普爾特房屋 (PHM) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PulteGroup's Q1 2018 Quarterly Earnings Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Jim Zeumer.

Please go ahead, sir.

Great.

Thank you, Barbara, and good morning.

I want to welcome everyone to PulteGroup's conference call to discuss our first quarter financial results for the period ended March 31, 2018.

Joining me for today's call are Ryan Marshall, President and CEO; Bob O’Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior Vice President of Finance.

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

We will also post an audio replay of today's call to our website a little later.

Before we begin the discussion, I want to alert all participants that today's presentation includes forward-looking statements about PulteGroup's future performance.

Actual results could differ materially from those suggested by our comments made today.

The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides.

These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.

Now let me turn the call over to Ryan Marshall.

Ryan?

Thanks, Jim, and good morning.

We're excited to speak with you today about PulteGroup's outstanding first quarter financial results.

As we'll review, the company continues to realize meaningful growth and performance gains across critical operating and financial metrics.

Heading into the spring selling season, there was tremendous focus on how higher interest rates would impact buyer demand.

It seems that buyers were not deterred by the volatility in rates.

And I point to our 12% increase in sign-ups and 4% increase in absorption pace as confirmation.

Even with the recent move, rates remain incredibly low by historic standards.

At the same time, housing continues to be undersupplied relative to a variety of metrics, including the 50-year average for new home sales, household formations and overall population growth.

Consistent with the trends that we've seen for a number of quarters, buyer demand continues to benefit from the strength of the underlying economy, a good jobs market with low unemployment, sustained high consumer confidence and support of demographics.

Against strong buyer demand is a generally tight supply of home for both new and existing in most markets across the country.

6 months of home supply is considered healthy, but we are seeing less than half that amount in number of the markets that we serve.

Within the strong demand environment, our results demonstrate that we are continuing to successfully execute against our strategic imperatives as they relate to operational performance and asset efficiency.

As Bob will detail in a couple of minutes, we generated 21% of growth in home sale revenues to $1.9 billion, our highest Q1 revenues in over a decade.

Consistent with our ongoing efforts to drive enhanced operational performance, we realized improving gross margins and tremendous gains in overhead leverage.

Together, these contributed to a 270 basis point increase in operating margin to 11%.

Coming out of the downturn, we talked a lot about operating efficiency and taking more of a manufacturing type mindset with regard to our construction practices.

Production efficiency is one of the reasons we focused on having a robust backlog of sold homes.

This allows us to supply more even flow of work to our trades without having to rely on the construction of unsold stock inventory.

Building sold backlog on an even cadence is a lower risk way of keeping trades on the job site, which is important given tight labor resources.

While we focus on building sold homes, we do further inspects to help maintain a more even production cadence and about 25% of our starts are spec homes.

We then worked to sell these units in the -- early in the build cycle given the buyer the most opportunity to personalize the home to their wants and needs.

A manufacturing mindset is also why we launched our commonly managed plans.

This is the practice through which we build a series of highly efficient floor plans across multiple markets.

In the first quarter, 79% of our deliveries came from these commonly managed plans.

You may ask why this is important?

In addition to the gains and financial performance, we believe the production discipline associated with such an approach is critical to efforts to incorporate more off-site manufacturing into the construction process.

As builders evaluate off-site production to help mitigate labor challenges, having a disciplined, controlled process around floor plan management is a critical component to the entire effort.

The ongoing operating and financial gains we've realized enable the company to more than double reported Q1 earnings over the last year to $0.59 per share.

Clearly, we continue to make excellent progress as we work to be a more efficient and more profitable home builder.

Given our focus on delivering higher returns, it isn't just about growing the income statement, but also being more efficient with our balance sheet as well.

We continue to make steady progress against our stated objectives or shortening the duration of our land pipeline, while also increasing our use of options to reduce risk and support higher returns.

Reflective of our ongoing efforts in these areas, I would highlight that 61% of the almost 9,000 lots approved for purchase in Q1 were under option.

Depending on the ultimate composition of the land deals completed this year, we could end 2018 approaching 40% of our lots controlled via option and less than 4 years owned lots on our balance sheet.

As a reference point of the progress that we've made, back in Q1 of 2011 when we started this work, we controlled roughly the same number of lots approximately 144,000.

Only at that time, we owned 90% of those lots and they represented almost 8 years of supply.

In conclusion, I am extremely pleased with PulteGroup's first quarter results.

The financial performance and year-over-year improvement delivered in the quarter clearly demonstrate the operating gains we continue to achieve as we work to deliver high returns and long-term value for our shareholders.

Now let me turn the call over to Bob for a more detailed review of the quarter.

Thanks, Ryan, and good morning.

As Ryan stated, our Q1 financial results show significant year-over-year gains in a number of important areas.

Beginning right at the top, our Q1 sign-ups increased 12% on a unit basis to 6,875 homes and increased 18% on a dollar basis to $2.9 billion.

