普爾特房屋 (PHM) 2014 Q1 法說會逐字稿

Good morning.

My name is Tiffany, and I will be our conference operator today.

At this time, I would like to welcome everyone to the PulteGroup Inc.

first-quarter 2014 financial results call.

(Operator Instructions)

James Zeumer, you may begin your conference.

Great.

Thank you, operator, and good morning.

I want to welcome everyone to PulteGroup's earnings call to discuss our first-quarter financial results for the three months ended March 31, 2014.

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

Before we begin, I want to remind everyone that copies of this morning's earnings release, along with the presentation slide that accompanies today's call, have been posted on our corporate website at pultegroupinc.com.

Further, an audio replay of today's call will also be available on the site later today.

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.

With that said, now let me turn the call over to Richard Dugas.

Richard?

Thanks, Jim, and good morning, everyone.

I'm excited to speak with you this morning about PulteGroup's first-quarter operating and financial results, which show the Company's continued gains against our key business metrics.

Equally important, I am pleased to report that the positive January traffic and demand dynamics we discussed on our last earnings call continued to develop over the quarter, helping to improve our absorptions per community and giving us confidence in the ongoing recovery of housing demand.

Specific to the Company, our first-quarter pretax earnings of $130 million and related financial results show ongoing success, consistent with our value creation strategy and focus on driving better returns on invested capital over the housing cycle.

As Bob will detail shortly, gains related to this work can be seen clearly in our income statement and balance sheet.

There are couple of points I would note to highlight our progress.

First, on comparable revenues, we were able to expand year-over-year gross margins by 580 basis points to 23.8%.

Gross margins are also up 60 basis points from the fourth quarter of 2013, making this the ninth quarter in a row of sequential gains.

Last time our margins were at this level was back in 2005, a time when industry volumes and relating demand were obviously much higher than what we are experiencing currently.

Stated plainly, we are running a much more efficient business today, as we're able to generate much higher earnings at current production levels.

Second, our results show the continued benefits we are realizing from our strategic pricing strategy, which has given us a lot more opportunity to capture higher revenues and profitability per home.

The average sales price for closings in the quarter was $317,000, an increase of 10% over last year.

Yes, we were able to realize higher prices on our base house, but as Bob will detail shortly, we saw even bigger percentage increases on option pricing and lot premiums.

Again, and this is reflective of our pricing strategies, which focus on offering a great base house and then allowing the consumer to select those options and upgrades they value most and for which they are willing to pay.

In addition to the extensive new product development and testing work we are implementing for all new floor plans, we put a lot of analysis into the options we offer and our lot pricing strategy, as we work to capture the maximum value from each home we sell.

And finally, I would highlight to that our sign-ups for the quarter, which totaled 4,863 homes.

The sign-up number is down 6% from last year, but it was generated from 10% fewer communities, indicating improved absorption paces within our communities, a positive sign given the strength in last year's first-quarter demand.

Given how demand developed and the favorable comments we have heard from our divisions during the quarter, I am really pleased with our sign-ups for the period.

The combination of solid pricing, improved absorption pace, and cancellation rates that dropped back below 12% for the quarter leaves me optimistic about the remainder of the spring selling season.

We believe the industry is still in the early stages of what will be a sustained multi-year recovery, but one that will develop a more measured pace than past housing recoveries, given demand and supply constraints.

Certainly, we can see the pace of recovery accelerate, but I think we would have to see an increase in the rate of employment growth and better mortgage availability, especially for entry-level buyers.

To that point, we get a lot of questions about the entry-level buyer and PulteGroup's strategy for addressing this segment, which is most directly served through our Centex brand.

At less than 30% of current overall housing demand, compared with historical rates above 40%, this group is underrepresented in the overall housing recovery thus far.

However, we are seeing acceptable levels of entry-level activity in certain markets, and our most recent survey show millennials remain very positive about housing and home ownership.

When demand from buyer demographic returns, we will be ready.

We continue to refine our product designs and seek new land investments that are well located to serve this buyer.

We have the knowledge and financial capacity to ramp quickly as demand evolves and are excited about the future opportunities for this segment.

Now, let me turn the call over to Bob for more details on the quarter.

Bob?

Thank you Richard, and good morning.

PulteGroup has indeed gotten off to a great start in 2014, with continued improvement across a number of important operating and financial metrics.

These gains allowed us to post a strong Q1 financial performance.

First-quarter home sale revenues totaled $1.1 billion, which is comparable with last year.

As Richard mentioned, we realized a 10% increase in average selling price to $317,000, which was offset by the 10% decrease in closing volumes to 3,436 homes.

We were able to achieve this despite the difficult weather conditions in much of the country, as our operating teams worked hard to minimize its impact on our production schedules.

The higher average selling price in the quarter was driven by price increases at all three of our brands, including 13% increases at Pulte and Del Webb to $387,000 and $322,000 respectively, and a 5% increase at Centex to $203,000.

We did see a shift in the mix of closings during the quarter, which break down as follows.

41% from Pulte, 32% from Del Webb, and 27% from Centex.

This compares to our prior-year closing mix of 46% Pulte, 28% Del Webb, and 26% Centex.

With our land investment continuing to skew to our Pulte brand, we expect that our mix of closings will continue to be weighted to move-up and active adult product.

For the quarter, our gross margin was 23.8%, which represents an increase of 580 basis points over Q1 of last year and 60 basis points over Q4 of last year.

