year. This quarter Express accounted for 18% of our homes sold, 13% of homes closed, and 8% of home sales revenue. The average closing price in an Express home in the second quarter was $179,000. We are striving to be the leading builder in each of our operating markets with all three of our brands and we plan to maintain consistent broad diversity in our product offerings over the long term.

Our gross profit margin on home sales revenue in the second quarter was 19.7%, down 10 basis points from the first quarter and in the middle of the expected range we shared on our last call. The consistency in our gross margin in the first two quarters reflects the stability of most of our markets today and the normalization of housing market conditions we have seen over the past year, while the increases in our average sales price have moderated as we have increased our mix of entry level product. We are raising prices or reducing incentives when possible in communities where we are achieving our target absorptions and we are working to control cost increases. These factors have enabled our gross margins to stabilize within our normal historical range. Our general gross margin expectations remain unchanged from what we shared the past several quarters. In the current stable housing environment we continue to expect our average home sales gross margin to generally be around 20% with quarterly fluctuations that can range from 19% to 21% due to product and geographic mix and the relative impact of warranty and interest costs. As a reminder, our reported gross margins include all of our interest costs. For the upcoming third quarter we expect our home sales gross margin will be in the range of 19.5% to 20%, consistent with the first two quarters of the year.

Home building SG&A expense for the quarter was $242.4 million, compared to $187.9 million in the prior year quarter. As a percentage of home building revenues our SG&A improved 70 basis points to 10.4% compared to 11.1% in the prior year quarter as our significant revenue increase this quarter improved our SG&A leverage. Based on our projected backlog conversion, we expect our SG&A as a percentage of home building revenues in the third quarter to be in the range of 9.9% to 10.2%, which would be a year-over-year improvement of 40 to 70 basis points. Our ongoing annual target for SG&A as a percentage of home building revenue is 10%.

Financial services pretax income in the second quarter increased 111% to $21.5 million from $10.2 million in the year-ago quarter. 89% of our mortgage company’s loan originations during the quarter related to homes closed by our homebuilding operation. FHA and VA loans accounted for 45% of the mortgage company's volume compared to 43% in the year-ago quarter. Borrowers originating loans with our mortgage company in this quarter had an average FICA score of 717 and an average loan to value ratio at 88%.

At the end of March we had 21,300 homes in inventory, of which 1,700 were remodels, 10,200 were spec homes and 4,100 of the specs were completed. Our construction in progress and finished home inventory increased by $196 million during the quarter, due to our seasonal home construction activity for the spring selling season. Our second quarter investment in lots, land and development totaled $507 million, of which $282 million was to replenish finished lots and land and $225 million was for land development. At March 31, 2015 our lot portfolio consisted of 122,000 owned lots with an additional 55,000 lots controlled through option contracts. 64,000 of our lots were finished, of which 33,000 are owned and 31,000 are options. Our 177,000 total loan lots owned and controlled provide us a strong competitive position in the current housing market with a sufficient lot supply that supports strong growth in sales and closings in the future periods. As we invest in new communities for all three of our brands, our main underwriting criteria remains unchanged; a minimum annual pretax return on inventory of 20% defined as pretax income divided by average inventory over the life of the community. We expect each community, regardless of brand, to achieve this target by optimizing the balance between absorptions, margins, and inventory levels, as our underwriting continues to support our ongoing goal of continual improvement in the company’s home building pretax return on inventory.

During the second quarter we recorded $4.4 million in land options charges for write-offs of earnest money deposits and due diligence cost for projects that we do not intend to pursue. We also recorded $8.1 million of inventory impairment charges primarily related to an expected land sale in our Southeast region. Our inactive land held for development of $271.3 million at the end of the quarter represents 12,900 lots, down 7% from December and down 41% from a year ago. We continue to formulate our operating plans to work through each of our remaining inactive land parcels, to improve cash flows and returns, and we expect that our land held for development will decline further this year. We will also continue to evaluate our inactive land parcels for potential impairments, which may result in additional impairment charges in future periods, but the timing and magnitude of these charges will fluctuate as they have in the past.