By buyer group, sign-up increases over the first quarter of last year were 9% to 1,970 homes among first-time buyers, 18% to 3,294 homes among move-up buyers and 5% to 1,611 homes among active adult buyers.

Adjusting for changes in community count, our overall absorption pace for Q1 increased 4% over last year.

Looking at absorption pace within each buyer group, first-time was up 1%, move-up was up 9%, while active adult experienced a slight decline as absorptions were down 3% against the very tough comp of up 17% last year.

Working through our income statement, our top line continues to benefit from strong volumes and ongoing price realization as home sale revenues increased 21% over last year to $1.9 billion.

Our revenue growth in the period reflects the combination of a 10% or $38,000 increase in average sales price to $413,000 combined with a 9% increase in closings to 4,626 homes.

We're extremely pleased with how well our home construction operation is performing.

Thanks to a lot of effort.

We caught up on some hurricane-related production delays in Texas and Florida, and we were able to deliver some additional California homes were final permits have been slowed.

Given strong market conditions and high sales prices in California, the incremental closings there benefited the company's reported revenues, ASPs and margins in the quarter.

Looking at closings by buyer group, 29% were first-time, 47% were move-up and 24% were active adult.

In the first quarter of last year, closings were 30% first-time, 43% move-up and 27% active adult.

Consistent with our focus on limited spec construction and building sold homes under a more consistent production cadence, we currently have approximately 9,950 homes under construction, of which 25% are specs.

Given our current production universe, we expect deliveries in the second quarter to be in the range of 5,400 to 5,700 homes.

This would represent an increase in year-over-year closings of between 7% and 13%.

In addition, based on the strong sales environment, our first quarter actual deliveries and our expectations for deliveries over the balance of the year, we are raising our full year guidance for 2018 to be in the range of 22,500 to 23,500 homes.

This is up from prior guidance of 22,000 to 23,000 homes.

As noted, our Q1 average sales price was $413,000, which is up 10% over last year.

The increase in our average sales price reflects higher average sales prices among all buyer groups, including increases of 17% to $323,000 among first-time buyers, 8% to $483,000 among move-up buyers and 5% to $385,000 among active adult buyers.

Our higher ASP also reflects the increase in the percentage of our closings for move-up buyers in the quarter.

It's worth noting that the average sales price of homes in backlog at quarter end was $441,000.

Given our backlog and current market conditions, we now expect our average sales price for the full year to be in the range of $405,000 to $420,000, which is up from our previous guidance of $400,000 to $415,000.

Turning to margins, I'm extremely pleased to report that our gross margin in the quarter was 23.6%, which was 10 basis points above the guidance range we provided for the quarter and which represents a 40 basis point improvement over the first quarter of last year.

Our margins this quarter reflect the strong market dynamics Ryan highlighted, along with the mix of homes closed and the focused discipline of our home building operations.

It's also worth noting that as has been the trend throughout this housing recovery, our strategic pricing methodology continues to drive enhanced profitability.

For the quarter, auction revenues and lot premiums increased 7% over the last year to just shy of $78,000 per closing.

As an additional data point, sales discounts for the quarter were 3.2% or approximately $14,000 per home.

As a percentage of revenue, discounts were down about 10 basis point compared with last year.

The supported pricing environment that exists in many of our markets is allowing us to effectively manage the ongoing pressure in house costs, particularly as it relates to the sustained high level of lumber pricing.

As such, we remain comfortable with our previous guidance that we expect gross margins for 2018 to remain in the range of 23% to 23.5% in each of the quarters going forward.

Continuing down the income statement, SG&A spend in the quarter totaled $241 million or 12.6% of home sale revenues.

This represents a 230 basis point decrease compared with last year.

I would note that last year's SG&A included $15 million of expense associated with an insurance settlement.

Identifying ways to drive greater overhead leverage is an area of intense focus across our entire organization, so we are very proud of our Q1 results.

Given the gains demonstrated in the quarter, we are updating our guidance on SG&A.

We now expect SG&A to be in the range of 10.8% to 11.3% of home sale revenue for the full year of 2018 compared with our prior guidance range of 11% to 11.5%.

Given our anticipated gross margins and overhead leverage, we now expect our full year operating margin to be in the range of 11.7% to 12.7%.

This is up from our prior guidance range for operating margin of 11.5% to 12.5%.

Moving on to our financial services businesses.

We generated pretax income for the quarter of $14 million, which is essentially unchanged from the same period last year.

All of our financial services operations benefited from the growth in our home building volumes, but more competitive conditions in the mortgage market impacted our mortgage pricing, which in turn influenced our capture rate, which fell to 78% from 80% last year.

In total, based on our ability to deliver strong revenue growth and high operating margin, we reported a 61% increase in consolidated pretax income to $224 million.

Looking at taxes.

Our reported Q1 income tax expense was $53 million, which represents an effective tax rate of 23.8%.