Margins in the quarter benefited from mix of homes delivered in the period, as well as our strategic pricing programs which allow buyers to select the lots and options that they value most.

The success of this strategy can again be seen as lot premiums in the quarter increased 41% to $12,000 per home, while option dollars gained 12% to $44,000 per home.

Margins in a quarter also benefited from further reductions in sales discounts, which fell to 1.6%.

This is down 180 basis points from last year.

In dollar terms, sales discounts in the quarter were approximately $5,200 per home, compared with just over $10,000 last year.

While we're likely getting to the lower-end range of what's possible for discounts, we'll keep working hard to squeeze out every dollar we can.

In addition to pricing benefits, we continue to focus on driving greater construction efficiency and lower build costs through our common plan and related zone strategy.

For the quarter, commonly-managed plans accounted for 30% of closings, up from 21% in Q4 of last year, keeping us on track toward our goal of 40% by the end of 2014.

With rising material and labor costs, increasing the use of commonly-managed floor plans is critical to our ongoing efforts to enhance margins.

Our current estimates show house costs up roughly $1,400, or about 1.2% per home from 2013.

As we have commented on prior calls, rising land, labor, and material cost are an increasing margin headwind.

We see opportunities to enhance margins from here through common plan management, strategic pricing, and other initiatives.

But quarter-to-quarter volatility does exist depending on the mix of homes delivered and the seasonal demand.

Turning to our overheads, SG&A spend in the first quarter total $145 million, compared with $130 million last year.

Our spend in the period is consistent with comments we made in Q4 and reflects investments we are making in support of common plan management, product and purchasing zones, and our information systems.

Our Financial Services business reported pretax income of $22 million in the quarter, which is up from $14 million in Q1 of last year.

These results include the reversal of $19 million of mortgage repurchase reserves, offset by a decrease in operating profitability due to the more competitive operating conditions that currently exist within the mortgage industry.

We are obviously pleased to reverse a portion of our reserves related to mortgage origination exposure.

This accounting reflects the improving housing market, recent settlement activity relating to known repurchase requests, and the settlement of significant exposures relating to origination through the end of 2008 with a significant investor.

We will continue to work diligently to minimize and resolve our repurchase related exposures.

Looking at our taxes, we reported $55 million in expense, which represents an effective rate of 42%.

Our first-quarter rate was higher than our previous guidance of 39%, due in large part to adjustments to our deferred taxed relating to changes in certain state tax rates.

In the prior year, we reported less than $1 million of tax expenses.

We maintained a full valuation allowance against our deferred tax assets.

In total, PulteGroup reported pretax income of $130 million for the quarter, which is up 58% over the prior year.

Net income for the period was $75 million, or $0.19 per share, compared with $82 million, or $0.21 per share in 2013.

We've gotten off to a strong start in 2014 and are well positioned to build on this performance as we move through the remainder of the year.

Looking beyond the income statement, we had 5,121 homes under construction at the end of the quarter, of which, 19% were spec.

The spec percentage is comparable with Q1 of last year but down sequentially from Q4.

During the quarter, we put 9,700 lots under control and invested a total of $325 million in land acquisition and development.

As has been the trend for several quarters, most of these land positions are raw and require development, but we were able to increase the percentage of deals under option, which allows us to control, but not own, the positions until needed.

At the end of Q1, we had 128,000 lots under control, of which 26% are under option.

Roughly 23% of our lots are finished, with another 19% currently under development.

As previously reported, we authorized $2 billion for land ac and development in 2014, and we continue to target this level.

We are committed, however, to remaining disciplined in our investment process and will invest only when accessible risk-adjusted returns can be realized.

Looking at our cash flows, we generated $91 million cash flow from operations, despite the increase in our land investment activities.

During the quarter, we spent $45 million to repurchase 2.2 million shares of our stock at an average cost of $19.95 per share.

As of March 31, we had $190 million of capacity remaining under our existing share repurchase authorization.

We also completed our previously announced transaction to repurchase $246 million of his senior notes.

We recorded a charge of $9 million resulting from these redemptions.

At quarter end, our total debt outstanding is down to $1.8 billion, of which, $1 billion matures in 2032 and beyond.

And our debt to capital has decreased to 28%.

After completing all these transactions, we ended the quarter with $1.3 billion in cash.

The improvements we've realized over the past couple of years in our operating, and in turn, financial metrics, have been dramatic and are being recognized as PulteGroup has been upgraded recently by each of the major rating agencies.

Let me finish with just a few more data points before turning the call back to Richard.

We generated net new orders for the first quarter of 4,863 homes, which is a decrease of 6% from last year.

As Richard mentioned, year-over-year community count was down 10%, so we did experience higher absorption paces in the period.

Benefiting from the strong price appreciation we've driven, the dollar value of sign-ups actually increased 2% to $1.6 billion.

In the quarter net sign-ups decreased 8% for Pulte, 6% for Centex, and 4% for Del Webb.

However, absorption paces were up 7% in Del Webb and 29% in Centex, offset in part by an 8% decrease in Pulte communities.

The year-over-year increase seen in our Del Webb brand is a positive given the deep land positions we maintain in those communities.

We ended the quarter with a community count of 584, which is down 10% from the end of last year and consistent with our guidance that we expect to operate from an approximate range of 560 to 580 communities during all four quarters of 2014.

We opened more than 40 communities in the quarter and remain on track to open approximately 190 new communities over the full year.

