普爾特房屋 (PHM) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

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

At this time, I would like to welcome everyone to the PulteGroup Inc., first-quarter 2015 financial results.

(Operator Instructions)

I would now like to turn our call over to Jim Zeumer.

Please go ahead.

Thank you, Ryan, and good morning to everyone participating today.

I want to welcome you to PulteGroup's conference call to discuss our first-quarter financial results for the three months ended March 31, 2015.

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

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

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

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

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

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

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

Now, let me turn the call over to Richard Dugas.

Richard?

Thank you, Jim, and good morning, everyone.

During our last conference call, we commented about seeing a strengthening of demand starting midway through the fourth quarter, and carrying into the first few weeks of January.

I am pleased to report that the momentum in demand, which began building in Q4, continued through the first quarter, and has gotten the spring selling season off to a good start.

Since the housing cycle turned positive several years ago, we have stated our belief that, unlike recoveries of the past, we didn't expect to see a rapid V-shaped rebound.

Our expectations were that this would be a longer, more gradual recovery, with periods of faster and slower growth, but with an overall upward bias, consistent with a sustained rebound in housing demand.

The early read on the industry's 2015 spring selling season is that we are now in one of those periods of improving demand.

Having participated in a number of investor meetings over the past couple of months, one of the questions we are often asked is: What has been the catalyst for the improvement in the country's housing demand?

In the absence of a single dramatic change in any of the underlying demand factors, it is likely a combination and continuation of market dynamics.

First, with boomers and millennials acting as powerful bookends, certainly the demographics are favorable and supportive of an ongoing rebound in demand.

Millennials may be doing things later, but their desire for home ownership is well documented, and our strong Centex results, which Bob will discuss shortly, support this thesis.

Turning to active adults, with the youngest boomers just now passing 50, this group remains a tremendous source of future demand, and our Del Webb brand is unmatched in its ability to serve these buyers.

Second, interest rates remain low.

And with recent cuts in FHA fees, the monthly payment has become a little less expensive for many potential homeowners.

The mortgage market generally remains tight, and we don't expect any material change in credit availability any time soon, but every little bit helps, as our Centex results suggest.

And third, consumer sentiment and the job market trends have certainly been positive, with more than 3 million jobs created over the past year.

While these numbers jump around from month to month, there are clear signs that point to an improving economy and a rising number of household formations.

Looking ahead, along with more jobs, we would like to start seeing more wage inflation, which would make it easier for would-be home buyers to afford a mortgage.

Given the acceleration in US housing demand in the early stage of the spring selling season, our expectations are that the strengthening of demand is sustainable, and should drive better new-home sales for all of 2015.

Like the overall industry, PulteGroup experienced strong demand in Q1, and is well positioned to deliver yet another year of strong operating and financial performance in 2015.

First-quarter sign-ups of 5,139 homes were up 6% over last year on a 5% increase in community count.

I am pleased by the fact that we were able to increase sales while maintaining high absorption paces without pushing incentives meaningfully during the period.

Consistent with our value-creation strategy, having strong sign-ups per community at high margins is a more efficient business model for PulteGroup than trying to drive volume aggressively.

Our continued steady improvement in return on invested capital these last several years indicates that our strategy is working.

One of the things we have emphasized during this housing cycle is the need to focus on better-located properties, which typically means staying with the better, closer-in locations, and within established areas of buyer interest.

For the most part, buyer demand in the secondary locations around our markets remain tepid; so, even though the land may be cheaper, it doesn't necessarily make it a good investment for us.

The strong margin performance we continue to enjoy is partly the result of sticking to our land investment discipline.

Speaking of land investment, the 5% increase in community count that we reported understates the amount of activity actually taking place in terms of getting new communities open.

In the first quarter, we grand-opened almost 60 new neighborhoods, which keeps us on track with previous guidance that we expect to open upwards of 200 new communities in 2015.

Turning over 10% of our communities in a quarter is a lot of work, especially in today's environment where entitlement and land development delays grow increasingly common.

