PulteGroup Inc (PHM) — Q1 2015 Earnings Call Transcript

Thank you, Ryan, and good morning to everyone participating today. I want to welcome you to PulteGroup’s conference call to discuss our first quarter financial results for the three months ended March 31, 2015. Joining me for today's call are Richard Dugas, Chairman, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Vice President and Financing Controller. A copy of this morning's earnings release and the presentation slide that accompanies today's call have been posted to our corporate website. We'll also post an audio replay of today's call to our website a little later today. Before we begin the discussion, I want to alert all the participants that today's presentation may include forward-looking 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. Now let me turn the call over to Richard Dugas. Richard?

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

Thanks, Richard, and good morning. Against the backdrop of improving conditions that Rich discussed, our first quarter operating results were in line with our expectations and with the guidance we provided on our last call. More importantly, our Q1 results have us well positioned to deliver another year of excellent operating and financial results. Looking at our first-quarter numbers, home-building revenues were $1.1 billion, which is consistent with last year. Our current quarter revenues reflected a 2% or $6,700 increase in average selling price to $323,000, offset by a 2% decrease in closing the 3,365 homes. Our conversion rates in the first quarter dropped from the prior year as production was negatively impacted by a number of factors including weather in certain markets which hindered land development and house construction, a continuing challenging municipal entitlement environment, and tight labor resources. We expect that we will be able to get our production-related closings back on schedule over the balance of the year, with the majority of the delayed closings occurring in the third and fourth quarters. The 2% increase in average selling price for the quarter was driven by price increases realized in each of our brands, with Centex being up 2% to $208,000, and Pulte and Del Webb each increasing by less than 1% to $387,000 and $325,000 respectively. On a year-over-year basis, we saw a continuation of recent trends in our mix as Pulte continued to increase as a percentage of our total closings. More specifically, closings in the first quarter broke down as follows: 45% of closings from Pulte, 30% from Del Webb, and 25% from Centex. This compares to 41%, 32%, and 27% in the first quarter of last year but is consistent with the fourth quarter of last year. Gross margins for the first quarter were 22.7%, which is down 110 basis points from last year but is in line with the 2015 outlook we provided on our fourth-quarter earnings call. Our Q1 margin reflects higher land, labor and material costs, as well as the impact of acquisition accounting associated with the Dominion transaction which impacted our Q1 margin by approximately 30 basis points. These headwinds were partially offset by lower interest expense resulting from our deleveraging over the last two years. Looking at option revenues and lot premiums in the quarter, we continue to realize higher dollars on both lines. In the quarter, option revenues per closing increased 13% or $5,700 over the prior year, while lot premiums in the period increased by 3% or $400. Sales discounts in the quarter totaled 2.2% per home, which is up about 60 basis points from last year, little change for the fourth quarter. Given our strong Q1 margin performance along with ongoing opportunities from our value creation initiatives and our positive view of the market, we continue to target full-year 2015 gross margins of approximately 23%. As we’ve said in the past, there will be movement in margins up or down as we move from quarter to quarter and dependent upon the mix of closings. SG&A costs in the first quarter totaled $161 million or 14.8% of home sale revenues, compared with $145 million or 13.3% of home sale revenue last year. The higher SG&A spend in the period reflects investments we’re making in people and information systems as well as increased start-up costs associated with the large number of new communities we are opening this year. The overhead spend in Q1 was consistent with previous guidance for 2015 SG&A expenditures to be in the range of $160 million to $165 million per quarter. Our financial services operations reported first-quarter pretax income of $5 million compared with $22 million last year. Note that last year’s pretax income included a $19 million benefit related to the reversal of mortgage repurchase reserves. Capture rate for the period improved to 82%, up from 78% last year. Our reported Q1 income tax expense of $41 million represents an effective tax rate of 42.6%, which is higher than our previous guidance of 38%. The higher tax rate for the period reflects the charge of $0.02 per share relating to an adjustment to our deferred tax assets resulting from a change in our perspective effective tax rate due to tax planning initiatives. We currently estimate that the company normalized rate for future quarters this year will remain near our previous guidance of 38%. On the bottom line, the first quarter net income was $55 million or $0.15 per share compared with net income of $75 million or $0.19 per share last year. Note that our prior year results include $0.02 per share of net benefit relating to the reverse of mortgage repurchase reserves, which was partially offset by charges in connection with debt retirement activity. Shifting to homebuilding operations, the company had 5,387 homes under construction at the end of the quarter, of which 19% were a percentage of construction activity comparable with the prior year. At the end of March, our finished spec inventory totaled over 345 homes, so we continue to maintain tight control on our spec production. In the first quarter, we improved approximately 2,000 lots for purchase and finished the period with 135,000 lots under control. Our lot position includes 39,000 lots controlled under option. This represents 29% of our lots, which is up from less than 26% last year. Of our controlled lots, approximately 23% are finished, with 18% currently underdeveloped. We spent $484 million on land in the quarter, of which 49% was for development of existing positions and 51% was for acquisition. That spend rate is behind our full year authorization of $2.4 billion; this is due to the fact that the timeline in a number of land transactions have gotten longer as municipal approvals and/or land development is taking more time, but we still have a lot in the pipeline and are working hard to get deals approved and into production. Even though housing demand in 2014 was up only slightly over the prior year, land prices did not retreat and, according to our division presidents, have actually risen in 75% of our markets. As we’ve consistently indicated, we intend to remain disciplined in our investment in the business and only fund projects that meet our return thresholds. In support of our broader value creation objectives, we continue allocating capital consistent with the priorities we articulated most recently at our Investor Day. First to invest in the business and pay dividends, then to opportunistic M&A, with any excess funds being returned to shareholders in the form of share repurchase activity. During the quarter, we repurchased 4.6 million shares for $100 million or $21.75 per share. This level of activity is comparable to Q4 and reflects a stated strategy of being systematic in our approach to share buyback rather than trying to time the market. We ended the quarter with $1.1 billion of cash and a debt to capital ratio of 28%. Our debt to cap is unchanged from the prior year. I will note that we're likely to use a portion of our cash to retire $238 million in bonds which mature in the second quarter of this year. We closed the quarter with sign-ups of 5,139 homes. On a dollar basis, sign-up revenue increased 6% to $1.7 billion. By brand, unit sign-ups increased 13% at Pulte, 6% at Centex, and decreased 7% at Del Webb. The decrease at Del Webb is due to the closeout of a number of selling efforts in Del Webb communities. Absorption rates increased 8% at Centex and were essentially flat at Pulte and Del Webb. We are certainly encouraged by the improved sales pace among entry-level buyers and particularly in some of our largest Centex communities which are experiencing notable increases in sales pace. For the quarter, we operated from 613 communities, which is up 5% from the same period last year. We continue to forecast operating from approximately 620 communities in each quarter of the year and are on track to open over 200 new communities in 2015. One last data point: we ended the quarter with a backlog of 7,624 homes valued at $2.6 billion, which is up from 7,199 homes valued at $2.4 billion in March of last year. Now let me turn the call back to Richard for some final comments.