At March 31st our homebuilding liquidity included $665.8 million of unrestricted homebuilding cash and $710 million of available capacity on our revolving credit facility. We had $175 million of cash borrowings and $90 million of letters of credit outstanding on the revolver. Our gross homebuilding leverage ratio was 39.6% and our homebuilding leverage ratio net of cash was 34.7%. We repaid $158 million of senior notes at maturity in February and the balance of our public notes outstanding at March 31 was $3.3 billion, which includes $500 million of 4% senior notes we issued in February. We had no debt maturities for the remainder of fiscal 2015 and as of today we have a total of $542.6 million of senior notes maturing in the next 12 months. At March 31, our shareholders equity balance was $5.4 billion and book value per share is $14.78, which is up 11% from a year ago. For the fiscal year-to-date period our cash used in operating activities was $168.8 million, down from $265.8 million in the year-ago period reflecting our efforts to improve our cash flow from operations.

Looking forward, we would like to update our expectations for the full fiscal year, which are still relatively consistent with the beginning of the year. As we are well into the spring selling season and gaining better visibility we are tightening the ranges that we originally provided. Our updated expectations continue to be based on the current relatively stable housing market conditions and we still expect to generate a similar level of profitability and operating margins as our original range. In fiscal 2015 we expect to close between 35,500 and 37,500 homes and generate consolidated revenues of between $9.8 billion and $10.5 billion. We anticipate our home sales gross margins for the full fiscal year of 2015 will range from 19.5% to 20.5%, consistent with our margins during the first half of the year. We estimate our homebuilding SG&A expense will range from 9.9% to 10.2% of homebuilding revenues for the full year. We expect our financial services operating margins to range from 30% to 33%, slightly higher than our original range. And we continue to forecast our fiscal 2015 income tax rate to be between 35% and 36% and our diluted share count to be approximately 370 million shares. For the third fiscal quarter of 2015, we expect our number of homes closed to approximate the beginning backlog conversion rate in the range of 78% to 80%. We anticipate our third quarter home sales gross margin will be in the range of 19.5% to 20% subject to potential fluctuations from product mix, warranty, and interest cost and we expect our homebuilding SG&A in the third quarter to be in the range of 9.9% to 10.2% of homebuilding revenues.

In closing our second quarter growth in sales, closings, and profits in a relatively stable market is the result of the strength of our operating platform and we are excited about the remainder of the year and opportunities ahead. We remain focused on growing both our revenue and pretax profits at a double-digit pace, while improving cash flows and increasing our returns. We are well positioned with our solid balance sheet, industry-leading market share, broad geographic footprint, diversified product offerings across our D. R. Horton, Emerald, and Express brands, attractive finished lot and land position, and most importantly our tremendous operational team across the country. We’d like to thank all of our employees for their continued hard work and we look forward to working together to continue to grow and improve our operations. This concludes our prepared remarks. We can now host questions.

Thank you. Good morning everyone. I’ll begin with Express, David. It seems there is notable growth in that area. Are you experiencing increased competition in the market aimed at this customer base? Additionally, you discussed your growth trajectory; what should we anticipate regarding the timeline and community openings? Also, how does our gross margin in this segment compare to the rest of the company?

Well, Stephen, at this point we’re not seeing a lot of competition. People try to come in and compete with us. We continue to open markets pretty much as fast as we can. So we are seeing good growth in that brand and expect it to continue. There seems to be a lot of talk about the lack of first-time home buyer coming into the market. That’s certainly not something we’re seeing; where we have been able to get product on the ground we have found buyers. So and from a margin perspective, it’s running below the company average but it’s in line with our expectations and in some cases, we were able to push margins up.

Solid margins over there, but that solid margins and absorptions are very strong. So absorptions are probably a bit higher than our original expectations.

And that then drives the returns in line with our expectations.

Okay, got you.

We’re very happy with it.

Okay what we’ve seen in the field has been amazing response to it. I guess you are, if we look at Texas more broadly and Houston specifically, I know your numbers were really good. Can you give us a little bit of color though about what you’re seeing as the progression month by month and maybe what April looked like particularly in Houston as everybody is concerned about it?

Yes, Stephen I have spent the last month and a half driving our Texas markets, including Houston with the Regional President reporting and his Divisional Presidents. You would think the market would be slowing down, but we are seeing consistent performance pretty much across the board and our April sales are a continuation of what we saw in the first quarter.