We, of course, track the progress and performance of our communities in relationship to their original project plans, and a number of the communities end up running behind schedule in terms of when they register their first sign-up.

Still, through a lot of hard work by our land teams, we are getting the job done, and I am optimistic we can reach our community count guidance for this year.

We are encouraged by market conditions during the closing months of 2014 and through the first few months of 2015, and remain positive about expected housing trends for the next several years.

Now, let me turn over the call to Bob for a detailed review of our first-quarter results.

Bob?

Thanks, Richard, and good morning.

Against the backdrop of improving conditions that Richard discussed, our first-quarter operating results were in line with our expectations and with the guidance we provided on our last call.

More importantly, our Q1 results have us well positioned to deliver another year of excellent operating and financial results.

Looking at our first-quarter numbers, homebuilding revenues were $1.1 billion, which is consistent with last year.

Our current-quarter revenues reflect a 2%, or $6,700, increase in average selling price to $323,000, offset by a 2% decrease in closings to 3,365 homes.

Our conversion rate in the first quarter dropped from the prior year, as production was negatively impacted by a number of factors, including weather in certain markets which hindered land development and house construction, a continuing challenging municipal entitlement environment, and tight labor resources.

We expect that we'll be able to get our production-related closings back on schedule over the balance of the year, with the majority of the delayed closings occurring in the third and fourth quarters.

The 2% increase in average selling price for the quarter was driven by price increases realized in each of our brands, with Centex being up 2% to $208,000, and Pulte and Del Webb each increasing by less than 1% to $387,000 and $325,000, respectively.

On a year-over-year basis, we saw a continuation of recent trends in our mix, as Pulte continued to increase as a percentage of our total closings.

More specifically, closings in the first quarter break down as follows: 45% of closings from Pulte, 30% from Del Webb, and 25% from Centex.

This compares to 41%, 32%, and 27% in the first quarter of last year, but is consistent with the fourth quarter of last year.

Gross margins for the first quarter was 22.7%, which is down 110 basis points from last year, but is in line with the 2015 outlook we provided on our fourth-quarter earnings call.

Our Q1 margin reflects higher land, labor and material costs, as well as the impact of acquisition accounting associated with the Dominion transaction, which impacted our Q1 margin by approximately 30 basis points.

These headwinds were partially offset by lower interest expense resulting from our deleveraging over the last few years.

Looking at option revenues and lot premiums in the quarter, we continued to realize higher dollars on both lines.

In the quarter, option revenues per closing increased 13%, or $5,700, over the prior year, while lot premiums in the period increased by 3%, or $400.

Sales discounts in the quarter totaled 2.2% per home, which is up about 60 basis points from last year, but little changed from the fourth quarter.

Given our strong Q1 margin performance, along with ongoing opportunities from our value-creation initiatives and our positive view of the market, we continue to target full-year 2015 gross margins of approximately 23%.

As we've said in the past, there will be movement in margins up or down as we move from quarter to quarter, and dependent upon the mix of closings.

SG&A costs in the first quarter totaled $161 million or 14.8% of home sale revenues, compared with $145 million or 13.3% of home sale revenues last year.

The higher SG&A spend in the period reflects investments we're making in people and information systems, as well as increased start-up costs associated with the large number of new communities we are opening this year.

The overhead spend in Q1 was consistent with previous guidance for 2015 SG&A expenditures to be in the range of $160 million to $165 million per quarter.

Our financial services operations reported first-quarter pre-tax income of $5 million, compared with $22 million last year.

Note that last year's pre-tax income included a $19-million benefit related to the reversal of mortgage repurchase reserves.

Capture rate for the period improved to 82%, up from 78% last year.

Our reported Q1 income tax expense of $41 million represents an effective tax rate of 42.6%, which is higher than our previous guidance of 38%.

The higher tax rate for the period reflects a charge of $0.02 per share relating to an adjustment to our deferred tax assets resulting from a change in our prospective effective tax rate due to tax planning initiatives.

We currently estimate that the Company's normalized rate for future quarters this year will remain near our previous guidance of 38%.