This is below our prior guidance of 25.5% due primarily to the impact of the equity compensation accounting standard we have addressed in the past.

As a reminder, certain stock compensated -- compensation-related tax attributes that were previously recorded in equity are now recorded as an element of income tax expense.

As this accounting is triggered by the exercise in stock options by our employees, it's difficult to accurately estimate the impact of this standard on our future tax rate.

Having said that, we continue to project an effective income tax rate of approximately 25.5%, excluding the impact of stock compensation and any other discrete events.

Closing out the income statement.

Net income for the first quarter totaled $171 million compared with $92 million last year.

On a per share basis, Q1 earnings more than doubled to $0.59 per share, up from $0.28 per share last year.

Diluted earnings per share for Q1 2018 were calculated using approximately 288 million shares, which is a decrease of 32 million shares or 10% from Q1 of last year.

The lower share count is due primarily to share repurchase activities executed over the past 12 months.

This includes 1.7 million shares repurchased in this quarter for $52 million for an average price of $30.86 per share.

We ended the first quarter with a $185 million of cash and a debt-to-capital ratio of 42%.

As we have talked about on prior calls, we expect 2018 earnings will have us back inside our targeted 30% to 40% debt to cap range by the end of this year.

Let me address a few final operating metrics before I turn the call back to Ryan.

As I mentioned earlier, we had approximately 9,950 homes under construction at quarter end, which is up 21% over the comparable period last year.

Of that universe, 25% are spec, which is comparable with last year as well.

We continue to do an outstanding job managing specs, which we think helps pricing and margin realization.

In fact, we had only 610 finished specs at the end of the quarter, effectively unchanged from last year despite the increase in our community count.

Looking at our community count.

We operated from 844 communities during the quarter, which represents an increase of approximately 8% over last year.

As we have discussed before, we do not believe community count provides a clear picture of the business due to the large variation in the profile of our communities.

Having said that, in response to numerous requests from investors, we expect that our community count will increase in 2018 by between 3% and 5% on a quarterly basis compared with the comparable prior year quarter.

During the quarter, our land acquisition spend totaled $290 million, which is up from -- which is up 20% from last year.

Of the land deals approved in Q1, approximately 30% of the lots are targeted to serve first-time buyers, with 49% serving move-up buyers and 21% targeting active adults.

As we have discussed on prior calls, we are working to expand our percentage of first-time buyer communities, so this quarter's numbers reflect the timing of deals, not a change in strategy.

We ended the first quarter with a total of 90,000 lots owned with an additional 54,000 lots held through auctions.

We remain focused on improving our overall asset efficiency as we control about 38% of our land pipeline through options and own just under 4.2 years of lots.

In conclusion, our Q1 financial and operating metrics show the growth and performance gains we continue to generate.

Beyond delivering great numbers for the quarter, we believe we have the business well positioned to deliver strong performance throughout the year.

Now let me turn the call over to Ryan for some final comments on market conditions.

Ryan?

Thanks, Bob.

Given the strength of our first quarter results, it won't be much of a surprise when I say we are operating in a strong demand environment for new homes.

Even in a quarter that saw significant volatility in the financial markets and meaningful moves in mortgage rates, consumer confidence and buyer demand remain high.

This demand environment, in combination with a limited inventory of homes available for sale, supports our continued positive view of the housing market.

Looking at how these conditions impacted our Q1 business.

Even with the winter that seemed to never end, demand in the east from New England down through D.C. was strong throughout the quarter.

Demand conditions in the Southeast and in Florida were equally robust.

Even among the higher price points where we experienced some softness last year in the Southeast, we are seeing consistent demand for our Pulte product.

In the middle third of the country, demand conditions were very good in the Midwest and down into Texas.

Our Q1 numbers show sign-ups down in the Midwest, but this was driven by last year's exit out of St.

Louis and the decision to slow sales paces in certain communities to manage backlog and avoid any gap out on lots.

And finally, demand in the West remained very strong throughout the region and across all price points.

As mentioned previously, California remained exceptionally strong, but we also experienced excellent demand in Arizona, Las Vegas and Seattle.

The positive buyer traffic and sign-up patterns that we saw in the first quarter have carried through and into Q2.

Even with all the geopolitical and financial uncertainty that is swirling around, we see sustained momentum that we expect can carry through the second quarter and the entire year.

Before opening the call, it is important for us to recognize the recent passing of our founder Bill Pulte.

Bill is a home building icon and a visionary leader who impacted how the entire new construction industry operates today.

More directly, he infused the passion for build quality and customer experience into the cultural fabric of this company.

A passion that our employees embrace as we carry Bill's legacy into future decades.

We will miss him.

Jim?

Thank you, Ryan.

You're right.

Bill was an amazing individual.

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.

(Operator Instructions) Barbara, if you'll explain the process, we'll get started.

(Operator Instructions) We will take our first question from Nishu Sood from Deutsche Bank.