Stephen, our Houston sales were in line with the expectations for the quarter, our south central region was up 33% in sales and Houston was pretty much in line with the region. So still strong increases out of that market for us.

I can tell you Steve we’re not seeing a slowdown in our projects.

Okay, thanks a lot. I appreciate that.

Good morning, Ken Zener here.

Good morning, Ken.

Good morning, Ken.

So no good, Steve goes unpunished here today. You talked about in line with orders, in line with expectations. From our analysis while obviously you’re up very strong year-over-year. If I look at pace it looks as though you’re doing normal seasonality sequentially. Could you just comment on that and if that’s accurate?

Yes, we would consider it to be in line with normal seasonality. Our sales were up I want to say, right around 50% sequentially. And even when you take into account our change in active selling communities, as we've talked about for a little while, those increases have moderated and so our sales were up about 51% from December to March on about 2% increase in selling communities. So right in line with what we would expect for this time of the year.

Yes, so that’s kind of how our seasonality is consistent with what we see, but clearly we took a step up in absorptions this year versus last year and that is continuing through the spring.

Correct. And then Dave, I guess what's interesting, our view or thesis is this is quantity not quality pointing to actually a lack of supply at the low end being the inhibitor for cyclical growth rather than demand, which would be more loan oriented. You seem to express that view relative to Express Homes. Could you talk about why you think it’s supply not demand when so many people are focused on the tight loans as the issue? What are the differences between your Express buyer and your traditional Horton? Thank you.

Technically the Express Buyers are buying their first home. 60% of our Express Buyers are first-time home buyers. Or they are people that are very conservative and looking for a great buy. I'm not sure there is a lot of difference other than their income levels between the people buying the Express Home and the people buying a D. R. Horton home.

And just based on our experience thus far what we're seeing when we put the product out there at an affordable price for those entry levels buyers and the current mortgage environment, there is plenty of demand. We're not having any problem selling those houses. So from that standpoint, our evidence would show that we think that any limitations for the entry level buyer is supply driven. The mortgage environment, someone has a decent credit score, decent credit history they can get a mortgage today.

You do think housing demand is elastic relative to the home prices, what Express would tell you?

Yeah, absolutely. It's a value-driven market. And that's pretty much across the board.

Thank you.

Thank you. My first question is about pricing power. You have provided clear insights into demand trends, noting that the spring selling season appears normal and you have slightly adjusted your gross margin expectations downward. However, you have also experienced three or four consecutive quarters of nearly 30% order growth, with this quarter showing a year-over-year increase of around 25% to 26% in absorptions, and you've raised your volume expectations. How do I reconcile these points? Given such volume increases, one would expect greater pricing power, yet that doesn’t seem to be your indication. How do you reconcile these two aspects?

So I can tell you, the way we're looking at it is a return-based model. And if we can generate a 20% return at the division level, then it's going to drive significant improvement to our operations and overall returns as a company. So where we have the ability to maintain that absorption level and increase production we do. And I can tell you we have seen a significant number of our projects where the margins have improved.

We are seeing that we are hitting the pace and our plan pace in the various communities that we get there and then we feel we have pricing that are coming back; incentives have not been increasing, incentives are essentially flat for about a year. And so we're seeing as pace improves we get price, we will get some pricing power back we’re seeing in communities. And we're very happy with getting the stability in our margins.

The other thing Nishu keep in mind is our mix shift and so our average sales prices have moderated in terms of increases, but that's with Express Homes now accounting for 18% of our sales this quarter and 13% at closing at an ASP of about $179,000. So we are raising prices in many of our communities today but we do have that Express grow in mix that's offsetting our overall ASP that you are seeing.

Got it. Thanks, that's very helpful. And then the second question, Easter came a couple of weeks earlier than it did last year. So I wanted to ask if there was any effect on demand, maybe it pushed some orders from March into April. So I guess, maybe if you could comment on March relative to April to just let know if there is any effect there.

I think both year – Easter was in April both years, slightly earlier this year and we don’t see a big impact there, as David said earlier, April’s continued the same trend we saw through the March quarter.

Okay, thank you.

Hello, guys. Can you hear me?

Yeah, sure. Good to see you, Stephen.

Are you there?

Hello, Stephen.

