普爾特房屋 (PHM) 2016 Q1 法說會逐字稿

Good morning.

My name is Carol, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Q1 2016 PulteGroup Inc earnings conference call.

(Operator Instructions)

I would now like to turn today's call over to Mr. Jim Zeumer.

Great, thank you, Carol.

And let me welcome everyone to today's conference call discussing PulteGroup's first-quarter financial results for the three months ended March 31, 2016.

Joining me for today's call are Richard Dugas, Chairman and CEO; Ryan Marshall, President; Bob O'Shaughnessy, Executive Vice President and CFO; Jim Ossowski, Vice President, Finance and Controller.

A copy of this morning's earnings release and the presentation slide that accompanies today's call have been posted to our corporate website at PulteGroupInc.com.

We'll also post an audio replay of today's call later this afternoon.

Before we begin discussion, I want to alert everyone, 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?

Thanks, Jim, and good morning, everyone.

Some of you may have seen the letter issued yesterday by Bill Pulte or his grandson's performance on CNBC yesterday.

As there is nothing new in Bill's letter, we will not be responding to these attacks or otherwise be discussing the Pultes on this call, other than to say that we stand by the completeness and accuracy of our previous disclosures.

We run this Company for the benefit of all shareholders, and will continue to do so.

I've had the opportunity these past few weeks to speak with many of our largest holders, and it's encouraging to hear your support for our entire leadership team, our Board of Directors and our value creation strategy.

I want to take this opportunity to ensure all investors that we're busy running this Company, and remain squarely focused on continuing to deliver value for you.

To that point, we are extremely pleased with the strength of our first-quarter results.

Consistent with our strategy and our efforts to enhance returns on invested capital, for the past few years, we have highlighted strategic pricing, construction productivity and balance sheet efficiency as drivers of our performance.

Our financial results over the past few years reflect these drivers, as we realized significant gains in pretax profitability, despite only modest gains in production volumes.

Many of you have seen the graph in our investor presentation, which we have included in today's conference call slides, which shows our pretax income improving by $1.1 billion over the past five years on just a 12% increase in closings.

We have communicated that 2016 would be an inflection year, with increasing volume being delivered through a much more efficient homebuilding operation.

The combination of rising unit volumes, increasing average sales prices and the more efficient homebuilding machine can translate into significant earnings growth.

Add in the benefit of consistently returning funds to shareholders, and you have a business that can produce high returns for its investors over time.

As Bob will detail in a moment, the business is beginning to turn in that direction, with sign-ups increasing by 10% to almost 5,700 homes, closing volumes gaining 17% to almost 4,000 closings, average selling prices expanded by 9% to $353,000, and our backlog value climbing 31% to $3.4 billion.

These metrics obviously resulted in the strong quarterly performance in the first quarter.

But equally important, they position the Company to deliver continued growth over the balance of 2016.

While our Q1 numbers and our expectations for 2016 point to increasing scale, we have not and will not lose our focus on our primary objective: to run a business that can deliver better returns over the housing cycle, and do so with less risk.

We have believed since the outset of this housing recovery that it would be more gradual than the V-shaped rebound typical of most housing cycles.

Our thesis is unchanged, as we expect an extended recovery will continue to unfold for the next several years, supported by an improving economy, favorable demographics, years of relative under-building and a supportive mortgage rate environment.

Given these dynamics, we have been increasing our investment in the business, but have done so in a disciplined manner by emphasizing smaller projects, while expanding our use of options when possible.

This has served to shorten our years of land supply, helping to mitigate market risk.

We have also focused our land investments on closer-in locations, where we think demand is more sustainable when the market ultimately takes a breather.

We have accepted the trade-off of having to pay a little more for certain positions, for where we can be more confident in our future performance.

As evidence of our focus on driving returns and reducing risk relative to prior business practices, consider that our supply of owned lots has fallen from approximately 8.5 years in 2010 to roughly 5.5 years in 2015.

Based on our land acquisition discipline, expected sales paces, as we work through some of our longer and older communities, we look for our own supply to continue trending lower in the future.

Among the reasons for the decline is that approved land deals over the past five years have averaged roughly 125 controlled lots per community, and this includes 31 new Del Webb projects over that timeframe that have averaged just over 500 controlled lots each.

Along with how we manage land, our more disciplined approach to the business extends to the management of the Company's entire balance sheet.

Bob and his team have done an outstanding job reshaping our balance sheet and giving us the financial strength to run our day-to-day operations, and the flexibility to seize on opportunities that develop in the market.

As I mentioned earlier, we remain in the camp that this housing recovery has several more years of growth in front it.

As just north of 500,000 new home sales, unit volumes remain 30% below the historical average.

And with Millennials beginning to buy homes, the leading edge of that demographic is now impacting the market.

These factors, along with the growing economy, modest wage inflation and a favorable outlook for jobs, keeps us optimistic about the near- and long-term opportunities for PulteGroup.

Let me turn the call over to Bob for more details on our quarterly results.

Bob?

Thanks, Richard, and good morning, everyone.

Consistent with Richard's comments regarding the positive market environment, our first-quarter financial results show significant gains in key operating metrics.

In addition to delivering strong results in the quarter, our Q1 numbers have the Company well-positioned to deliver outstanding full-year results as well.

Looking at the business, we experienced excellent demand in the first quarter, with sign-ups increasing 10% to 5,652 homes.