And -- yes, so first question I wanted to ask about was on the strong start to the year from a cash flow perspective.

How does that potentially influence the $600 million to $800 million, I believe, range that you'd kind of laid out in the -- for the year on the last call?

Yes, Nishu, great question.

And obviously, the incremental closings we think could provide incremental cash flow somewhere in the neighborhood of $100 million.

Got you, okay.

And on the mix issues, obviously, a very strong gross margin performance, I think this is your first performance in, I think, 2 or 3 years where you had an up year-over-year and so strong start.

You mentioned Bob though, the Northern California mix issues, does that -- California remained strong.

So did you bring that up to a point out that there may be some give back?

Or was that a temporary 1Q issue?

Or given the ongoing strength in California, would you expect that to persist?

Nishu, it's Ryan.

We are seeing nice strength in our California markets both in Northern and Southern California.

So we are very pleased with how the operations are performing there.

The point that we are trying to make and highlight in Q1 is we had a few delays that we talked about in Q4 related to some permit and entitlement delays.

The margins from some of those closings that carried into Q1 certainly had a little bit more of an impact on our Q1 volume.

And it had an influence on ASP and margin.

So that's all we were trying to highlight there, but we are very pleased with how California is performing.

Our next question today comes from Michael Rehaut from JP Morgan.

I want to offer my condolences on Bill's passing.

First question, you highlighted your shift or continued shift rather towards lot optioning and with the hope that by the end of this year, you could be around -- you hit the 40% mark and be under 4-year zone.

Provided the cycle continues and the growth projections, that the industry continues to grow similar to what it's been.

And I would assume, you would more or less try and mirror that pace.

What could we see that number in, let's say, the next 1 to 2 years?

Yes, Mike.

Great question.

And it's really just playing out the strategy that we've been articulating for the last couple of years that in an ideal setting, we like to see a mix of about 50-50, 50% owned, 50% options.

And I think what you're seeing in our results in the most recent quarter is that we're moving well along that path that we've articulated.

So we're approaching the 40% range.

We think that by continuing to execute the strategy that we've laid out, we can get closer to that 50%.

It's directional in where we're going as opposed to hitting a specific number.

Great, understood.

And I guess, second question just on the cash flow and appreciate the incremental quantification of the upside in closings that could result in another $100 million to that number.

On that point and I'm sorry if I didn't hear this earlier if you had touched on it.

But with regards to the share repurchase around $50 million this quarter, given the increased cash flow outlook for the full year, how should we think about the rest of the year?

I think -- obviously, you've talked about share repurchase as kind of one of the core parts of capital allocation.

And with that number being even bigger and that's after taking care of your land purchasing needs, how should we think about the rest of the year in this area?

Yes, Mike.

I think as we've talked about, we don't want to be targeting numbers going forward.

So we'll be reporting what we do.

Having said that, we remain in the camp, we're not stock pickers.

We're not making exclusive calls on valuations.

We look at capital needs of the business.

We look at the capital generation of the business.

And so certainly, if we project an incremental $100 million of cash flow, that will influence our thinking.

But what we want to do is, over time, be systematic in our return of capital to shareholders.

But with the premise being for constructive on the market and we are today, that we want to invest in the business as long as we can do that at high returns, that will be our primary view.

So as we look at multi-year needs of capital and has not just what we have in line of sight over the next 6 or 9 months, it's actually over the next 2 or 3 years.

We work together here and then with our board, think about how much to allocate to share repurchases.

And we'll let you know how we proceed with that quarter-by-quarter.

Our next question today comes from Stephen Kim from Evercore.

I wanted to ask, if I could, about your manufacturing productivity, which I think you spend a fair amount of time, Ryan, in beginning of the call talking about.

You talked about the move to commonly managed plans and spec homes.

I think you said 25% in your production.

Was curious as to whether you've looked at or contemplated other aspects of the business, which seem to be emerging, specifically with respect to increased use of panelization and some of the initiatives or innovations that are going on there.

Can you give us a sense for what percent of your closings used external panelization plans to help you build your homes?

And if you have any sort of thoughts around the sensibility of making further investments in that area?

Yes, Stephen.

Appreciate the comments and we highlighted it for a reason.

We do think that it's one of the necessary elements that the entire industry is likely going to have to embrace to deal with the continued labor challenges that the industry is facing.

So we're putting efforts inside of the organization at studying and evaluating how we can incorporate it and integrate it into our business for future success.

I will highlight note that there will be winners and losers as the entire industry looks to incorporate manufacturing.

Our company has a long history going back some 20 to 25 years of innovation around manufacturing and vertically integrated technologies.

And our founder, Bill Pulte, was someone who was very passionate about innovations in the space.

So we're looking at a number of different things inclusive of wall panels and integrated plumbing and electrical connections, vertically integrated trades.

I think we're looking at the full complement of potential things that we could use to improve our operations.

It's not going to be a one-size-fits-all.