Sorry about the technical issues. The first question is about Express and Emerald. You've been working on this for over a year, especially with Emerald, and I'm interested in how your thoughts on product design are changing. How are you refining the product offerings for Express and Emerald? What advantages have come from launching this product early on? When you first introduced it, you likely had expectations about what customers would want. Could you share what you've found so far? For example, have you discovered that at Express, customers are not only interested in very small boxes but are also open to larger sizes? And with Emerald, has there been a preference for more design features or customization than you initially thought when you launched that product?

Stephen, when we first launched Emerald we were launching a brand that was different than what the perception of D. R. Horton had been in the past and so we built really, really strong ourselves. And I think as we have met with these customers and kind of defined what they are looking for we are modifying that and we are ultimately it kind of comes back to the same thing that’s on the Express side. People want a great value at a great location and so yes, we are really kind of simplifying what we are doing on Emerald side, focusing on location but delivering competitive house in that market.

Within the Express product, we have aimed to maintain consistency in our offerings while being responsive to market demands for larger square footage. We are adapting our product mix community by community to align with what buyers want in those areas. This is not a one-size-fits-all model; it's driven by family needs, specifically the number of bedrooms required. Thanks to the efficiencies we achieve with Express, we can provide the necessary square footage at a price point that fits within their mortgage capabilities.

And would you launch Express or Emerald across all of our markets, I mean you are going to learn a lot and you are going to make modifications to improve returns through the process. We are looking at the market, we are identifying where we can get better and we are pushing to get better.

So if I could paraphrase what I think I heard you say, is it sounds like in Emerald there is maybe an emphasis to really, if anything do less customization and maybe a little bit more that would lead probably to a little more spec activity but more of a focus on value. And in Express I hear that there is some elasticity upwards in terms of the size of the homes. Did I just generally hear that right?

It would be 100% correct.

Okay. My second question relates to conversation rate, backlog conversation rate. I think you gave guidance for conversation rate, you are just a little bit higher than where you were last year and that would represent a deceleration in turnover rate from what you did in the second quarter. Generally speaking, we think of conversion rates or backlog turnover rates going up as you do more spec activity and what we are seeing here from the way we model your spec activity it’s continued to go up but yet you seem to be looking for a bit of moderation in your backlog turnover rate. And so I was curious if you could talk a little bit about why that is, is there some exogenous factor that we are not thinking about here or you are just being conservative on your backlog turnover rate or if you can reconcile that for me, that will be great.

We exceeded our expectations in the second quarter, with results higher than our initial range and a notable increase in backlog conversion from Q1 to Q2 compared to previous periods. For Q3, we are guiding a conversion rate between 78% and 80%, which is an improvement over last year's conversion rate. This aligns with our current business observations and updated forecasts, reflecting feedback from our operators. Due to strong sales in Q1, our backlog has risen significantly, and we are focused on closing as many homes as possible that are ready for closing. Based on our business plans and visibility, we anticipate a conversion rate in the high 70s to 80% for Q3.

And Steve, if you look at the last five years we really had been a slight tick down from Q2 to Q3 in our backlog conversion rates. So what we are projecting is in line with our sequential changes over the last few years.

Yeah, got it on seasonality. Thank you very much guys I appreciate it and good luck.

Hey, good morning and nice quarter. Just one question for me, I just want to understand your comment, obviously you are getting tremendous demand with the entry-level product and from a mix standpoint, I think that would drag down your ASP which continued to increase. So I am just trying to understand from a modeling standpoint, whether it’s the third quarter or fourth quarter, does ASP start to turn negative on a year-over-year basis, just because you are selling more of the Express Homes?

Bob, we’ve, really from the start of the year we said we did expect our ASP growth to moderate to the low single-digit range and that’s where it is today. There are a number of factors that offset and it’s a little difficult to say whether it will continue to be slightly up, flat, or slightly down. I wouldn’t say we have an expectation, it could be down. Certainly as Express grows that does pull the ASP down. But we are seeing good sales in Horton, good sales in Emerald. We are seeing pricing power in a number of our communities as well. So that ASP is one of the most difficult things to predict, exactly where it’s going to be quarter-to-quarter. So I think we would stay consistent with what we have said all along this year, expect it to continue to moderate and to the extent it’s up, it will be up in the low single digits.