On the bottom line, our first-quarter net income was $55 million, or $0.15 per share, compared with net income of $75 million, or $0.19 per share last year.

Note that our prior-year results include $0.02 per share of net benefit related to the reversal of mortgage repurchase reserves, which was partially offset by charges in connection with debt retirement activity.

Shifting to homebuilding operations, the Company had 5,387 homes under construction at the end of the quarter, of which 19% were spec.

As a percentage of construction activity, this is comparable with the prior year.

At the end of March, our finished spec inventory totaled only 345 homes, so we continue to maintain a tight control on our spec production.

In the first quarter, we approved approximately 2,000 lots for purchase, and finished the period with 135,000 lots under control.

Our lot position includes 39,000 lots controlled under option.

This represents 29% of our lots, which is up from less than 26% last year.

Of our controlled lots, approximately 23% are finished, with another 18% currently under development.

We spent $484 million on land in the quarter, of which 49% was for development of existing positions, and 51% was for acquisition.

That spend rate is behind our full-year authorization of $2.4 billion.

This is due to the fact that the timeline on a number of land transactions has gotten longer, as municipal approvals and/or land development is taking more time.

But we still have a lot in the pipeline, and are working hard to get deals approved and into production.

Even though housing demand in 2014 was up only slightly over the prior year, land prices did not retreat, and, according to our division Presidents, have actually risen in 75% of our markets.

As we've consistently indicated, we intend to remain disciplined in our investment in the Business, and only fund projects that meet our return thresholds.

In support of our broader value-creation objectives, we continue allocating capital consistent with the priorities we articulated most recently at our investment day.

First, to invest in the Business and pay dividends, then to opportunistic M&A, with any excess funds be returned to shareholders in the form of share repurchase activity.

During the quarter, we repurchased 4.6 million shares for $100 million, or $21.75 per share.

This level of activity is comparable to Q4, and reflects our stated strategy of being systematic in our approach to share buybacks, rather than trying to time the market.

We ended the quarter with $1.1 billion of cash, and with a debt-to-capital ratio of 28%.

Our debt-to-cap is unchanged from the prior year.

I will note that we are likely to use a portion of our cash to retire $238 million of bonds which mature in the second quarter of this year.

Moving past the balance sheet, sign-ups in the first quarter increased 6% to 5,139 homes.

On a dollar basis, sign-up revenue increased 6% to $1.7 billion.

By brand, unit sign-ups increased 13% at Pulte and 6% at Centex, and decreased 7% at Del Webb.

The decrease at Del Webb was due to the closeout of a number of selling efforts in Del Webb communities.

Absorption paces increased 8% at Centex, and were essentially flat at Pulte and Del Webb.

We're certainly encouraged by the improved sales pace among entry-level buyers, and particularly in some of our larger Centex communities, which are experiencing a notable increase in sales pace.

For the quarter, we operated from 613 communities, which is up 5% from the same period last year.

We continue to forecast operating from approximately 600 to 620 communities in each quarter of the year, and are on track to open over 200 new communities in 2015.

One last data point: We ended the quarter with a backlog of 7,624 homes valued at $2.6 billion, which is up from 7,199 homes valued at $2.4 billion in March of last year.

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

Thanks, Bob.

As I talked about at the beginning of the call, for a variety of factors the spring selling season is off to a very good start, with improving traffic, manageable inventories, and select pricing opportunities across many of the markets we serve.

At a regional level, many of the trends we have discussed during a number of the previous earnings conference calls continued to develop during the first quarter of 2015.

More specifically, on the East Coast we saw very solid demand up and down the coast, with Florida and the Southeast experiencing strong buyer interest throughout the period, while demand improved in the mid-Atlantic and Northeast markets as the quarter progressed.

Once again, the Carolinas, Georgia and Florida realized the strongest demand, some of which was likely people looking to escape yet another harsh winter.

Heading toward the middle of the country, conditions in the Midwest were generally stable for the quarter, although, like the East, we did see demand improve slightly as the quarter progressed.