The year-over-year increase in the dollar value of sign-ups is even greater, climbing 24% to $2.1 billion.

Breaking down sales by buyer group, unit sign-ups increased 2% among first-time buyers and 37% among move-up buyers, while sales decreased 12% within our active adult communities.

The decrease among active adult buyers is due in part to the close-out of several selling efforts.

Looking at buyer groups, our absorption pace has increased 8% among first-time buyers, and declined 4% and 5%, respectively, among move-up and active adult buyers.

Excluding the impact of the Wieland assets, which typically have slower absorption paces and largely influenced our move-up buyer group, our overall absorption paces were flat.

During the quarter, home sale revenues totaled $1.4 billion, which is up 28% over last year.

This significant increase in homebuilding revenues was driven by a 17% increase in closing 3,945 homes, combined with a 9% increase in average sales price of $353,000.

The 17% increase in closings resulted in the increased sales activity we've experienced over the last few quarters, coupled with a slight increase in our conversion rate.

Our Q1 conversion rate improved over last year, but is still running below recent multi-year averages.

We expect this power to continued in Q2 and throughout 2016, as we make gradual progress of conversion rates versus last year.

However, elongated construction cycle times will prevent us in the near term from reaching the levels we realized a few years ago.

Looking at the mix of our closings in the first quarter, 29% were first-time buyers, 41% were move-up buyers and 30% were active adult buyers.

In Q1 of last year, closings by buyer group were 33% first-time, 34% move-up and 33% active adult.

As I noted, our ASP increased 9% in the first quarter, reflecting our continuing mix shift towards the move-up business.

Coupled with increases from all consumer groups, including an 8% increase to $252,000 for first-time buyers, a 7% increase to $425,000 for move-up buyers and a 5% increase to $353,000 for active adult buyers.

I would like to point out that, in addition to increased selling prices we realized from our Q1 closings, we also realized notably higher sales prices from current sales that resulted in the ASP in our backlog being up 14% over the prior year.

These pricing gains are primarily driven by the mix shift to move-up that I mentioned a moment ago, coupled with higher sales prices at Wieland communities.

Given our expectations for backlog conversion rates and the longer build times associated with the larger Wieland products, the higher backlog ASPs will translate into higher closing prices on a gradual but sustained basis over the remaining portion of 2016 and into 2017.

In the first quarter, we reported gross margins of 21.9%, which includes approximately 80 basis points of decreases associated with our acquisition of the Wieland assets.

Excluding the impact of the Wieland transaction, margins were consistent with last year.

It's worth noting that, in addition to the impact of the Wieland purchase, our Q1 margins reflected anticipated higher land, labor and material costs, offset by lower interest charges.

Offsetting some of the cost pressure has been our continued success in systematically increasing the amount of option dollars and lot premiums, which provide richer margins we realize on each home.

In the first quarter, option revenues per closing increased 6% or slightly more than $3,000 over the prior year, while lot premiums increased by 4% or just under $600 per home.

Sales discounts in the quarter increased 40 basis points over last year to 2.6% per home, which is consistent with results we've seen over the past several quarters.

I'd like to take a couple of minutes to address some questions we've gotten over the past few quarters related to our gross margins.

Specifically, over time we've been asked about the influence on our gross margins of longer dated assets that had basis adjustments during the downturn in the market.

In response to this, you may recall that we provided an analysis of our Del Webb assets and related margins, which we've included as slide 11 in our webcast deck, that provided comparisons of our older, much larger legacy Del Webb communities to our smaller, newer positions.

As you can see on that slide, we enjoy strong margins on that entire book of business, with the more recent investment also enjoying strong returns.

Based on continuing questions from investors around our entire land position, we've prepared some additional analysis, which is included in slide 12 of the deck.

That slide provides details comparing the margins and income statement impact of our newer and never-impaired land with that of our land that's either impaired by us or adjusted through the fair value process as part of the Centex acquisition.

Looking at the slide, there are a few things I would like to highlight.

First, if you look at the bottom row of the chart, you'll see that the legacy lots were actually detrimental to our margins in 2011 through 2013.

This is due to the fact that our impairment and fair value processes typically resulted in gross margins in the low teens, and it's only after the benefit of several years of ASP growth that closings on those lots represent a slight bit benefit to our performance.

As with any legacy lot, the margin profile improves over time, assuming no home selling prices are increasing, even modestly, each year.

Second, if you look at the second row of the chart, you'll see that the legacy lots are decreasing as a percentage of our overall closings.

In fact, closings on legacy lots represented 72% of our total closings in 2011.

But it falls to 38% in 2015, and will drop even further in 2016 and the years beyond.

And finally, I would highlight that the margins on our unimpaired land purchases remain almost as high as our legacy positions, reflecting the benefit of the investor discipline we institute as part of value creation.

Given the margin profile of our total land portfolio and our ongoing value creation initiatives, we continue to target gross margins in the range of 21.5% to 22% for the full year.

Moving past gross margins, our SG&A in the first quarter was $191 million or 13.7% of home sale revenues, compared with $161 million last year or 14.8% of home sale revenues.

The increase in our total spend is due primarily to the hiring of additional field resources to manage a 41% increase in the number of homes we have under production, plus approximately $4 million in charges associated with the Wieland acquisition.