Got it and the other question nobody has really touched on it, how to think about land spend and land acquisition in terms of the cycle and where you are at? Thanks very much.

I think so far this year we are about consistent in our land spending and largely looking at replacements of the lots that we have been delivering. We feel like we have got a very strong owned and controlled lot position over 170,000 lots available for us. So I don’t see a huge growth in our land acquisition spending at the present time but we still do see opportunities in all of our markets and we will continue to invest.

I believe our current advantage is that we don't need to make any purchases. We are in a very strong position and have identified numerous high-quality deals that we are pursuing with significant energy and determination.

Just to replenish our lot supply at the level of volume we are at today there is still going to be significant investment. It will be north of $2 billion, $2.0 billion to $2.3 billion somewhere in here in land spend for the year, consistent with last year.

Got it. Thanks very much.

Hi, thank you. My first question, I understand that there, on a total community basis the community count growth has been fairly modest. But wondering just given the rollouts in Emerald and Express if you can breakdown, you said sales doubled in Emerald, sales tripled in Express, what was community count growth versus absorption in those two parts specifically?

We haven't disclosed our total community count or by brand. However, we are certainly growing our Express community count at a faster rate compared to the rest of the company. The number of homes sold has significantly increased in both brands, with sales doubling or tripling in Express, while in Emerald we are seeing growth at a slightly slower pace. Nonetheless, our absorptions have improved considerably in both brands, alongside some growth in community count.

Got it and then this is my second question, if we think about Express and how is the product that we have seen in person, it seems like the strength in absorption is such that the backlog delivery times have stretched out, call it five, six months and so just wondering at what point do you think you have maxed out sales velocity in terms of absorption at Express, and so incrementally you’re likely to just see growth coming from the community rollout versus incremental gains and absorption at Express?

It’s a project-by-project comment. I will tell you we have a lot of projects out there where we continue to expect absorption for community to increase. Some we have maxed out and then some are our bigger Express offerings. We are building everything we can build on it. So in those projects we’re taking margins up.

My comment would be no different in a Horton community or an Emerald community; that’s the case community by community across our country all the time.

Okay, thank you.

That’s a very good problem.

Thanks, good morning everyone. First question, I had was just wanted to circle back to the pricing trends during the quarter. I think David in your initial comments you kind of just characterized the market overall as healthy and relatively stable demand, growing moderately and I think just you kind of highlighted as well that you are still raising prices in a bunch of communities, but overall how would you characterize the pricing environment? I mean what we’ve heard is kind of just kind of stable to maybe just slightly increasing and incentives by and large, incentives/discounts by and large stable. I mean obviously market to market that varies but on a broad basis is that kind of what you’re seeing?

That’s pretty much the market out there right now. It’s a great market for us because we’ve got the land, we’ve got the operating platform, we’ve got the people in place. So we’re not having to make any investments. We’re just riding the market. It jumps up then labor becomes a bigger issue and some of the higher-priced land that have been bought by others becomes competitive and we like the way deals run, it’s a good market for us, or consistent, absorptions are consistent, margins are consistent, yes, just continuing to gain market share.

Yes, no, certainly and I guess just the second question here, I appreciate all the detailed guidance for the year and like you said kind of tightening the ranges here and there. One area of focus for many is the gross margins and that did come in a little bit, of course on the flip side you slightly raised the closings and revenue and lowered SG&A. So don’t want to exclude that but people do focus on the gross margins, the slight lowering of the range or lowering the high end of the range, could you just elaborate on what was the driver there, is it mix, is it maybe costs coming in slightly higher, any color there would be helpful.

Michael I think we’re seeing there we are six months into the year at this point. So we’ve been through a very good spring selling season. We posted two quarters of margin in the 19.7%, 19.8% range and looking forward we see continued stability around that level. So it’s not necessarily price pressure that’s come in to play. I think we’re seeing that our pricing relative to our sales price, our cost increases relative to sales prices have moderated and we’re not losing ground there. We’re seeing some stability in our reported margins and probably in our go-forward margin at this point. So at this point halfway through the year, at the turn we’re looking to kind of tighten that range down around what we posted.

We’re very pleased with that, to find that stable level in our normal range and obviously we’ll work to improve it in here.