We ended Q1 with a backlog of 7,199 homes, valued at $2.4 billion, which compares with our prior-year backlog of 7,825 homes and a comparable $2.4 billion value.

In conclusion, our Q1 results represent a strong start to the year and are further confirmation that our efforts towards running a more efficient and profitable business are meeting with success.

Now, let me turn the call back to Richard for some final comments.

Thanks, Bob.

As I said at the outset, we experienced good demand in the quarter with generally stable to rising prices and gains in absorption paces suggestive of buyers coming back into the market, especially in March.

We'll have to see how demand develops over the remainder of the spring selling season, but we are certainly encouraged by what we saw.

Taking this view down a level, looking at the East Coast, sales activity was stronger in the South and softer as you move into the northern markets.

Demand to trends were strong in Florida and generally positive up through the Carolinas.

But as you move through DC at into the New England area, demand was respectable but certainly not as strong as the other areas in the East.

We saw a similar pattern in the central third of the country, with demand in Texas arguably among the strongest the country.

Again, as you continue heading north, you can still see pockets of strength, but conditions are a little bit more mixed.

The one outlier is Michigan, which continued to see good traffic and demand, even in the face of the snowiest winter in more than 100 years.

Inventory is just so tight in Michigan that any available supply is quickly snapped up, and often at higher prices.

The West, obviously, didn't have to deal with snow and cold, but I think the market is still finding its level after the significant price increases experienced over the prior 24 months.

On a relative basis, the Pacific Northwest and Northern California saw better demand during the quarter, while Arizona felt more pressure.

As for April, we are seeing stable to slightly lower traffic levels of highly-qualified buyers compared to March, which is a normal seasonal trend and keeps us optimistic for demand over the remainder of the spring selling season.

As always, I want to thank the employees of PulteGroup, as they are the people who really make this business successful.

For a number of our markets, it was a tough quarter to be home builder, so I want to recognize all those divisions that worked so hard to keep sales and production on track under some tough weather conditions.

Thank goodness, spring has finally sprung.

And finally, before opening the call to questions, I want to make you aware of a press release we will be issuing later today.

I'm excited to share with you an announcement we made to our employees this week, that we have named Ryan Marshall to become Executive Vice President of Homebuilding Operations, and Harmon Smith has been named Executive Vice President of Field Operations.

Both will be reporting directly to me.

Ryan has been with the Company for 13 years and Harmon 25 years.

In addition to being strong operators, both have been instrumental in advancing our value creation strategy which has helped raise our financial and operating results to be among the best in the industry.

In moving them into these new roles, we are aligning additional resources in direct support of value creation and allowing them of to focus full time on advancing key underlying initiatives to ensure we realize the maximum benefits.

Some of you may have already met with them during market tours in Florida or Texas.

For those who haven't, I'm sure there will be opportunities to speak with them in the future.

The press release we issue later today will provide more details on these changes and the respective backgrounds of Ryan and Harman.

Thanks for your time this morning, and I will now turn the call back to Jim Zeumer.

Jim?

Thank you, Richard.

At this time, 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 yourselves to one question and one follow-up.

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

(Operator Instructions)

Adam Rudiger, Wells Fargo Securities.

Good morning.

Thanks for taking my questions.

Bob, I realize you just gave us the absorptions by segments, but truth be told, I had a little trouble writing that quickly.

Can you elaborate a little bit more on just the trends you're seeing and the patterns by buyer segment?

In terms of absorptions during the (multiple speakers) --?

Yes.

I wanted some more color on the whole idea that the entry-level buyer is challenged and move-up active adult might be better positioned, and I just wanted either some more commentary to either prove or disprove, or just discuss that whole idea.

Yes.

So what we saw was is we -- I'll give you the data again.

On sign-up, we saw 8% decline at Pulte, 6% at Centex, 4% down at Del Webb.

But on absorption paces, Pulte was down 8%, Centex was actually up 29%, and Del Webb was up 7%, so absorption paces were up 4% overall.

I think that there's a couple of things happening there.

Certainly, the Texas market was very strong in the first quarter, which is where we have a really -- a larger percentage of Centex operation, and so that 29% pace increase is reflective of the really strong market we saw in Texas.

The Pulte market was influenced in part by Arizona, where we saw a slowdown from what we saw as really strong results last year.

And again, the highlight to us is that across the board, the Del Webb product absorptions were increasing during the quarter, which is pretty consistent with what we've seen over the last couple of years, that we've said we think it's been a little bit slower back to market for them, but we saw nice demand out of them in the first quarter.

Okay.

And then the second question just on gross margin.

I think previously, you'd talked about all else equal, the debt reduction could have added maybe a point to gross margin expansion, with the most recent debt refinancing and some of the increase in commonly managed plan contribution.

Can you comment on what the updated thoughts were there?

Adam, this is Richard.

The recent debt refinancing won't impact margins until 2015 and 2016 and beyond given the way that we amortize interest overall.

So we still like our margin trajectory.

As we said, there's going to be quarter-to-quarter volatility from here, but we've been real pleased with what we've been able to do.

And just to clarify, year over year, the margin benefit from the reduced interest cost coming through cost of sales is 110 basis points.

So of that 580-basis-point increase in total margin, 110 basis points is interest related.

Ivy Zelman, Zelman & Associates.

Thank you, operator.

Good morning, guys.

Congratulations on a great quarter.

One of the things you guys talked about is the common floor plan and all the success of the initiatives.