Given that Q1 is the seasonal low point for our deliveries, SG&A spend will certainly decrease as a percentage of revenues over the course of the year.

But we also expect the dollar spend will gradually trend lower in subsequent quarters.

As such, we expect full-year SG&A spend of approximately $730 million, or approximately 10% of home sale revenues.

Turning to financial services, first-quarter pretax reported income was $10 million, which compares to $5 million last year.

The increase is due primarily to the higher closing volumes generated through our home-building operations.

Our capture rate for the period was 81% compared with 82% last year.

Looking at our income taxes, our first-quarter expense of $35 million represents an effective tax rate of 29.5%, which is below our guidance of 38%.

During the quarter, the Company realized approximately $10 million of net favorable adjustments related to the settlement of certain state tax matters.

Going forward, we expect our normalized rates for the remaining quarters of 2016 to be consistent with our previous guidance of 38%.

Finishing up on income statement, our Q1 net income was $83 million or $0.24 per share compared with prior-year net income of $55 million or $0.15 per share.

$83 million is our highest reported first-quarter net come in a decade, providing further confirmation that we've gotten off to a very good start to the year.

Looking at our controlled lot position, we approved approximately 7,000 lots for purchase on the first quarter, which represents an average of roughly 160 lots per community approved.

We continue to focus on smaller, faster-turning communities.

However, given that most of the land positions we're putting under control are raw, we still estimate it will take 12 to 18 months before a community will typically come online.

At quarter-end, we had approximately 146,000 lots under control, of which 30% were controlled via option.

During the quarter, we spent $262 million on land acquisition, which does not include our purchase of Wieland assets.

Based on our Q1 land acquisition spend, we're on track with our prior guidance of investing approximately $1.2 billion, excluding Wieland, for land acquisition in 2016.

This estimate assumes we can continue to identify projects that meet our disciplined underwriting guidelines and return thresholds.

Consistent with our value creation priorities, we continue to return funds to shareholders through dividends and share repurchases.

After curtailing stock repurchases in Q4 2015 because of activity surrounding the Wieland transaction, we reinstated our buyback programs, and look to be a consistent and systematic participant in the market for our shares.

During the quarter, we repurchased 3.1 million shares for $50 million or $16.36 per share.

We ended the quarter with $1 billion of cash, which includes funds raised through our February senior note offering.

We plan to use approximately $465 million of our cash to retire bonds which mature in May of this year.

Our debt to total capital ratio at quarter-end was 39% compared with 30% at the end of 2015.

On a pro forma basis, adjusting for the May bond repayment, our debt to capital ratio drops to 35%.

For the quarter, we operated from 709 communities, which is up 16% from the same period last year.

The increase is higher than our guidance range of 8% to 10%, but reflects a slower closeout rate for existing communities, as opposed to acceleration of new store openings.

As such, we expect the year-over-year change in community count will come back in line with our previous guidance as we move through the year.

And finally, our quarter-end backlog of 8,755 homes is valued at $3.4 billion, which represent increases of 15% and 31%, respectively, over the prior year.

Now let me turn the call over to Ryan Marshall for some additional comments.

Thanks, Bob, and good morning.

As both Richard and Bob have mentioned this morning, our financial results demonstrate that 2016 is shaping up to be an inflection point for the Company.

Reflective of actions we've taken over the past several years, we've transitioned the business to deliver more growth, but without introducing excess risk.

For the past five-plus years, we've been methodically altering our risk profile by selling off unproductive land parcels and moving through long-lived assets that have been a drag on the balance sheet.

Over this same period, we have reinvested in shorter duration, high-margin communities that have generated high returns and driven the financial gains of the past few years.

Having been in the field for over a decade, and now part of the senior leadership team for the past few years, I fully appreciate the change we've undergone in pursuing the value-creation strategy, and the benefits we've captured.

As we transition to responsible growth, my focus is on ensuring we capture additional operating efficiencies, while continuing our disciplined investment process.

This means delivering more volume in a profitable, responsible and risk-adjusted way, and avoiding the trap of chasing growth for growth's sake.

During my field visits, I have and will continue to drive home the point that we're running a business designed to deliver through cycle returns.

And this demands efficiently growing pretax income, while intelligently investing in the business.

Now, looking at our home-building operations, we had 7,909 homes under construction of the end of the quarter, of which 27% were spec.

Consistent with our previous guidance, we purposely increased spec production heading into the spring selling season, to help manage and smooth our overall production cadence.

With spec sales tracking to plan and finished specs continuing to average well-below one per community, we are right where we wanted to be during this busy time of the spring selling season.

After several months of strong spec starts, and now having a large and growing backlog of sold homes, we have already started reducing the number of specs we put into production.

Looking at demand conditions for the quarter, we are very pleased with activity in the marketplace these past few months.

As you might expect with a 10% increase in sign-ups for the period, we generally saw positive traffic and demand conditions across the country during the quarter.

And I would add that this trend has continued into the first few weeks of April.

In summary, the feedback I've received from our operators during my recent market visits is consistent with what we see in the data -- the selling scene has gotten off to a very good start.

Taking this down to a regional level, on the East Coast, overall demand was solid in the quarter, and got better as you moved from north to south.

Consistent with the trend over the last several quarters, we continued to see stronger demand in the Carolinas, Georgia and Florida.