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

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

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

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

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

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

Right, okay, thank you.

Thank you.

Thanks, good morning everyone.

Hello, Mike.

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

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

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

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

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

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

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

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

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

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

Hey, good morning.

Hi, Bob.

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

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

Hey, just one point on that—think about the way the closing sequence works. We are going to get more closings from warm weather places, which typically have lower ASP, so it's not mix by brands; it's really geography driving that. If you look at our backlog, you know ASP in the backlog is consistent year-over-year today. So March versus March, and it actually up from December.

Okay, so I'm thinking you are saying that’s going to reverse as we move forward, correct, or start to improve?

Right, so the backlog ASP today, as I think, is $335,000 or $6,000 versus the ASP that we actually printed at $323,000 in the first quarter. Again, geographic matters and where the closings are coming from.

Hey, good morning everyone.

Hi, Jay.

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

I would say I had a hard time hearing you actually, well.

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

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

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

Hi, good morning, and thanks for taking my question.

Hi, Will.

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

I would say I had a hard time hearing you actually, well.

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

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

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

Hi, good morning everyone.

Hi, Jack.

Looking at the cadence of buyback. So I think we are running what we called about $50 million in the first three quarters of last year and kind of stepped up to the $100 million number through the first quarter. I am just thinking, say systematic is because the question is, systematic, the $100 going forward or $50? How do we think about that on a go-forward basis?

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

Heard, I thanks.

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

Thanks, good morning guys. I'd like to follow up on Jack's question just a little bit, associated with capital allocation in your ROIC target. First on the ROIC, do you all have a target out there you are willing to share maybe or at least that progression of how you expect this to go over the next few years? And then given what you all have been talking about seeing much higher land costs, probably not running—probably not getting out over year skews on community growth, etc. Are you starting to—is your cash allocation starting to move away from reinvestment toward pay down and return to shareholders, or are you still where are you still pretty much in the same type of mode, if you will?

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

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

Okay, yes, thanks. And then just one more time on Centex; you did push it a little bit more you said you saw some better demand out there, is maybe if you could talk a little bit about that—the demand which you are seeing and this Centex really become much more of a 2016 and 2017 type story versus later this year. And if I can squeeze one other, do you mind ranking on the cost you said land, labor, and materials? I assume the pressure on the gross margin is in that order, but if you could clarify it.

Yes, so from a Centex perspective, Stephen, we are pleased with what we’ve seen; I think it’s a little too early to say whether it’s a 2016 or 2017 story, more than this year. We have some large communities that are absorbing nicely throughout Texas, throughout the Southeast, and in the Midwest in a number of markets, so we're feeling good about that. And with regard to margins, just a comment over there: we feel like land pressure is definitely coming through. But in terms of the comment that you are making, we are very pleased with the margins you are right in the guidance range that we have. They continue to be among the industry leaders, and we're guiding for flat to up margins from here. So we’re very pleased with that there is a lot of commentary out there about margins down, but we are right where we want to be, and we intend to stay at or near the industry leaders. Just one other thing on Centex, just to be clear, we have not invested a lot in Centex over the past couple of years. So the likelihood of Centex continues to be a smaller portion of our deliveries in the coming quarters is still there, and that’s okay. It will take some time to invest in Centex, and the current timeframe reported manifest itself, and we are watching the markets clearly to see when that happens.