Can you give us just the numbers as respect to the closings that benefited the common floor plan and what you anticipate over the multiple, say, next two years or so.

I know you've given goals before.

If you can confirm that they are track or where you are, maybe ahead of expectations.

I also think there's a lot of skepticism despite your great performance around the fact that your margin performance, gross margins specifically, is really just a result of purchase accounting from the Centex acquisition and that you've got all this old Centex mothballed stuff and it's all going to hit the P&L at some point, and your runway going forward is not there as we're more optimistically viewing it.

So maybe just a clarification, Bob.

Go through the Centex legacy assets, and much of which is gone from what I've understood, but I think it would be really helpful for -- especially for the bears that are listening.

Ivy, this is Richard.

A couple of thoughts.

First of all, with regard to common plan management, we were at 30% of our deliveries in the end of Q1 from common plan management.

That's up from 21% in Q4 and substantially below that later -- or excuse me, earlier last year.

We are well on track toward our goal of 40% by the end of this year, and our long-term goal is 70%.

So to answer that question, I would suggest that, if anything, we're at or slightly ahead of the pace that we projected to get to, so we feel very good about that and it's beneficial to the Company.

I'll answer the first part of the gross margin question and then throw it to Bob for more detail.

Our gross margin efforts have been very, very focused on a combination of common plan management and strategic pricing actions that, frankly, along with mix, are driving all of our margin benefit.

In fact, margins on legacy land that has been around a while are, in fact, not benefiting from purchase accounting.

They are actually a little bit of a drag on our margins overall relative to the land that we've underwritten the last four or five years.

So I would suggest for any of the bears listening, we're earning every single dollar of the gross margin improvement that we're getting.

I'll just highlight again a couple things Bob mentioned.

Our discounts are extremely low, and we are continuing to work those hard.

Our option revenue is very high.

Our lot premiums are very high, and we're working on our base house improvement through our common plan management work.

So purchase accounting doesn't have much to do with it.

Maybe Bob can illuminate that a little bit more.

Yes, just for color, more than half of our closings in the recent quarter are from newer vintage land, so stuff that wouldn't have been impaired.

And we actually like that land better.

To Richard's point, the margins are a little bit -- not dramatically so, but a little bit better.

And I would suggest that the land we're underwriting today, we feel better about, too.

So --

And let's remember that the purchase accounting didn't allow us to write land down to incredibly low levels.

It was market levels at the time.

So we did the right accounting, but that's not what's causing our margin expansion.

Well, that's very helpful.

I'd just elaborate, if you would -- or ask you to elaborate on what is mothballed today relative just the total Company, and that's not assets that you can get a return on.

I know that you really changed course in your return focus, and you've pared down on assets that weren't going to give you that return.

So for clarification, how much of the land that you hold on balance sheet is mothballed today and not going to generate the returns that would justify keeping them?

In terms of percentage, we've got some longer-life assets in the Del Webb portfolio.

But we've been pretty actively selling things that we don't think would generate return over time.

There was another $5 million in this quarter, several hundred million dollars over the last two or three years.

So it is a small percentage of our book, of what you describe as mothballed and non-returning assets.

Jackie Micenko, SIG.

Hey, got a new nickname.

And it's going to stick with you, Jack.

I hope not.

Looking at the -- the G&A ratio ticked up a little bit in the quarter.

Anything behind that?

And as an extension of that, is the Atlanta headquarter expense, is that all in the numbers?

Is there anything to thing about?

I think that move is going to take place later this year.

Anything of the expense side to talk about that ratio moving up little?

Yes, Jack, frankly G&A came in actually slightly better than our own internal projections and very consistent with the guidance Bob gave in Q4.

So we're making some investments in some IT systems that have been needed.

Our common plan management zone infrastructure to help sustain these excellent margins we're posting, we're spending some money there.

And then there's less than a couple million bucks in this quarter relative to the headquarters relocation, so that wasn't a big driver.

So again, while the dollar number is clearly higher than last year, it's well within the guidance range, actually a little bit lower than Bob projected at Q4.

Okay, great.

And I noticed the put-back slide has finally been removed.

Agree, that issue is largely behind the industry.

Can you remind us what the reserve is left after the release?

And was there anything -- was there any specific communication with the FHFA, or was it just more assumption and behavioral patterns that led to the release?

Well, so at the end of the quarter, we'll have $102 million reserve.

That's after reversing the $19 million.

And actually, we were able to negotiate a settlement with one significant investor, which prompted us to look at this during the quarter, and coupled with rising home prices, which certainly reduces the exposure on individual loans, the GSEs have indicated that they are largely through their book.

We've seen a decline in the current year in the number of requests -- a significant decline in the number of requests that we're receiving.

So on balance, we looked at it and felt comfortable to release the reserve.

Like we've always said, we'll look at it every quarter.

If there are things that happen that merit adjusting the reserve, we'll do it.

We'll explain it to you when it happens.

Okay great.

Thank you.

Michael Rehaut, JPMorgan.

Thanks.

Good morning, and congrats on a good quarter.

The first question I had was the continued solid execution around the gross margins, and you've clearly had a lot of success there.

And as you look at the common plan management implementation, and you're roughly halfway through getting to your long-term goal, I was hoping if you could remind us how you think about how that could incrementally benefit the gross margin from here being -- topping -- in a 27%, 28% pre-interest range, if you expect any incremental benefit from here or be more just operational and efficiency related perhaps, balance sheet, inventory turn, etc.