And you alluded that mix change does have an impact on this; our Express margins which are making up a bigger percentage of our deliveries are at slightly lower margin rates on average with their faster absorptions than the company average right now.

Right, okay. No fair enough, appreciate it, thanks guys.

Good morning. First in terms of the Express product, can you tell us a little bit about your ability or your confidence in realizing the efficiencies that you see in those sort of core three markets where you’re currently selling through, as you expand into the rest of your areas?

The Express was designed to be a very efficient product to build, and as we build it more and more times we’re getting better and better at delivering it and that’s across all three of those markets.

Okay, and then in terms of material pricing and any of labor constraint can you just sort of talk to that and if there’s anything we should be aware of there?

Part of what I think it’s going to be one of the big constraints in this cycle is going to be labor. And we are focused on creating efficient plans that will allow us to build more houses with less labor and that’s been an ongoing effort now for really the last couple of years.

Susan as Mike just alluded on one of the previous questions, we have seen our rate has increased and our cost come down a bit. So our stick and brick cost per square foot this quarter was up about 4.5% on a year-over-year basis and that still wasn’t in line with our revenues but it’s a smaller increase than we’ve been seeing and headed in the right direction. Sequentially we actually saw our stick and brick cost increase per square foot almost essentially in line with what our price per square foot did. So we’ve made a lot of progress on that front and we plan to continue to do so as we move throughout the year.

Okay, great. That’s very helpful. Thank you.

Hi good morning and thank you for taking my question. In terms of this cycle versus past cycles, how are you thinking about cash and cash returns or said it differently, given I would call that certainly a slowdown but from a land investment perspective you’re not buying at I recall the same year-on-year pace, would it make sense to step up the dividend or think about some other capital returns to shareholders?

First as we look at our land supply, we did make a lot investments early in the cycle and so we built up our land supply to a very sufficient level to support really strong top line growth for a few years here. So we are working into that and so our requirements to increase our land supply really not there right now. So the pace of spending has slowed but as we said earlier our pace will continue to be at a very strong pace in terms of reinvesting in the business. We’re constantly evaluating our opportunities to invest market by market. We’re focused on achieving a 20% ROI, so pretax income over average inventory on every project that we invest in. It’s one of our key investment criteria and to the extent we were finding deals that can do that in markets that we feel confident in we’ll continue to invest strongly in our business. That being said, we do expect and one of our goals is to continue to improve our cash flow. We did see and are seeing improvement in our cash flows from operations. We’ve improved year-to-date a $100 million or better in terms of cash use from operations this year versus last year and we believe we’ll see significant improvement by the end of the year on a year-over-year basis. So heading towards the breakeven and hopefully a positive cash flow position. We’re focused right now on achieving that and when we achieve that certainly that opens up a lot of flexibility for us either to invest further in the business, to look at other opportunities to look at distributions to shareholders as well, all those things come into play when we get to a stronger cash flow position.

Thanks for that and just a quick follow up on Texas. It seems like from our vantage point things slowed a little bit in January and February and then snapped back towards the end of March. I guess from that perspective what activity have you seen and there’s a big differentiation point between your higher ASP homes and your lower ASP homes and thanks again.

I don’t think we’ve seen anything in Texas outside of our expectations and pretty consistent performance across our price points. Our exposure in Texas is long and deep. We’ve been here a long time; it’s home and our presence in the markets is very tailored to the individual markets and we’ve not seen anything outside in Texas that’s occurring outside of our expectations right now. We do watch it closely, but we are very happy with Texas’ performance.

These are normal seasonal trends Will in January and February. So our sales cadence in Texas was increasing as we moved throughout January and February, which is what we would expect as we move into the early part of spring.

I have been in almost every project, every slide that we have in Texas over the last month and a half. And I can tell you there is no defining point about whether one of them is doing really well or not doing well. Across the board they are almost 100% on target and at the price point of the Express or the price point of Emerald. Texas is a good market for us right now.

Thanks again. I appreciate the time.

Thank you, David. We appreciate everyone's time on the call today and look forward to speaking with you in July. I'd like to personally thank our people out there for the outstanding results of the last quarter and the way you are positioned for the quarter coming up. We appreciate it. Thank you.