Good morning.

Good morning, Susan.

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

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

Hey guys, good morning.

Hi, Ivy.

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

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

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

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

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

Stephen this is Richard. I would say a couple of things. We clearly intend and optimistic that we can drive returns higher in the coming years. We don’t have a particular target out there other than that is crystal clear throughout the organization that our view is to our number one goal financial is to drive higher returns. With regard to allocation we are very consistent we go we said our December Investor Day our first priority is to invest in the business and we are pleased with getting our communities open and we’re pleased with the ability we believe to hit our targeted committee count for the year. That’s our number one goal. Second is to continue to fund an increasing dividend, third is any opportunistic M&A and then residual cash on a very systematic basis back to shareholders in the form of share repurchase activity. During the quarter we repurchased 4.6 million shares for a $100 million or $21.75 per share. This level of activity is comparable to Q4 and reflects a stated strategy of being systematic in our approach to share buyback rather than trying to time the market. We ended the quarter with $1.1 billion of cash and with the debt to capital ratio of 28%. Our debt to cap is unchanged from the prior year. I will note that we're likely to use the portion of our cash to retire $238 million in bonds which mature in the second quarter of this year. We passed the balance sheet with sign-ups in the quarter increased 6% to 5,139 homes. On a dollar basis sign-up revenue increased 6% to $1.7 billion. By brand unit sign-ups increased 13% at Pulte, and 6% at Centex and decreased 7% at Del Webb. The decrease at Del Webb is due to the closeout of a number of selling efforts in Del Webb communities. Absorption phases increased 8% at Centex and were essentially flat at Pulte and Del Webb. We are certainly encouraged by the improved sales pace among entry-level buyers and particularly in some of our largest Centex communities which are experiencing notable increase in sales phase. For the quarter we operated from 613 communities which is up 5% from the same period last year. We continue to forecast operating from approximately 620 communities in each quarter of the year and are on track to open over 200 new communities in 2015. One last data point we ended the quarter with a backlog of 7,624 homes valued at $2.6 billion which is up from 7,199 homes valued at $2.4 billion in March of last year. Now let me turn the call back to Richard for some final comments. Thanks, Bob. As I talked about at the beginning of the call for a variety of factors the spring selling season was off to a very good start with improving traffic, manageable inventories and select pricing opportunities across many of the markets we serve. At a regional level many of the trends we have discussed during a number of the previous earnings conference calls continue to develop during the first quarter of 2015. More specifically on the East Coast we saw very solid demand up and down the coast with Florida and the Southeast experiencing strong buyer interest throughout the period while demand improved in the mid-Atlantic and Northeast markets as the quarter progressed. Once again the Carolinas, Georgia and Florida realized the strongest demand some of which was likely people looking to escape yet another harsh winter. Heading towards the middle of the country conditions in the Midwest were generally stable for the quarter although like the East we did see demand improve slightly as the quarter progressed. As I know it’s an area of focus let me spend a little extra time on Texas. In total Texas sign-ups were down 5% in the quarter mostly as a result of the closeout of several large communities in Austin and San Antonio which are yet to be replaced. Demand in Dallas held up reasonably well while Austin and San Antonio were slightly weaker in the quarter. Specific to Houston sales in the quarter were flat with the prior year although demand slowed as the quarter progressed particularly at the higher price points. So far the impact of lower oil prices seems manageable, and with oil prices seeming to have bottomed, we are optimistic that Texas will continue to be a strong market. Our West conditions held up well during the quarter, but the market, the submarket and the community location all matter as we continue to experience better demand on a coast of California and we close certain locations around Phoenix, Las Vegas, and Albuquerque. On our last call, we mentioned our newest Del Webb community called Cielo in Albuquerque. The community comprises 550 homes roughly seven miles from downtown. The community which is open very well is part of an expanding portfolio of projects designed to serve active adult buyers who want to be closer to a city center and the amenities such locations offer. In the coming quarters and years I expect you will see us open more communities for active adults expanding a variety of sizes, amenity offerings, locations, and brands. Overall, we are pleased with our demand developed in the quarter and during the first few weeks of April. We are particularly encouraged by the improved experience in our Centex communities. We are optimistic that this is the beginning of a more substantial recovery in the entry level which is really the missing piece of the housing recovery to date. Assuming there are no dramatic changes in the U.S. or globally that have a material impact on employment trends, consumer confidence or interest rates, new home sales should see continued gains in 2015. PulteGroup is also well positioned to see improved operating and financial performance as the quarters progressed given the opportunity for increasing margins and greater overhead leverage as delivery volume increases over the course of the year, particularly in the third and fourth quarters. As the year progresses we will continue to advance our key value creation initiatives and focus on delivering high returns on invested capital. At the end of our formal remarks, I also want to recognize and thank all of our employees for their tireless efforts to deliver a great home buying experience to our customers every day. Our success is only possible through your passionate commitment. Now I turn the call back to Jim Zeumer. Jim?

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