We are excited about the long-term opportunities we see in the South, particularly in the Southeast, given the migration trends, buyer preferences and land availability.

It is one of the reasons why we were interested in the Wieland assets.

Looking at the middle-third of the country, we saw broad-based improvement in demand through the Midwest, with sign-ups climbing over 30% for the quarter.

Winter weather conditions were a little easier at the start of this year compared with 2015.

But we're optimistic that the higher sign-ups for the quarter reflect a more fundamental improvement in demand.

Dropping down into Texas, on a year-over-year basis, sign-ups were essentially flat, as exceptional strength in Dallas was offset by softer demand in Houston and San Antonio.

Houston demand improved as we moved through the quarter, and the market has performed better than I think many were expecting.

And finally, looking out to our Western markets, we continue to experience good demand, particularly in some of our bigger markets, including northern California, Phoenix and Las Vegas.

We have some new communities opened in Las Vegas, and it's great to see the market responding favorably to these new locations.

Given the differences in market dynamics that can exist at the local level, it can be tough to generalize, but we would say that demand continues to improve, and that communities located closer to the city center fare better in terms of sales prices and paces.

The inventory of homes available for sale remains tight in most of our markets, and at least on the new-home side, will likely remain that way for a while, given the limited supply of finished lots available.

I've already met some of you at conferences earlier this year, and I look forward to meeting more of you as the year progresses.

Let me turn the call back to Richard.

Richard?

Thanks, Ryan.

In summary, we had an excellent quarter, and given our strong backlog and growing production pipeline, are well-positioned to have an excellent year.

The work we have done since value creation began in 2011 has responsibly positioned PulteGroup to be a through-cycle performer, which is why we look forward to the future with optimism.

I want to close by thanking our terrific PulteGroup employees, who, despite the public distractions these past few weeks, have and continue to do a fantastic job, staying focused and delivering for our customers.

You are the best team in the business, and I could not be more proud to work side by side with you.

Let me turn the call back to Jim Zeumer.

Jim?

Thanks, Richard.

We will 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.

Carol, if you'll explain the process, we'll get started.

Thank you.

(Operator Instructions)

Susan Maklari, UBS.

Good morning.

Good morning, Susan.

I just wanted to start off by talking a little bit about the conversion rate.

You clearly did see some improvement in the quarter there, but it sounds like there's still some more that we could see coming through as we move through the year.

Can you talk a little bit about what were the puts and takes that allowed you to get the incremental move-up?

And yet what's still holding you back?

And how should we think about the trend through the year?

Yes, we've talked about that something as something we're striving to do.

We still have a challenging entitlement process.

And so as we go through the year, it's our expectation we will continue to see improvement relative to last year, but that we won't get back to historical averages, at least not during 2016.

Okay.

And then I also wondered if you could just give an update on the Wieland acquisition.

Clearly that's starting to come together.

But just a bit more detail on how that's progressing?

Hi, Susan, it's Richard.

The Wieland acquisition is progressing well.

The teams are moving through the integration process as expected.

We had, what -- about two-and-a-half months in the quarter of total activity from the brand.

But it's going well.

We have an excellent team focused on integration, and we're pleased with the way it's going so far.

So it's early yet, but so far, so good.

Michael Rehaut, JPMorgan.

Thanks, good morning, everyone, and nice quarter.

Thanks, Mike.

First question I had was just going back to the order trends, and by component, community count and sales pace.

I believe you said that community count was better than expected due to lower close-out rates during the quarter, but you expect 2Q to get back to original guidance.

I just wanted to make sure I'm thinking about that right, that the original was for the first-half community count to be up 8% to 10% versus 4Q end.

And also, from an absorption standpoint, roughly flat year-over-year.

And I believe you had expected Wieland to maybe have a little bit a negative impact and a slight overall decline in absorption.

If being flat versus that original slight decline was also related to the slower closeout of the older communities and could we expect that original expectation to reassert itself in the second quarter as well?

A lot there, Mike.

I think to answer your first question, yes, your memory is correct.

So we were 8% to 10% Q2 year-over-year, and then 10% to 15% year-over-year in the back half of the year.

And what we're saying is, we think we'll get back to that range of growth, period over period.

As to absorption paces, we did say, coming into the year, that Wieland would likely have an impact on our absorption paces, because it moves a little bit slower than our traditional Pulte business.

And in fact, that's what we saw.

So we highlighted that you had an 8% increase in first-time, and 4% and 5% decreases in move-up and active adult.

And if you take Wieland out -- and that's a net 5% down, 8.4% to 8.0% in terms of absorption paces, if you take Wieland out, we go up to 8.4%.

So essentially, we're flat, X the Wieland business.

Okay.

Also on the gross margins, a little bit better than we were looking for, but you reiterated your full-year outlook on a net basis.

So just wanted to make sure that we're thinking about the right way in terms of the interest amortization.

How should we think about that for the year?

As well as any moving parts that were maybe better than expected, pre-interest?

Well, I think we've given guidance 21.2% to 22%.

We are reiterating that.

Coming into the year, we had said Wieland would influence our margin by about 70 basis points for the year.

We still think that's a pretty good number.

We had given quarterly estimates on that, and it was 100 basis points in the first quarter, 70 basis points in the second, 50 basis points in the third and fourth.

And we're a little bit less impactful in the first quarter -- it was only 80 basis points.