Yes, Mike, this is Richard.

Common plan managements definitely have -- excuse me.

Commonly managed plans definitely have better margins than non-commonly managed plans.

So we would expect some benefit from commonly managed plans increasing in the future.

Two other point to them make.

As Bob rightly points out, some of the elements of common plan management, such as value engineering and should costing, which we've been doing for a while, are already embedded in our non-commonly managed plans.

So there's a portion of that benefit that we're not waiting to get.

But the biggest point that I'd like to make is that our commonly managed floor plans are better floor plans for the buyers, and the absorption rates per home, the take rates from buyers on options and things like that are better, significant a better than our non-commonly managed plans.

So in addition to getting a cost benefit, we're getting a revenue benefit.

And the combination of those keeps us extremely bullish to push this initiative as fast as we can.

I appreciate that.

And that leads to my second question on the absorption rate.

Appreciate the additional color, Bob, that you pointed out in terms of the Centex benefit from Texas, and Del Webb, obviously, continuing to perform nicely.

As you think about absorptions on a longer-term basis, where do you think that can go from here?

A lot of the industry is -- they're all over the map in terms of where they are relative to history.

Some are seeing absorptions back to middle of the past decade; some are still well below that.

How are you thinking about that, particularly as you're looking at new communities that you expect to come online over the next two to three years?

Mike, Richard again.

Listen, it is impossible to predict absorption paces for a community.

There's just so many multiple factors that impact things.

I will tell you this; I really like the land that we're buying.

As a Company, the disciplined investment process that we have put in place three years ago now is really benefiting us.

Obviously, we've been focused on return on invested capital more than growth, and I think you're seeing in our numbers some of the benefits of the good land we've been buying.

We have really stayed away from any B or C locations.

So how does that translate to absorption paces per community?

It's hard to predict.

I will tell you we're pleased with what we delivered in Q1.

David Goldberg, UBS.

Thanks, good morning, everybody, and great quarter.

I wanted to start and maybe follow up on Mike's question a little bit.

And what I want to get an idea of is, I think most builders, yourselves included, are using current pace, current price, current cost when they are doing their underwriting.

But given your heightened sensitivity to risk in the model and the increased caution around capital allocation and focus on return on capital, I'm wondering how you think about sensitivity analysis, [upside down tide], especially with the volatility in pace right now.

How do you think about that?

If you could just give us some color and maybe some specificity when it comes to trying to underwrite deals in this market, which is such a choppy selling season.

David, it's a good question, and there's no definitive answer to that.

What I can tell you is, when we see the pro formas that our deal teams put together, we've got an Asset Management Committee here that vets every deal, so the field will go through it, and they put comps together on what pricing is and what paces are going to be, and it gets challenged.

And so in markets where we have seen rapid run-ups, we actually will tend to, I don't want to say discount that, but at least challenge, is it sustainable.

Maybe one of the most important factors around that is what supply is coming online around it.

So if you've seen a community that's selling very well and you use that as a comp, well, gosh, is there anybody selling against them?

What's going to come to market by the time we get there?

It goes a little bit to Mike's question, too, in terms of we are looking two and three years out typically.

So we really do try and flavor that into the expectations of what we can deliver.

Again, it's not a -- we're going to apply a 10% discount because they've run up.

It's more around, how do we feel the market and job creation is going to be there, and then what supply do we see in the market?

David, if I could just add a little color -- this is Richard -- to that.

We have a saying internally, stay the course.

And we've been staying the course.

And that's probably the most important thing we could do depending on market conditions is not kid ourselves about what's happening, as Bob indicated, and stick to our discipline.

And I believe that's helped us continue to do the right thing with land transactions.

That's great color.

And it's actually good segue to my second question because, Richard, you mentioned about the hope that the entry-level is going to come back and trying to be positioned and be ready for that move when it does happen.

And yet, the land acquisition is very focused on A locations and not B, C locations.

So I'm just trying to get an idea from a market research perspective, how do you think about being ahead of when the entry level does come back.

Clearly, you have the product in the Centex brand, but from a land perspective, how do you stay ahead of peers and make sure you don't end up chasing those positions.

Well, David, number one, we're not going to underwrite transactions that don't meet our return criteria.

And the truth is, we haven't found that many there be our return criteria for the entry-level recently.

So our goal is to get ahead of it by ensuring we're challenging ourselves on what that buyer wants.

How do we deliver tremendous supportability, and if credit eases, be able to implement product very quickly that meets those demands.

So we do have a strategy team internally that looks at future trends in each of the segments.

We're working hard to understand the needs of millennials.

Millennials are stretched with student loan debt.

Obviously, down payments are hard to come by.

So I can't give you a lot of specificity on that, but I will tell you, we're not going to get caught flat footed is credit eases and not have product and offerings ready to go.

The goal is to stay ahead of it.

The tough part is, is that going to be a year from now, two years from now?

When does that buyer return more meaningfully?

We don't know, but the point was, we'll be ready.

Nishu Sood, Deutsche Bank.

Thanks.

First question I wanted to ask was about, following up on Dave's question, the Centex brand doing well in Texas.

So is that a reflection of first-time buyer demand re-emerging maybe locally just in Texas, or is that a reflection of the historical positioning that Centex was the Texas brand, so maybe Centex might skew a little bit more move-up in Texas?

Nishu, I'd say it's combination of those two things plus a very strong economy in Texas.

Texas economy is adding jobs.