It will depend on geography and it will depend on our scale and different markets and regions.

And it's going to take some time.

It's not going to happen overnight.

So we can continue to run our business the way that we have been we think for the foreseeable future, but we do believe it's not a matter of if, but when the change comes and we just -- we want our investor base and our shareholders to know that we're putting some efforts around studying this and making sure that our organization is ready.

The reason that we highlighted the commonly managed plans, which we've been working on now for the better part of 5 years, having a more streamlined plan platform with high throughput we think is a big lever to unlock success or lack thereof around manufacturing.

Yes, that's great.

I agree with a lot of what you said there.

One of the things that we've thought about and I'd be curious to get your perspective is, if or when over the next few years, you see an increase in this use of panelization technology.

Do you think it will influence the competitive advantage that the largest builders in the markets are enjoying relative to their competitors?

In a way, I've contemplated that perhaps you might see some of the advantages of scale being captured by the factories, which are making the panels and, therefore, they could sell it to builders large or small, which would seem to flatten the overall cost advantage of the largest builders are working on getting.

I was curious as to how you thought about that evolution in terms of competitive advantage of the largest builders versus their peers?

Yes, Steve.

I think it's a great question and certainly scale matters.

And it's something we've talked about for a long time.

You've heard us talk about relative market share.

And so I think volume and scale at a national level are certainly part of the equation.

We frankly believe that scale at the local level is probably even more impactful and more important.

As far as the manufacturing piece and if there are third-party providers that are -- if I understand your question right, those third-party providers or manufacturers, they are the ones that will benefit more from the scale as opposed to the large builders.

It's certainly possible.

I think the question really becomes, are you making or buying?

And we're looking at both alternatives, where you may be buying panelization, which may just purely be a unlock or a way to overcome labor shortages and challenges.

The other side of it is, we may be the manufacturer and that certainly on the table as well.

Our next question comes from Susan Maklari from Crédit Suisse.

Ryan, when you were speaking to some of the regional trends you're seeing.

You said that in the Southeast, you've seen some pretty robust demand even at the higher price points.

How much of that improvement do you think is driven by company-specific efforts or things that you have done to the product relative to the broader market and maybe some of the impact of the tighter inventory that we're seeing?

Susan, I think it was more -- the point that we're trying to make is, we saw some softness in the higher price points in the Southeast a year ago in the same quarter.

We commented at that point in time that it was really about a very local competitive environment, some of the communities that we're going head to head against at that particular point in time.

We've seen some of that softness dissipate and certainly, the tight inventory that's out there is having an impact.

That being said, I think it does come back to some of the broader fundamentals.

Interest rates are still incredibly low.

We're seeing a backdrop of a strong economy.

I think all of those things are contributing to that price point performing well for us.

Okay.

And then can you talk a little bit to inflation, especially maybe as it relates to some of the materials.

It sounds like that continues to creep upon you, just maybe what you're seeing there?

Yes, this is Bob.

We certainly see the same thing everybody else does.

It's interesting lumber, which we had highlighted coming into the year that we expect it to see sort of follow the seasonal trend -- historical seasonal trend down has not.

And so we see price pressure there.

The labor market, as Ryan talked about, is still challenging.

You hear about tariff-related increases on steel and aluminum.

So having said that, there is inflationary pressure on commodities.

The good news is that we've seen a market that's allowed us to price to cover most of that.

So we have guided I think 2.5% to 3% on inflationary pressure.

We see that's still every bit of it, maybe a little bit more depending on what lumber does over the balance of the year.

But we still feel good about our margin guide based on the strength of our backlog and the strength of the selling environment today.

Our next question today comes from Alan Ratner from Zelman & Associates.

So on that final point on the lumber side.

You look at the random ones pricing and lumber prices are up 20% plus and it seems pretty unwavering.

Can you just refresh our memories here, how do you guys purchase lumber?

Is there a certain price that's locked in for a period of time and then it resets or do you try to smooth out the fluctuations there?

Because 2.5% to 3% seems pretty low in the context of at least the largest material up 20% on the spot market?

Yes, it's a good question.

We actually do buy on a trailing 13-week average price, which gets reset quarterly.

So we have the ability to do at least in terms of production time lines is -- the lumber that gets delivered is going to be priced consistently with when we actually sold the house.

So we sell the house, we'll build it 6, 8 weeks later.

The lumber that gets delivered is going to be based on the pricing that was in effect.

So we feel like we've got some ability to control the cost input and related margin estimates on the backlog that we've got.

Certainly, it's one of the primary components of the house cost.

So like I said, we're at 3%, maybe even a little bit above it going through fiscal '18.

Got it.

And then second question.

I know you guys don't spec a lot, but you do spec some and you mentioned 25% of your starts are specs.

So I'm curious in the last 4 months or so, you've had at least a couple of weeks where there has been pretty sharp moves in rates, including the most recent 10 basis point move over the past few days.