But we think through the year, that it's still about 70 basis points.

So coming into it, we said: look, we've got higher land and labor construction costs, and that will be offset by interest increases.

That's exactly what we saw in the first quarter.

I think you can expect to continue to see that through the balance of 2016, again within that annual range of 21.5% to 22%.

Obviously the financing we did here in the first quarter took our leverage up -- took our interest spend up.

So for the first time in a long time, our cash spend is a little bit higher than our interest expense.

That will influence 2016.

It will have some influence on 2017 and beyond.

I guess the only thing I'd point out to that end is, paying down the debt that we'll do in the second quarter, there's a net add of about $500 million year-over-year, at roughly 5%, 5.5%.

So it's not a huge incremental interest increase as we go forward.

John Lovallo, Merrill Lynch.

Hey, guys, thanks for taking my call.

The first question is on order pricing -- pretty strong here.

I just wondering if you could give us a breakout of how much of that was mix and how much of that was organic price increases?

John, this is Richard.

Most of it was mix.

We certainly got some price in the quarter.

Bob indicated that we had improvements in both option impact, as well as lot-premium impact.

So certainly some of it was price, but the majority of it was mix, reflective of the investments that we've made over the past few years.

We've been quite clear that the majority of our investments have gone to that move-up category.

So that was the majority of it.

There was also a little impact from the Wieland backlog coming in.

So you see the backlog ASPs expanding pretty dramatically, and that's primarily due to mix, with a little bit of Wieland and some price.

Okay, that's helpful.

And then as a follow up, I think you guys indicated that the Houston market seemed to improve somewhat throughout the quarter.

Was there a particular price point where you saw most of that improvement?

Hey, John, it's Ryan.

We actually saw the Houston market recover probably better than expected the further that we moved through the quarter.

The lower price points certainly performed better, and we saw a little bit of slowness in the higher-end price points in Houston.

Stephen Kim, Barclays.

Hi, guys, this is actually Trey on for Steve.

So my first question is, on your gross margin in the quarter, you definitely did a lot better than we were looking for, with the almost reaching 22%.

And we're wondering how -- with your year-end margin guidance remaining in the 21.5% to 22% range -- how you are expecting your quarterly cadence to develop, when normally we would expect lowest gross margin in the first quarter and the highest gross margin at the end of the year?

Trey, this is Richard.

I'll answer that.

We're not providing quarterly margin guidance.

We're very pleased with our margins.

I think the takeaway is that we continue to run the business focused on high returns.

But margins are holding up, and we're pleased to reiterate the guidance that we started the year with.

Okay.

So you would expect obviously the 21.5% to 22% -- everything to stay within that range for the year, though?

That's our expectation, yes.

Okay, got it.

And then secondly, what was your land development spend in the quarter?

It was about a little over $300 million.

So pretty consistent with historic spend patterns, where we've been spending roughly, dollar for dollar, land acquisition and land development.

Mike Dahl, Credit Suisse.

Hi, this is actually Matthew [Bouley] on for Mike.

Thank you for taking my questions.

I just wanted to ask about the legacy land, beyond what you're planning to deliver.

So just how are you thinking about bringing specifically your inactive legacy land back?

Have you seen signs that demand is pushing out a bit into outer locations?

And then how should we think about potential margin impacts from that?

For example, would there be any more interest capitalized into the older land?

To the final question, the answer is, no.

The answer is, it doesn't get capitalized into older positions that way.

But I guess the way I would answer that is, we don't have a tremendous amount of what I would characterize as outer-ring assets.

If you think back, we certainly have a large lot position associated with some of the larger, older Del Webb positions.

It's that slide 11 in the deck.

And we've talked about that for years, that it would just take us time to work through that.

Good news is, strong margins on that business, good return on incremental investment.

We own the land to [monetize].

Now we're just development dollars, sticks and bricks.

So we do okay on that.

It's also worth mentioning that over the last, gosh -- I guess it's five years now, we've been pretty active in selling some of those older, what I would categorize as challenged assets.

So if you think about it, over the last four or five years, it's certainly more than $400 million probably of land sales that moved a lot of those, again, what I'd characterize as challenged assets.

So our book today doesn't have a lot of that.

Okay, got it, thank you.

And then secondly, just on SG&A, I was wondering if you could elaborate a little bit on the workforce investments that you mentioned?

So just geographies and which types of labor were you targeting?

Thank you.

Yes, Matthew, this is Richard.

Primarily that's field resources to get homes in production, field managers or superintendents that manage our business.

You know, we had a very large increase in homes under production -- 41%.

And that takes incremental people to help manage the process.

So most of it was related to construction resources, to get those homes into production for deliveries later this year.

And geography-agnostic.

We've had a fairly significant ramp up in land spend the last few years.

And as we've indicated, 2016 would be a pivot year for volume for the Company, and you are beginning to see that come through the system.

And that's what those dollars are for.

Ivy Zelman, Zelman & Associates.

Thank you.

Good morning, and congrats on the solid quarter.

Thanks, Ivy.

I'm not sure if Deb is in the room or not, but I was hoping for an update on Pulte Mortgage, with respect to trends related to the TRID headwinds.

Because we're hearing concerns about closings that might be impacted in future quarters because of uncertainty around the rules, especially in the secondary markets, as opposed to those ones being sold directly to Fannie, Freddie that don't seem to be as problematic, or accepting it and not pushing back.