As I know it's an area of focus, let me spend a little extra time on Texas.

In total, Texas sign-ups were down 5% in the quarter, mostly as a result of the closeout of several large communities in Austin and San Antonio, which have yet to be replaced.

Demand in Dallas held up reasonably well, while Austin and San Antonio were slightly weaker in the quarter.

Specific to Houston, sign-ups in the quarter were flat with the prior year, although demand slowed as the quarter progressed, particularly at the higher price points.

So far, the impact of lower oil prices seems manageable; and with oil prices seeming to have bottomed, we are optimistic that Texas will continue to be a strong market.

Out West, conditions held up well during the quarter, but the market, the submarket, and the community location all matter, as we continue to experience better demand on the coast of California and in closer-in locations around Phoenix, Las Vegas and Albuquerque.

On our last call, we mentioned our newest Del Webb community called Mirehaven in Albuquerque.

The community comprises 550 homes, roughly 7 miles from downtown.

The community, which has opened very well, is part of an expanding portfolio of projects designed to serve active-adult buyers who want to be closer to a city center and the amenities such locations offer.

In the coming quarters and years, I expect you will see us open more communities for active adults, spanning a variety of sizes, amenity offerings, locations and brands.

Overall, we are pleased with how demand developed in the quarter and through the first few weeks of April.

We were particularly encouraged by the improved experience in our Centex communities.

We are optimistic that this is the beginning of a more substantial recovery in the entry level, which has been a missing piece of the housing recovery to date.

Assuming there are no dramatic changes in the US or globally that have a material impact on employment trends, consumer confidence or interest rates, new-home sales should see continued gains in 2015.

PulteGroup is also well positioned to see improved operating and financial performance as the quarters progress, given the opportunity for increasing margins and greater overhead leverage, as delivery volumes increase over the course of the year, particularly in the third and fourth quarters.

As the year progresses, we will continue to advance our key value-creation initiatives, and focus on delivering higher returns on invested capital.

Let me end our formal remarks by recognizing and thanking all of our employees for their tireless efforts to deliver a great home-buying experience to our customers every day.

Our success is only possible through their passionate commitment.

Now I'll turn the call back to Jim Zeumer.

Jim?

Thank you, Richard.

We'll now open the call for questions.

So that we can speak with as many participants as possible during the remaining time of this call, we ask that you limit yourselves to one question and one follow-up.

Ryan, if you will explain the process, we will get started.

(Operator Instructions)

Mike Dahl, Credit Suisse.

Thank you.

I wanted to ask, Houston being a big topic in a wide range of comments so far from some of the builders -- I think you guys are one of the few to talk about some slowing, but it seems to be very dependent on submarkets.

So I was wondering if you could just specify which submarkets within Houston, not just that price point, but around the area, have you seen the impacts?

Trying to get a sense of how isolated it is, or broad.

Mike, this is Richard.

In talking to our Leadership Team, it is fairly consistent around the whole metro area of Houston.

But as indicated, the higher price points seem to be a little bit slower.

We're very pleased with demand at the lower price points.

But I wouldn't note any particular submarket as being stronger or weaker than others.

Got it.

And if you -- the comment on Houston being flat for the quarter, but then demand slowing through -- is there any sense if you'd give us in terms of magnitude, so if January started up year over year and then February and March were down, and by how much?

No, I think the reason we noted it, Mike, is that typically you would see stronger demand in March than you would, say, in February or January; and we did not see that through the quarter.

I don't have any specifics on exactly how many units it was.

I'll point out that, while Houston is an import market for us, we have a very balanced portfolio throughout not only Houston but also through the state of Texas and the country.

So frankly, we're not particularly worried about it and continue to like the overall benefit that lower oil prices give the whole country as opposed to the headwinds potentially for Houston

Great.

Okay, thank you.

Michael Rehaut, JPMorgan.

Thanks.

Good morning, everyone.

First question I had was just on pricing trends.

You noted, I believe at the beginning of your remarks, Richard, that you didn't push meaningfully in terms of incentives to achieve the sales that you were able to book.