Do you see any difference in behavior among buyers coming in, looking for homes that might be a little bit closer to completion in order to lock in that rate when you see those movements in rates?

Or has the buyer behavior really been pretty constant through these various moves?

Yes, hey Alan, it's Ryan.

The -- what I would tell you with buyer behavior is, I think when buyers go into the housing market, they have a need for housing that is being driven by changes in life events.

And I think at that point in time, they look at what they can afford based on the prevailing rate at that point in time.

While we certainly have seen a movement in rates, we're still at an incredibly affordable overall rate environment, which I think is the big theme here.

And we still see lower margins on the spec homes that we sell, which is one of the reasons that we prefer to sell to-be builds or dirt sales as we're more profitable on those.

So whether somebody wants a spec or a dirt, I think it really comes down to what their need for housing is.

Are they coming out of an apartment, are they relocating, have they already sold their home, et cetera.

I think those are the bigger drivers versus kind of locking a rate.

The other thing that I would tell you is our financial services division.

They do a great job of providing longer-term rate locks, which I think help to mitigate some of that fear.

And then right now, kind of back to the first part of your question, Alan, just in terms of how many specs we have in the system?

It is about 25% of our starts, and we have roughly 2,500 homes that are in some stage of construction that are specs.

Our next question today comes from Matt Bouley from Barclays.

This is actually Marshall Mentz on for Matt.

A follow-up on the -- just a follow-up on the manufacturing team.

You called out the percentage of deliveries coming from your commonly managed plans.

I just wanted to understand where do you think that percentage can go from here?

And what do sales from those plans mean from a margin perspective?

So Marshall, we think we're about at the rate that we'll operate at going forward.

We said all along our target was right around 80%.

The plans -- the other 20% that we build that aren't necessarily part of our commonly managed portfolio.

Those are in more infill, more difficult locations that requires a specific unique product.

So we think we are there in terms of the percentage that we get.

In terms of the margins, I don't know that we've specifically disclosed or provided margins.

But one of the benefits that we derive and one of the reasons that we implement at the commonly managed plans is our costs are better.

These plans have been value engineered.

They have been should cost.

They have been intentionally designed to live better to provide better livability to the consumer, which we believe translates into higher sales prices and lower costs.

So just directionally, I would tell you we have better margins on those plans.

And I guess, just as a quick follow-up.

What's the status on updates of the active adults floor plans?

Are those still in process or beginning to be rolled out?

So you're making reference to the redesign of our commonly managed active adult portfolio.

The progress on those is going well.

We have a very detailed process that we follow in testing those.

They are in the market being tested and being first built.

And those will roll out more broadly to new communities as they open into 2019.

Our next question today comes from Jack Micenko from SIG.

This is actually Soham on for Jack this morning.

So over the last couple of quarters, you've been growing absorptions.

So wanted to get your thoughts on the intersection, if you will, between growing community count, managing pace?

And then what that means for gross margins ultimately?

Because clearly, as you manage pace, you've been able to sustain margins, but at the same time, community count growth is more cash intensive way to grow the business.

So just wanted to get your thoughts on where you're headed there?

Yes, there was a lot there.

This is Ryan.

I will try and touch on a couple of pieces and then maybe the pieces that we miss, you can come back with follow-on.

The first thing I would tell you is that we don't underwrite to margin.

Our focus is on delivering the best return profile that we can for the business.

Certainly, margin and pace are 2 of the significant levers that play into that as well as the asset turns and how efficient we are with the assets.

So it's managed on a community by community basis frankly.

Sometimes it's margins, sometimes it's pace and it's really working to find what the optimal blend of that is.

We think we're doing a pretty good job of it right now.

Our margins are sector leading, industry leading, and we like where we're at.

We're getting nice absorptions.

We're getting good asset efficiency and it's translating into a nice return profile.

So I think we've got the dials appropriately adjusted, but we're constantly looking at it and making tweaks.

Okay, great.

And then just wanted to see if you guys have or are willing to share sort of an ROE target now that your contracted share buyback program is behind you and your growing book value, again?

We candidly haven't done that historically, and so of-- offered today, we're not going to today.

And largely because the return characteristics change over time depending on where you are in cycle and investment.

And so our goal is to invest at high returns.

And if we do that, we think we will generate good returns on equity over time, particularly being a company that does have part of the capital allocation buying back stock.

Our next question today comes from John Lovallo from Bank of America.

It's actually Pete Galbo on for John.

I think to an earlier question, somebody had asked about option percentage for the total book moving up close to 50% over the next 1 or 2 years.

Is there anything structural that will prevent you from growing materially higher than that longer term?

Or is that just kind of a yardstick that you're putting up for right now?

Yes.

Bob.

I think the answer to that depends on how the sellers behave.

We've been pretty clear over time that when we're doing this, we're not putting money sources between us and land sellers.

We're typically negotiating with the land seller.