So any concern about 2Q and 3Q closings?

Well, Deb is not here, but I'll take that one, Ivy.

We do sell direct and so I would tell you, we're not seeing that as an impediment to our closing process.

More broadly for the market, I can't comment on.

Got it.

All right, great.

And Bob, just in terms of my follow-up, if you can give us an update on some of the higher price points around the market, if you're seeing any change in activity we've heard?

Depending on the city obviously, high-end is defined differently.

So I don't know if you see that, but for example, in Atlanta, above 600 or 700, are you seeing changes in absorption paces for that higher-end price point?

Ivy, this is Richard.

I will take that one.

We are not.

We're seeing good activity in the higher price points around the system.

Again, we have a modest number of really high-priced point homes -- $600,000, $700,000, $800,000 -- relative to our ASPs in the mid- to high-threes overall.

But we're seeing good demand.

And most of that for us is in Northern California, some in DC, some of the higher-priced markets in general.

But overall, so far, so good in that area.

Paul Shibilski, Evercore ISI.

Thank you.

This is Paul Shibilski on for Stephen East.

First, you mentioned Del Webb orders were down on the community close-outs.

I was wondering if you had heard anything from the field, though, about equity market volatility negatively impacting that buyer?

Hey, Paul, this is Ryan.

Yes, we've seen a little bit of traffic slowdown in our Del Webb communities, which we think is directly related to the market volatility.

We saw that last time as we moved through the quarter, and some of the market volatility started to come back into normal ranges.

We're quite pleased with what we're seeing out of the Del Webb markets right now.

Okay.

And then you spoke to Houston improving through the quarter, but now Houston has its own weather problem.

What kind of impact do you think that would have on 2Q conversion rates?

And then how long after, you know, we have a significant weather event like that, does it take demand to rebound?

Yes, great question.

Houston is obviously dealing with some weather challenges right now.

We haven't gotten a full assessment of the extent of the damage.

Many of the committees are still underwater and having a struggle getting out of their homes.

We don't expect it to have much of an impact at all on our Q2.

Probably it's fairly small impact as we move into Q3.

And Paul, just to add to that, remember, Houston is roughly 4% or 5% of our total Company volume.

So when you add it collectively, obviously we're paying attention to it, but we're not too concerned about it.

And we do still have seven, eight months to watch that for the year.

Jack Micenko, SIG.

Hey, good morning, everybody.

The first question -- looking at some of the regions, Northeast down a bit, more than last year, strong in Midwest, strong in Southeast.

Relative to absorption, is it okay to think that, that's generally sort of moving in line with community count?

Or is there any more pronounced demand swing in any of those outsized move regions in the quarter, from an order perspective?

Jack, we're seeing our Western markets do quite well.

We think this is reflective of some of the places where the local economies are strong, as well as where we have great investment.

We've also seen the Midwest perform very well year-over-year.

So those are the two spots that I would highlight.

Okay.

And then another follow-up on the G&A guidance on the dollar.

I think, Richard, you said a lot of that is field-type labor.

Is the significant improvement or implied improvement in G&A ratio at the end of the year, is that more function of sort of flexing in the overhead spend around the construction, and then maybe bringing that back down?

Or is it all conversion rate improvement?

Or is it sort of a mix?

I'll speak to the first part of that, and maybe ask Bob to comment a little bit more.

From an overall absorption perspective, we're definitely going to get a conversion rate improvement as we go through the year, as you might expect with all the homes in production that will be flowing through.

There is also, however, a little bit of a total dollar improvement, maybe Bob can speak to that.

Yes, we've talked about this in the past.

And for the most part, our dollar spend is relatively fixed.

We don't run sales commissions through SG&A and so we have, other than production level and footprint expansion -- so if we're opening a bunch of new communities, there are costs associated with that.

So as we look at the balance of the year, the guidance would imply another $540 million of spend, which translates to about $180 million a quarter.

And I would suggest that's kind of how we will spend it.

It's not going to be largely variable.

Will Randow, Citigroup.

Hey, good morning, guys.

Congrats on the quarter.

Thanks, Will.

In terms of going back to -- this was asked a couple different ways -- variances in your gross margin expectations -- can you talk about how your expectations for lumber inflation, as well as labor inflation are -- again, the gross margin expectations have moved since you reported your last quarter?

Yes, we had said coming into the year that, with a relatively benign commodity market but a relatively tight labor market, that we saw our construction costs up about 2%, and that was largely labor.

And we still see that.

We've got pretty good visibility into six months of costs.

So in terms of our backlog, we have, like I said, pretty good visibility into what our cost structure is going to be on that.

So we haven't seen that move materially since we last talked.

And Will, just to be clear, I'm not sure I heard you correct at the end of your question there, but we're not changing our gross margin expectations.

We're reiterating them in the same range.

So just to be clear.

Understood, thank you.

And then just one follow-up in terms of backlog conversion.

What is your confidence level going into the peak production season for closings in the second and third quarter that we don't have any more, I'll call it, disruption?

I know you guys have ramped up spec count.

Can you talk about some other preventive actions you may have taken to improve that confidence level?

Yes, Will, this is Richard.

I'll take that.

Certainly spec count is definitely helpful to us.

We've also paid a lot of attention to the overall labor market in total, when we saw some of the disruption last year, and have done our best to add incremental vendors where we could, overall.