Houston is the biggest housing market in the country now.

I recently did a tour in March through all of our Texas markets and was amazed as the activity going on in all four of the major metro areas with just the overall economy.

So I think a combination of strong economy, our legacy position there, and an emergence of the entry-level category there, but largely fueled because of the strong economy.

Got it.

And a second question, the new EVP positions you highlighted -- and congratulations to Ryan and Harmon on those -- is that a reflection of the success you have seen with some of your operating strategies, the common floor plans and efficiency in production?

So is that a formalization, a recognition of that, or does that tell us that there are major new directions you're going to pursue, and therefore, these positions reflect more of that?

Nishu, they're very clearly focused on adding incremental resources to what we've already been pushing, so definitely not signalling anything new.

But candidly, we've had a very flat structure for the past four or five years.

And despite all the gains that we have made, we believe there's more to go there.

Harmon, Ryan are exceptional operators, have been very involved in all of the value creation work and delivered great results in their respective geographic areas.

So we're bifurcating the roles, if you will, to where Harmon can help us focus on pushing each of the field operations to drive out additional benefits, and Ryan's role overseeing our homebuilding operations, sales, and marketing functions in the Company will be derived around capability development to help us further enhance some of the things that we been working on.

So very much staying the course, but more horsepower behind it, if you will.

Joel Locker, FBN Securities.

Just was curious on your backlog conversion rate going forward.

Do you expect it similar, say, just in the second quarter to the 53% you guys reported last year?

Joel, this is Richard.

We won't give any guidance on that, but I will tell you, we don't have many specs.

So we have a very healthy backlog, a very strong backlog, and it's just a matter of getting those homes delivered.

But to add to that with incremental specs converting is not going to happen because we don't have the specs.

So read into that what you will.

We're very, very focused on a built-to-order model, and it's benefited us in many, many ways, so we're committed to that.

Right.

And also, on your amortized interest, that fell around 70 basis points sequentially, 440 down to 370, and that got down further faster than I expected.

What do you expect going forward?

Do you think that level is going to stabilize there, that 370 basis points?

Or do you see maybe up or down going forward?

We don't a commentary on margins by quarter.

What we did indicate is the total spend would -- or total expense, sorry, for the year would be down about $50 million or $55 million from last year.

It doesn't come in straight line during the year; it comes in based on closing volumes, so you'll see a little bit more expense in market in quarters the have higher closing volumes.

But again, call it $205 million-ish we're thinking for the year in terms of total expense.

And to Richard's comment earlier, the activity that we did in the first quarter of this year doesn't move the needle on current-year interest.

That would be out years.

Stephen Kim, Barclays.

Hey, guys.

Thanks very much.

I wanted to follow up, actually, on the management change question.

Can you talk a little bit about the -- how you see the structure of Pulte going forward on the homebuilding side as different or distinct from the management structure you had on the homebuilding side pre-crisis, if you will.

I know that things have obviously gone through a lot of changes.

I imagine you probably learned some lessons and some things you don't want to replicate, and I was curious as to what you thought those things were and how we might be able to look at what you're doing today as being consistent with that?

Thanks, Stephen.

It's a great question.

First of all, we're significantly smaller with our overall structure, including home office executive structure, if you will, and these moves don't change that.

What they do, as I was indicating before, is allow us to put direct application toward common plan management, toward what we call internally our sales effectiveness work, toward our consumer-inspired approach to our marketing efforts overall, and that, frankly, we think we have a long way to go to push to where our vision is.

And then those are the primary responsibilities for Ryan.

With regard to Harman's role, again, very, very focused on having the field operations report to him and digging in to all the opportunity areas that I've been able to dig into, frankly, over the past four years myself.

But we still see lots of pockets of opportunity, and my role has been fairly broad, and we need to get a little bit more incremental focus on some of the areas to take it to the next level.

All this signals is stay the course with additional very, very well respected and highly qualified individuals to lead these efforts.

So relative to the long-term -- or excuse me, the past structure that the Company has had, I don't think it's all that similar.

We still have a very flat structure in the Company, and we're likely to keep it that way.

Okay.

Great.

Well, certainly looking for to following up there with them.

You made a comment about absorptions being up 29% at Centex -- the Centex subdivision, and I'm curious -- or this division, and I'm very curious about how much of that can be explained by Texas alone, or if you were to ex Texas out, did you still see Centex communities performing better on an absorption basis?

And are you looking to increase the number of Centex divisions or subdivisions that you're going to be opening up as a result of this?

Just trying to understand how you process that our-performance and absorption at Centex?

Stephen, as we highlighted, it was -- the largest driver of that was the Texas market where we happen to have a lot of Centex communities.

I candidly haven't done it ex Texas, but I would suggest that it was up across the board, but I don't know that percentage.

We can probably get that for you.

In terms of opening new communities, our investment in land has been -- we've talked about it 75%, 80% Pulte.

Of the of the 9,700 lots we put under control the first quarter, less than 10% of those were Centex lots.

So I wouldn't expect a large flood of openings from us because we just don't have the land to do that.

As Richard highlighted, we think if we see, whether it's in specific markets or more broadly, a move toward that buyer becoming more active, we think we can get on the lot pretty quickly.

Stephen East, ISI Group.

Thank you.

Good morning, and congratulations, also, guys.

Richard, you all are really the only one in the industry that can move their gross margin significantly from internal things you all are doing at this point.

If you look at the external market, what do you think that's giving you right now?