And so we're really seeking to do is a, preserve capital efficiency and b, to try and mitigate market risk.

And so our ability to do that is going to be predicated on seller's willingness to do that.

We haven't put a mandate out in front of the deals that said we want to make sure that you only have 2 years of own supply in any 1 deal or that you have to have optionality and it's just that the economics make sense.

So with that has been said to Ryan's point, we've done a pretty nice job getting up to almost 40%.

We think we might get there by the end of the year, but that's directional as opposed to a target.

Pete, the other thing I want to may be just correct.

We are directionally moving in the 50% direction.

It will likely take longer than the next 1 to 2 years.

So I think what Bob talked about is right.

It depends on the seller.

We don't -- well, we like the benefits that we derive from having more option lots.

They do come at a cost, and we've got to work that into our overall economics of land acquisition.

Got it now, that's helpful guys.

And Ryan, maybe in some of your regional commentary, if we can dig in a little bit more.

Florida, again, this quarter was particularly strong, orders up around 40%.

Is there any 1 price point there that's performing particularly well for you guys?

Or is it really a function of you're opening a lot of communities in that area, just any additional granularity to help us with that?

Yes, the more affordable price points are certainly performing well, but we've got a broader range of products throughout all of our Florida markets.

We operate nearly every major city within Florida and with that comes kind of a broad range of price points.

I think our Florida team has done an outstanding job with strategy and land positioning, community positioning there.

We've got good execution.

We operate all 4 of our brands there well.

So I think it's kind of the full complement of what our company offers has contributed to our success in Florida.

Our next question comes from Carl Reichardt from BTIG.

I wanted to ask back on lot options, Ryan.

As you're looking at your current mix and what you anticipate in the future, how do you think about those split between finished lots and raw lots?

Would you intend to do more raw lot in general or are you seeing finished lots come back in a meaningful way?

Are those of interest to you?

Yes, Carl, good question.

We're seeing mostly raw, mostly self-developed.

There are a few developed lot positions out there.

But as -- I think we and probably, you've heard from a lot of our competitors, the developer base really was decimated in the downturn and they have not come back in a meaningful way.

So there is a few markets where there is good developer base.

And I think when available -- when they put finished lots on the ground and if they are available, I mean, we will certainly take them, but it goes through the same underwriting process that we do any other transaction.

Okay, makes sense.

And then on the M&A, Ryan, ex-price and wanting to get something as inexpensively as possible, can you sort of sketch out your perspective on M&A now?

What kind of a deal would be of interest to you, if any would?

Obviously, there are investors saying, "Well, the ball is in Pulte's court now, what might they do?" So I'd just like to get your thoughts on that.

Yes, Carl.

M&A really falls into the -- and it goes back to some of the things that Bob was talking about as it relates to capital and use of cash and share buybacks.

When we articulate that our capital allocation priorities, #1 was to invest in our business and M&A falls into that category.

So a deal that would make sense for us would be one that we think is consistent and in line with our overall land acquisition strategy.

We don't believe that we need any other brands, and we don't believe that we need anyone else's home building platform.

We think the one that we have is superior.

So would really be about if there is a land acquisition opportunity that was in the form of M&A.

The next question comes from Dan Oppenheim from UBS.

Was wondering if you can talk a little bit about the entitlement process.

You talked about the West where some closings came through based on (inaudible) and such, wondering how that is impacting the overall thoughts on community growth across regions here?

Yes, this is something we've been asked about for years, it's hard and getting harder I think is the right way to characterize this.

You have to spend time.

You've got to work through the planning commission, you've got to work with local residents.

Especially, if you think about where Pulte has been investing, we've not worked out into the exurbs, or that secondary or tertiary, and we've tried to stay a little bit closer.

So it's typically going to be higher density.

It's going to be more infill or closer, and I think the entitlements, they are certainly, on the coast, it has been a challenge for years.

I think the entitlement time lines are extending just about everywhere.

Got it.

And then in terms of the land and the time line for getting to 50% option, you're trying to comment about that won't be longer than next 1 to 2 years.

Presumably that means there is more potential for cash being used for repurchase the longer the time line ends up being there?

Not essentially, I would actually say it's the opposite.

The more optionality we can build into our land pipeline, the less cash we have to invest in land, which would free up capital for other purposes.

So if you ask as an example, if we cut our land spend in half because we did twice as much optionality, we have more cash available to invest, obviously, or to do other things with, whether it's dividends or repurchases.

Right.

And then as far as would we use that extra cash, which I think was part of your question was -- would use that extra cash to buy more shares.

It really goes back to one of the answers that Bob gave several questions back.

It's a committed priority of our capital allocation strategy.

We are not providing any forward guidance other than to say it's something that we're going to be a consistent repurchaser of the equity.

Our next question comes from Stephen East from Wells Fargo.

This is actually Paul Przybylski on for Stephen.

I guess, earlier in the call, Ryan, you mentioned that local scale was most important for increased efficiency.