So we're pleased with the progress we've made.

And just to be clear -- Bob mentioned this earlier on the answer to a question -- we expect improvement relative to prior-year conversion rates, but not back to old, historical levels.

And that's primarily due to the fact that our cycle times are extended.

We indicated on one of our calls last year that they were up eight or nine days in total, and we're still seeing that.

So we've improved our processes overall, but we're not expecting to get back to historical ranges, even though we will be improving relative to prior year.

Ken Zener KeyBanc.

Good morning, gentlemen.

Hi, Ken.

Slide 12, very interesting.

I have two questions.

Related to this slide, what can we infer from the outlook, I guess -- or how do you guys balance where you think -- if you talk about gross margins, which we can see on the non-adjusted side having peaked in 2014, could you kind of talk about the deltas that are associated with each of those, pre-interest?

I mean, do you have higher interest expense in the legacy?

Or is there any accounting nuances that we should be familiar with there, if we think about the mix aging three times, you deplete those legacy land positions?

Yes, Ken, fair question.

The answer is, no, our interest gets applied across our entire production portfolio.

And so when we manage the business, these are the numbers we're managing against.

So this is sort of book-value historical cost versus selling price for each.

So as you look at this, interest doesn't really influence it.

And Ken, this is Richard.

I would just add, I think what you should take away is that the investments we've made the past four or five years are at really nice margins.

We're very pleased with that, and that even though it will be declining as a percentage of total production, the legacy lots will continue to be a tailwind for margins going forward.

Those are the two key points we are trying to drive here.

Understood.

And I think you guys did very well by presenting it this way.

My next question is a bit more regional, specifically about California.

It's not the biggest market for you guys, but could you talk about the trends you're seeing in San Francisco, given perhaps slowdowns we're just seen in DC funding and how that might impact your points that you have up in San Francisco?

And if you could, describing a rate of foreign buyers, if that's a item that you have been tracking in California or Seattle in general?

Thank you very much.

Hey, Ken, this is Ryan.

We've actually seen exceptional strength in our Northern California market, and it's really reflective of the wonderful investments that we've made, really focused on the core employment areas in the East and South Bay.

We've got a lot of infill opportunities and infill communities that we've invested in.

And we're seeing excellent demand that is being driven by what's been a strong labor market, as well as a very tight supply.

So we're obviously watching some of the things that are going on in the technology sector.

But we've stayed away from some of the outer locations.

As you move further away from the Bay Area, we think those are some of the areas that will obviously be hit first, if the labor market there tightens.

Bob Wetenall, RBC Capital Markets.

Good morning.

This is actually Michael Eisen on for Bob this morning.

I just had a quick question about the pace of ASP growth and your order growth.

They both were very strong.

Wondering how much of this is attributable to community count shift and how much is price appreciation?

Yes, Mike, this is Richard.

The majority of it is a continued mixed shift that we've had in the business, ASPs arising strongly because of our investments of the past couple of years with mix shift.

We are also getting some benefit out of the Wieland business integrating into our backlog, which raises our ASPs some.

But the vast majority of it is from our core business continuing to move higher.

So as you note, our ASP and backlog is over 380,000 now.

And as Bob indicated, we will be delivering into that number slowly and steadily through this year and into next.

Great.

And then when you guys talk about the delayed closure of some community counts, are any of these at significantly higher or lower price points that would cause fluctuation quarter-over-quarter, as we look forward into the rest of the year, as those close out?

Yes, this is Richard again.

No.

And this is one of the reasons we don't love community count as a metric.

We've explained this before.

You might have a handful of legacy communities that had one or two sales, that drifted from Q4 into Q1, and those get counted as a new -- or excuse me, a community in our convention.

So no, there's no significant impact on either ASPs or anything else related to the few close-out communities that we had some activity in, in Q1.

Gabe Kim, Wellington Management.

Good morning.

Excellent results, thank you.

Thanks, Gabe.

Thank you.

My question is on slide number 11.

And this is a slide we've looked at for a couple of quarters now -- legacy Del Webb versus new active adult investments?

Yes, go ahead, Gabe.

Okay, super.

So what I'm looking at here -- so I appreciate the purpose of the slide.

On the left-hand side we have older Del Webb, and then on the right-hand side we have newer Del Webb.

And newer is always better than older.

So the gross margin is 10% higher.

And then when you sort of look at the bottom of the table, it says, estimated remaining lot supply 12 years for the older; estimated remaining lot supply for the newer is five.

If we were to translate this slide to a dollar basis, how would that 12 versus five look, do you think?

The turnover -- not in relation to the units, but the dollars of inventory -- does it look -- how does it look?

I'm not sure I'm following you, Gabe.

Are you talking about the total balance sheet investment on the left side versus the right, Gabe?

Yes, thank you.

I don't know if we have that at the tip of our tongue.

We could certainly work on that and potentially get back you.

I think it's --

Yes, Gabe, it's complicated, because you've got option lots in here versus owned lots.

So are you talking about committed capital, spent capital?

In particular, in the newer Del Webbs -- for the older ones, typically, we own them.

But for the newer ones, we've tried to structure them with option take-downs.

So let us give that some thought and maybe when we present this either at the next investor conference or next quarter, we'll try and get some color on that for you.