So I was hoping maybe to get little more granular.

If there was any regions that maybe saw pricing power a little better than expected outside of the regional commentary that you gave?

Just specific to prices and incentives, if there any trends that maybe surprised a little bit to the upside or downside?

Yes, Mike.

This is Richard again.

Good question.

I think that, as opposed to regional trends, which, frankly, we felt the country was pretty consistent, what we continue to be pleased with is our ability to drive option revenue and lot premiums higher, and this is the multiple quarters in a row that Bob has commented that we've been able to take those numbers up.

That's indicative of a fairly healthy market.

As we indicated in our prepared remarks, we do have higher input cost -- land as an example -- coming through the income statement, which everybody does.

But I would say we generally believe that the pricing environment is more favorable than not as we go through the balance of the year.

So we're optimistic.

As we indicated, we're guiding for 23% margins for the year, implying a little bit of growth through the balance of the year.

So we feel good about pricing

Great.

No, I appreciate that.

The second question -- you highlighted the sales pace by brand and Centex standing out there a little bit.

Bob, we've talked about in the past your focus on exploring opportunities for building the Centex brand or building that out a little bit potentially to the extent that, that market appears to be a little bit more favorable.

And I know that absorption was a big component of whether or not the economics might become more favorable.

I was hoping maybe you could talk about where you are in the process of exploring greater opportunities for Centex.

Obviously, it was also a slide on the Investor Day about looking at that brand in 2015 for land opportunities.

And obviously, the economics have to work.

So any thoughts around that would be helpful.

Yes, you are exactly right, Mike.

We are focused on it as a buyer group in the whole of the millennials, and so we are doing some strategic work around how to approach that marketplace.

In terms of how we buy land around that, that hasn't changed.

We're still focused on returns.

And what we're seeing still to this point is that, closer in is where people are choosing to live.

And so we are seeing better opportunities to drive paces at prices that make sense in that move-up space and in the active adult space.

I think if we continue to see absorption rates increasing with solid pricing in the first time, I think it will make more land available or attractive for that buyer group.

So certainly, we are focused on it because it is such a big cohort.

I wouldn't say we've seen a change in our buying patterns around that, but we are looking at ways to serve that group more specifically.

Stephen Kim, Barclays.

Yes, thanks very much.

Steve Kim from Barclays.

Let me just follow-up if I could on the margin trajectory improving over the course of the year comment.

I think you were talking about gross margin as well as SG&A.

I just wanted to ask about how margins typically progress through the year.

Generally, a lot of builders, first-quarter gross margins are generally lower just by virtue of the fact that you have some marketing expenses associated with community rollout, but you don't have as many deliveries, and that kind of thing.

I was wondering if that dynamic was actually going to be at work this year also?

And if that is what is giving you confidence about your gross margin maybe improving sequentially from what we saw this quarter, or if there's something else at work?

Stephen, the commentary was actually around gross margins, not operating margins, so SG&A would not be part of that.

So our SG&A -- we've confirmed that we still think that $160 million to $165 million a quarter is a good number.

And in terms of the gross margins itself, as we look at the backlog and as we look at the overall housing and market and the fact that we will no longer have the suppression that came from the purchase accounting, that we see opportunity; and candidly, we've obviously guided to a higher annual rate than we had in the first quarter.

So we think that the margins are actually going to be a little bit higher through the balance of the year.

Mix always matters to that, so there was a larger proportion of first-time closings that could move that a little bit.

But I think it moves it much on the whole.

I don't know if, Richard, you want to--

No, I think that's exactly right.

I just wanted to -- you already said it, Bob, clarify that we were speaking of gross margins, not operating.

Okay.

That's very helpful.

So you're not incorporating very much mix in that, but you are assuming that you're going to see some lift from the abatement of the purchase accounting and that kind of stuff.

Okay.

My second question relates to a comment you made about land prices being up, in 75% of the markets, I think you indicated that your folks were telling you.

Was curious if you could give a little more color around that?

Is a year-over-year comment?

If so, how about sequentially?