What markets you feel that you get the biggest bang for your investment to increase your local scale?

And is that how you have been deploying your capital of late?

Paul, I want to make sure that I understand the question.

Can you rephrase that?

Yes, you said local scale was the most important for driving increased efficiency.

What market out there do you think have the greatest opportunity for you to increase your local scale?

And is that where you have been dragging your capital?

Yes, Paul, it's a good question.

What I would tell you is, we seek to increase scale in all of our markets.

And if we don't have scale, we'll leave.

We highlighted St.

Louis, in particular, in the Midwest that, that contributed some of our year-over-year decline or comp in comparison to prior year.

So does it influence where we're making investments?

Absolutely.

But other economic factors in markets, in particular, are certainly a driver as well.

So is the population growing, are there jobs there, how does that local market behave and how do we see the opportunity to deploy our brands and our strategy into those cities, in particular.

Yes, Paul, the only thing I'd add to that is I agree 100%.

As part of our strategic planning every year, we sit down with our local operating teams and that is one of the things we cover.

Do you have local market scale?

And if you don't, how are you going to get?

What are the investment criteria we need to think about?

How much capital do you need to do it?

So to Ryan's point, does it influence our capital allocation?

Without question.

Okay.

And then I guess, change topics here.

Looking forward, your -- probably a rising rate environment, would there be any change to your pricing strategy at some point, so as not to choke off demand, would you take a more conservative outlook?

Yes, Paul, I think that's a day by day decision as we evaluate what the value is in the marketplace.

And so affordability is always a factor.

It's certainly getting more and more expensive to buy a home.

But as we measure the supply and demand environment and each individual community, that's what drives those decisions, not 1 specific data point of a rate.

Our next question comes from Jay McCanless from Wedbush.

My first question on the active adult absorptions being down versus last year.

I was a little surprised to hear that because that active adult empty nester cohort, we continue to hear in the field that there is a lot of demand coming from that group.

So maybe if you could talk about that cohort relative to what you guys are doing with Del Webb and some of your other products and over may be the next 1 to 3 years, what you see -- or where you see Del Webb growing?

Yes, Jay, it's Bob.

Certainly, we noticed the fact that absorbs are down 3%.

We've looked at it.

We don't see anything in particular, whether it's part of the market, part of the geography.

Paces were up 17% last year, so a challenging comp.

We feel really good about the active adult buyer.

Candidly, we're looking for more ways to serve them, whether it is through the active adult Del Webb brand, through our DiVosta brand in certain parts of the market and through our Pulte brand in other parts of the market.

So the demographic pull is strong.

The health of that consumer group is excellent.

So really nothing to report other than we think we are up against tough comp.

The second question I had.

Could you talk about how many of the -- because community count this quarter was a lot higher than we expected.

Could you talk about what percentage of those new communities went to first-time buyers and then also could you repeat what the guidance was for community count growth for the rest of the year?

Yes, I'll answer the first one second -- I'll answer the second one first, -- sorry.

Our guidance 3% to 5% each quarter compared to the prior year comparable quarter.

And if you look at the growth year-over-year, we are up about 9% in first-time community count, 8% in move-up and 8% in active adult.

So it's pretty consistent across the spectrum of the demographic groups.

Our next question today comes from Ken Zener from KeyBanc.

Looking at the EBIT margin by segment that you guys report and just kind of taking -- looking at it annually over the last few years.

Do you -- so Florida, Texas, you've got a 15 handle; the west, you've got an 11.

I mean, is there something as you look out next few years, not the corporate margins, but at the segment level that would cause some mean reversion one direction or another between your segment profitability.

And specifically, I mean, is there big gross margin SG&A swings in those regions to try to think about your collective mix because Florida is doing so well in your margin, Texas is doing very well.

Just wondering, if we might see upside from the West or compression in those other regions?

That's a -- it's an interesting question.

It's also a hard one to answer because -- and I know this is going to be a nonanswer, but mix matters.

So what are we buying and where, what consumer group is it serving?

Because if you're buying finished lots, you're going to have lower contribution margin, but it might be still excellent return, if you're buying raw, you might need a little bit more margin to make the return make sense and how that tethers into the profile matters.

So having said that, I don't think there is any structural difference between different parts of the market right now.

We would expect -- we see contraction coming or we real opportunity.

Certainly, the pricing environment in California has been one that has been able to allow price appreciation, but the land is expensive.

And so -- I know that's not a real answer to your question, but it really does matter how and when and what type of land you're buying.

That's fine.

And I guess, what is your total units under production at the end of 1Q?

Just under 10,000.

Yes, so that's the 9,950 we gave during the call, okay.

There are no further questions left in the queue.

I will hand the conference back over to your host for any additional or closing remarks.

Great.

I want to thank everybody for their time this marking.

We're certainly available for any follow-up questions, and we look forward to speaking with you over the course of the day and on the next call.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.