It's gotten significantly tougher, particularly out West and that type of thing.

Has your strategy needed to change any?

Do need to be tighter with pricing?

Or looking forward, I'm wondering, are your incentives going to have to move up at least because of what the market is demanding and that type thing?

Steve, listen, we're not immune to the market vagrancies that happen around the country.

So don't want to imply that our business is not subject to the overall broader turn trends.

I will tell you this, we have shattered some internal assumptions around what can be done in any different component of pricing, and frankly, cost.

So as a couple of folks prior to you on the call here have indicated, don't underestimated the impact of what the things that we're doing internally can do, and we're continuing to work hard on those.

So I would suggest we do have an ability to drive efficiency in our business that's significantly greater than we have in the past.

That will be offset some by headwinds.

Bob indicated some numbers on pricing and labor costs and what have you that are up.

But look, I like where we are.

I tell our teams internally, we should feel really good about where we are because we've earned our success.

We haven't just relied on the market improvement that lifts land values to lift margins like we used to quite frankly.

So feel good about that with some offset that makes us subject to market conditions.

So hope that helps.

Okay.

That does.

And then if you look at monthly, you gave some idea of what was going on.

As you've looked at this year, has it unfolded -- including into April -- has it unfolded from a monthly perspective and in a typical fashion?

And then you had -- in prior quarters, you had talked about still metering sales, etc.

I'm guessing based on your performance, you didn't -- that's probably starting to dissipate out there, if not gone away completely.

And along with that, on the Del Webb, are you getting -- you've talked about pricing power.

You've got the highest margins there.

Are you -- do you see this as a driver of your margins -- the primary driver of your margins moving forward?

So you snuck in three or four there on us, Steve.

I did.

(Laughter)

See, I caught that.

Listen, a couple of things.

With regard to metering paces, we are still metering paces in some markets.

A good example would be Northern California, which is red-hot, and a few other markets.

I think directionally, you're right.

Probably we're not metering as much as we were.

But frankly, we could've posted more sign-ups in the quarter had we wanted to let it run.

But where we already have been six- or seven- or eight-month backlog, that didn't seem to make a lot of sense for us given the way we're running the business, so we feel like we're operating the right way.

With regard to Del Webb, we're excited about what's happening in Del Webb.

As Bob indicated, the overall focus for the Company, given how much land we have for Del Webb, has been very, very positive, and I do think that's a positive for us overall.

However, I would just point out, as Bob indicates, our overall margins are up a similar amount for each of the brands, and the reason I highlight that is that's driven outside of market vagrancies.

That's driven from common plan management, from focus on discount, from focus on lot premiums.

The numbers Bob gave you on options and lot premiums we're very proud of.

Those are things we were not paying attention to like we should have four or five years ago.

Hope that helps overall.

Mike Roxland, Bank of America.

Thanks very much, and congratulations on a very good quarter, especially given the backdrop.

Given the slowdown in Arizona, what's steps are taking to address that, if any?

And excluding Arizona, how did the Pulte brand do?

So a couple of comments on Arizona.

Arizona is clearly not as strong as it was.

But I tell our people, given the total volume and margin we're driving out of that market, it's still a very good market.

Frankly, I would suggest that our land positions there are very well located.

Our teams have done an excellent job.

And while we've certainly seed some softer conditions in Arizona, it's not a bad market or one that we're concerned about.

We're actually quite happy with our overall performance there, so I'd just point that out.

I'm sorry, what was the second part of your question?

Sure.

If you exclude Arizona, how did the Pulte brand itself do?

As Bob indicated, absorption paces were down.

We were hit a little bit with weather conditions in the Midwest and the Northeast where we have quite a bit of Pulte brand, but we were pleased with our overall efforts on the Pulte brand.

I'm sorry I don't have a specific number for you if we exclude Arizona.

No, that's fine.

I appreciate all the color.

And then just on -- last question on the community count.

Obviously, it increased to 584 this quarter.

I know Bobby mentioned that you're still looking at 560 to 580 for the duration of the year.

What occurred during 1Q such that you see your expectations with respect to key community count?

And should we expect, really, community count growth to be at the higher end of the raise that you indicated in the last couple of quarters?

Again, we still feel comfortable 560 to 580.

It really -- the vagary of when does a particular community close, when does a particular community open, again, this isn't a signal of something structurally different in our community count.

Kenneth Zener, KeyBanc.

Good morning, gentlemen.

Given the success that you're demonstrating in the common plan, I wonder if you'd consider replacing, since you took it out of your put-back slide, with one that tracks your land and vertical costs.

And if you would perhaps comment on that on a year-over-year sequential basis, how the land is changing given that you are highlighting other factors like lot premiums, etc.

But I think the core vertical versus land, if you'd comment on your opinion about talking about that?

Well, listen, I appreciate the suggestion.

We are trying to do our best to give as much color as we can around that.

There's so many different factors that move the needle, but point taken.

We are clearly not relying just on land depreciation to drive are margins.

There's a lot internally that are -- a lot of internal effort that is going on there.

So, Ken, we'll take under consideration.

It's a very clean way to prove your point.

Second, could you comment on -- Arizona, I think there's obviously a lot of one-off things occurring there.

But to the extent it once a distressed (inaudible) MSA, can you comment why you think that might not be a precursor for what might happen as other once-distressed markets get more existing inventory back?

Florida, obviously, with a different foreclosure process is a very different stage of the game.