What have prices done in land, because land prices probably aren't that seasonal, I would think?

And which markets are you seeing that in?

I assume that's consistent with what you're buying also -- so just some color around the land price comments.

It certainly is year over year, and to a certain degree it's anecdotal.

It's what folks are telling us they are seeing as they go out to negotiate land transactions.

Three-quarters of the country, or at least our footprint in the country, I would tell you is most of our markets.

And so I wouldn't want to call one out versus another.

The point being, really -- and we've said it for a couple of years now -- land doesn't move quite as quickly down as it does up.

And there's, I think, again, for the types of land parcels that we are interested in, a competitive landscape.

So we are working hard to make sure we buy on terms that make sense and can support the returns that we have set out as being requirements to do the transactions.

And for those attractive parcels, it's a competitive set.

Bob, I would just add that we clearly believe our land buying discipline is very helpful to returns.

It's also one of the reasons that our margins not only are among industry leaders, several hundred basis points higher than many in this space, but also the reason that we continue to guide for a more positive margin trajectory versus the industry.

And we believe that the land discipline serves us well.

For us, it's not about a lot of unit volume, although we're pleased with the volume performance.

It's about higher returns through a combination of the appropriate volume and strong margins.

Bob Wetenhall, RBC Capital Markets.

Hey, good morning.

Just wanted to ask you, in terms of ASP trends, it seems like they're decelerating.

And I was trying to understand, is this more a function of a mix shift, or is it a function that you had really strong pricing gains in 2014 so the comps are tougher?

Bob, this is Richard.

That's a great question.

Two things there.

I think it's fair to say that the comps were a little bit tougher, but we did have an unusually poor mix of closings in Q1 relative to ASP.

And, frankly, we don't think we did a great job highlighting that last call.

So the numbers were down pretty substantially simply due to mix.

So as I indicated earlier on one of the earlier questions, we're pleased with the pricing trends, and you see that through premiums and option trends overall.

So it's a little bit of both, but we did have a particularly weak Q1 mix.

Bob, does that mix reverse then?

Yes.

Just to put a finer point on that, if you think about the way the closing sequence works, we're going to get more closings from warmer weather places which typically have lower ASPs.

So it's not mix by brand; it's really geography that drives that.

If you look at our backlog, the ASP in the backlog is consistent year over year today.

So March versus March -- and it's actually up from December

Okay.

So I'm thinking you're saying that's going to reverse as we move forward, correct?

Or start to improve because of the mix (multiple speakers)--

Right.

So the backlog ASPs today is I think $335,000 or $336,000, versus the ASP that we actually printed at $323,000 in the first quarter.

Again, geography matters in where the closings are coming from.

Got it, got it.

That's really helpful.

And just a follow-up.

You guys called out construction delays negatively impacted deliveries.

So I'm trying to think through that.

And Richard also mentioned some commentary about the difficulty of permitting, which I think could lead to extension in deliveries from a timeframe standpoint.

Does that mean that some of the products you expected to bring online in 1Q actually is going to roll into the second calendar quarter instead?

And so it's not like demand destruction.

So should we see a benefit in 2Q as you're able to resolve construction delays?

And I was just looking for a little granularity -- what kind of delays you guys were mentioning, and this sounds like a transitory problem as opposed to something recurring.

Thanks.

Bob, you're exactly right, and it's related to just being able to get the homes closed.

No change in overall demand trends overall there.

We simply missed some units below our expectations in Q1, and most of that makeup is going to be in Q3 and 4. We'll get about what we expected in Q2, but the makeup, unfortunately, just given the push in timing -- we're expecting the vast majority of that the second half of the year.

So it is a transitory or timing issue, having nothing to do with overall market demand.

Ivy Zelman, Zelman & Associates.

Hey, guys.

Good morning.

I (multiple speakers) try to understand on Centex's product offering in terms of your $208,000 average price.

With FHA available at pretty reasonable underwriting, 580 FICO, you're talking about 3.5% down, and the back-end ratio at plus 50%.