Okay, but the question really is, the dollars -- because we've heavily written down the stuff on the left, and the stuff on the right maybe not so much.

But the turnover expressed not in years, but in dollars?

That's kind of what I'm interested in getting a sense for.

Gabe, I think it's fair to say that the dollars associated are not gigantic for the Company, based on the total investment.

And to your point, the write-downs, which is reflected on the following slide, slide 12 which shows the sort of legacy lots, which many of these Del Webb lots would be included in that, as a margin tailwind going forward.

Okay.

It would be good to see that number.

Nice numbers, thank you.

Thank you.

Buck Horne, Raymond James.

Hi, thanks, good morning.

I realize you guys are hesitant and restricted in what you want to say about the Pulte family's recent letter, so I'm going to be careful how I word this.

But if the Board were to identify a CEO candidate before next year, could we expect to see a transition before the expected -- or previously announced retirement date for Richard?

Buck, this is Richard.

The Board plans to undertake a thorough review, as we talked about on our public disclosures.

Sometimes, CEO searches can be lengthy, so it's certainly expected that I'm going to fill out my announced term through May of 2017.

But we will keep you focused as that develops.

And I think the Board has been real clear that they're going to take a delivered process here, and they intend to follow it.

Okay.

And I understand the current situation is a little complicated, but would the Board seek to consult with the Pulte family on the next potential CEO candidate?

And also, are there any allowances that are in the new SG&A guidance related to your expected retirement?

There's nothing in our SG&A guidance related to expected retirement, I can tell you that.

And I'll just reiterate that the Board has a special committee of independent directors that they formed to look for my successor.

And I just want to assure every investor, until the day I walk out of here, our entire team is focused on continuing to successfully execute value creation.

And our Board has a really good process underway, and you can expect that will be revealed over time.

Mark Weintraub, Buckingham Research.

Thank you.

And I really do appreciate the slide 12, it's helpful, interesting.

Was hoping to get a sense of how many of your total existing lots now would be legacy lots?

Again, looking at the portfolio, it's relatively modest outside of Del Webb.

And in the Del Webb position, you can see there's 36,000 lots.

If you look at slide 11, there's 36,000 lots in that book we would characterize as those legacy assets

Okay.

Not wanting to get too technical, but I noticed that was prior to 2012.

This is a somewhat different date frame.

It is, but they're pretty close to the same, in that context.

Okay, great.

And then -- and I think you answered this question when you said that the legacy lots would continue to be a tailwind.

But the legacy lots that have been sold more recently, would they be meaningfully different than the remaining lots that you would have as legacy lots?

Have you been selling the much better legacy lots, as opposed to those that are less well-positioned?

No, they are -- I don't want to put words in your mouth, but we're not cherry picking with lots itself.

And Mark, this is Richard.

To add to something Bob said earlier, there is not a big block of legacy lots that are sitting, waiting to be sold off.

They are a lot of positions that are primarily Del Webb, that have eight, 10 years, 12 years of life left, that will be worked through at a reasonable pace over the next eight years, 10 years, 12 years, that will continue to impact, in a positive way, as you can see margins going forward.

But there's not going to be a big slug coming through at any one time.

To Bob's point, we've been very deliberate with regard to the way we're managing through those assets, and we've done a nice job with them.

Nishu Sood, Deutsche Bank.

Thank you.

There's been some pretty good discussion already about your delivery schedules and what you are doing to manage those, and the additional field personnel, and how we should expect to see improvement.

I wanted to dig a little bit into the labor market itself, the subcontractor pool, and what you are seeing out there.

Are those issues gradually easing over time?

Are pay scales rising?

And is that helping to solve the problem?

Do you see new sources of labor coming into the subcontractor pool?

What are you seeing out there?

It doesn't seem to be showing up in the macro data in terms of higher wage rates.

So what are you seeing out there, and how do you expect that to trend over the course of the year?

Nishu, this is Ryan.

We've seen stability in the labor market.

Certainly labor supply is tight.

It has been, and we expect that it will continue to be tight as we move through the year.

We have not seen a huge influx of new labor come into the industry.

And we're going to continue to run our business much like we have in the past.

And we don't expect significant changes; it's going to be stable.

Got it.

And in terms of its impact on your cost structure, obviously there was some pressures last year for you folks, and I think for a number of builders.

How has that trended more recently?

And has that cost profile come back in line?

And are you able to recover any cost increases through the pace of home price appreciation?

Well, certainly we've seen labor rates up.

We've talked about that.

We've seen input costs, commodity costs generally down or favorable -- not necessarily down, but favorable -- so not increasing.

And obviously we are seeking to maximize price across the buying spectrum in all cases.

So we have seen price appreciation, I would suggest it was certainly enough to cover the incremental input costs.

Alex Barron, Housing Research Center.

Yes, thank you.

Sorry if I missed it, but what was the interest rate on the new debt you guys issued?

We did two tranches -- a five-year piece and a ten-year piece.

And the 10-year piece was at 5.5%.

But through 5-year was at 4.25%.

Okay, I think that's all I had.

Thanks.

Thanks, Alex.

I will now turn the call back over to the presenters for any concluding remarks.

All right.

Thank you, Carol.

Thanks, everybody, for your time today.

We are certainly available if you've got any follow-up questions, and we'll look forward to speaking with you on the next call.

This concludes today's conference.

You may now disconnect.