It is not our view, but if you could address why you think it would not be a precursor for inventory pressuring new-home sales in other markets?

Thank you.

Well, I don't see a lot of excess inventory coming to the market in a lot of places.

There was a fairly rapid and focused land grab, if you will, in Phoenix 24 months ago when that market started heating up, and a lot of that supply is there today.

When we talk to our operators around the system, we don't hear of a lot of inventory coming into the market in any specific market overall.

Obviously, it's a function of demand versus supply, but I'm relatively comfortable that we're not going to see a lot of other markets with a lot of supply there.

And Ken, if I could just reiterated comment I made a minute ago, Arizona is still a very good market for us.

I know a lot of folks have written about the softness in Arizona so to speak.

But I'll go back to something a mentioned earlier in this call.

We're buying the right kind of land in the right locations where buyers want to be.

And I wouldn't suggest we're immune from the overall vagaries of the market, but we are posting exceptionally strong margins and good sales paces, if not phenomenal sales paces like we were 24 months ago.

So at least for our business, we're pretty with happy with Arizona.

Bob Wetenhall, RBC Capital Markets.

Hi.

Good morning.

Wanted to ask you, your average order price is up nearly 9%, which is terrific, and you have actually manageable comps going forward.

Do think that pace is sustainable in the current demand environment going forward for average order prices?

Bob, it's hard to say.

You can calculate what the backlog is.

It is going to depend a good bit on mix.

Bob's comment on Del Webb is going to be important there to the extent that Webb continues to accelerate.

That's a positive for us, obviously, given the ASPs that we drive there.

It's hard to predict.

I really wouldn't want to comment on that just because who knows exactly what's going to deliver in a given quarter and what the demand environment is going to be?

So I don't know, Bob, if you've got any other color of that?

No.

I think that's exactly right, yes.

Okay.

Understood.

One question on the balance sheet.

I know you guys have done a good job of managing towards driving return on capital higher, and debt to capitalization now is the lowest it's been in a very long time at 28%.

You've got a lot of cash on the balance sheet, $1.3 billion.

What's the longer view of how you see the balance sheet in two to three years, and what you want to do with the cash?

Thanks very much.

So let me start out and then ask Bob to comment more specifically.

I think we have demonstrated that we want to be balanced with our capital, and I wouldn't expect that to change going forward.

If you go back, history would say that putting all of our investment into land is not necessarily the best thing for our shareholders.

I think we've learned that, and you can continue to expect us to be balanced overall.

And frankly, I think we demonstrated in Q1 all four aspects of capital that we could -- or all four aspects of spend we could put our capital toward with increased land spend, obviously a dividend, continuing to buyback our own stock, as well as repurchase debt.

So I suspect more of the same.

I know that's not a lot of specific commentary.

Bob, anything else you'd like to mention there?

No.

You got it.

Dan Oppenheim, Credit Suisse.

Thanks very much.

I was wondering if you can talk about -- you talked about the absorption based the different brands, which is very helpful.

When you think about some of the strength in Texas and at Centex, lower price point and what that means, do you think that means there's going to be any impact on margins as you move forward from that?

Dan, it's a good question, and I'll remind everyone that our main focus is return on invested capital.

Obviously, were happy with our margin focus.

But we'll handily and be happy to underwrite a transaction with a 30% return and an 18% margin as an example.

So it depends what happens with that category overall.

It is a category, generally speaking, that has generally higher turn characteristics and lower margin characteristics.

But given what Bob indicated in terms of the overall land investment that we have, I think our results for the next period that we can view are going to be largely driven by what's happening with Pulte and Del Webb.

Centex, clearly, is having an impact overall, but I don't know that it will move the needle a whole lot one way or another in the short term.

Okay.

Thanks.

And other question is just you had provided some great color in terms of the cost per home in terms of the very modest increase there, I think just over a percent.

As you look at the land that's likely to flow through, how do you look at the land cost on a per-home basis in what is likely to come through this year?

We haven't commented on that historically, and I would tell you we highlight that land costs are going up.

I think that's true for everybody.

What we have highlighted is that margin performance in FY14 will be better than FY13.

You saw that in the first quarter.

Our margin in Q2 was 18.8, 20.9.

Our backlog visibility would suggest margins closer to what we saw more recently, so I think you'll see improvement there.

And Richard just highlighted pricing, so you can back end into the lands then.

Eli Hackel, Goldman Sachs.

Thank you.

I just wanted to go to a comment you made at the end of your prepared remarks just on April.

I think you just said it a little -- at least a little clearly for me, so I just want to understand what you were trying to say with April as regards to your optimism for the rest of the spring selling season.

Yes, Eli, what we said was that the traffic levels are slightly down from what we saw in March, and we said that's the normal seasonal trend.

We typically see traffic peak in March and then trail off a little bit through the rest of the selling season.

So we said -- our comment was, we are seeing a normal spring selling season unfold, which leaves us optimistic for the balance of the year.

That's what we said.

Great.

And in just one quick one.

What was the [can] rate in the quarter?

Just under (multiple speakers) --

Yes, just under 12%.

11 1/2%.

I would now like to turn the conference back over to our presenters.

Great.

Thank you very much.

I know there's a lot of conference calls queued up this morning, so we're going to stick to our scheduled time.

We're certainly available for any follow-up questions or emails.

And thank you very much for your time on today's call, and we'll look forward to speaking with you next quarter.

This concludes today's conference call.

You may now disconnect.