Richard, you mentioned tight underwriting.

What do you think is tight about that?

And then secondly, as you think about the impediments to expanding the Centex brand and getting more absorption, is it more an impediment because the land doesn't pencil to the returns?

Or what has to happen?

Because I don't think you're going to see any more favorable underwriting than FHA right now unless I don't understand what you think is tight about it.

Yes, Ivy, we agree with you on that.

FHA is clearly accommodative for the Centex brand.

It's more land underwriting criteria.

To one of the earlier questions, it's about pace coming back strongly enough to support the kind of returns we want.

I will say we're optimistic with what we've seen in Q1, and our markets are really watching that.

And the potential to invest further in that category I think is rising.

One other thing I will note, as Bob indicated earlier, we're in the middle of studying this category in detail.

We're actually breaking that study into two different portions.

One were calling the urban millennial buyer, and the other we're calling the suburban value buyer.

And we do think that both of those categories behave a little bit differently.

But later this year, we're going to have more color on what we believe drives those.

Of course, we're watching the market overall.

So we're optimistic that we could see a change in our investment portfolio over time.

We have not yet, and we're still seeing vast majority of our land transactions at Pulte.

But yes, we agree that FHA is accommodative for the entry-level buyer.

With regard to the comment around tight underwriting criteria, however, it is very clear that credit, in our opinion, is too tight in general.

We're also -- and we put in our prepared remarks -- don't think we're going to see much change in that regard.

And that has to do with QM and QRM just being a very tight underwriting box overall, and that's why we're making a comment

I appreciate it.

Thank you for that.

On the tightness, though, can you be more specific?

Because even within QM, I think that -- the question is, is it really tight, or is it just the self-employed borrowers and foreign nationals?

What's specific about QM would you say that's tight?

Because Fannie and Freddie, again, 3% down, 620 FICO, back-end ratio, so I think people -- when everybody talks about tight, it's hard for us to understand what really means

Yes, Ivy, I think you're right.

The construct of the offering is good.

It's the underwriting discretion or lack thereof that I think we're talking about.

So whether it's credit overlays or just an inability for the people who are underwriting the loans to say I see a blemish and I understand it and I can document around it.

People aren't really willing to do that yet, and so the rep and warrant issue that has been an overhang in the industry, we believe still impacts loan generation.

So that tightness we're talking about isn't around the product or how affordable it is or how accessible it is to a particular buyer group.

It's really that it's tough to get a mortgage approved.

Jack Micenko, SIG.

Good morning, guys.

Looking at the cadence of buybacks, I think we are running, let's call it $50 million in the first three quarters of last year, and stepped up to around $100 million number through the first quarter.

I'm just thinking -- you say systematic.

I guess the question is, is systematic the $100 million going forward, or is it the $50 million?

Or how do we think about that on a go-forward basis?

Yes, we haven't given any forward guidance on that, and we look at it candidly as we go through the year.

I think the fact that we've now done a couple of quarters at $100 million is indicative of what we're thinking for 2015.

The only thing I would offer on top of that is, as we look at our cash position and we look at our cash generation and what we're going to utilize our cash for, we will adjust that over time.

So as we, for instance, go through our re-forecasting process each quarter here, we look at what is our cash position, how much are we going to be investing in the business, what are we're going to need to run the business?

And obviously, $1 billion in cash is still higher than we would like to carry.

So you heard us talk about that we'll use cash, actually, to likely pay down the debt that matures in the second quarter.

Again, we're looking at ways to try and utilize some the cash that we've got on the books.

Okay, great.

And then just to confirm -- there's no more go-forward Dominion impact on gross margin?

Yes, we've worked through the width that we acquired, which is what has really challenged margins.

Stephen East, Evercore ISI.

Thanks.

Good morning, guys.

If I could follow on Jack's question just a little bit -- associated with capital allocation and your ROIC target, first, on the ROIC, do you all have a target out there you're willing to share maybe, or at least a progression of how you expect this to go over the next few years?

And then, given what you all have been talking about, seeing much higher land costs, probably not getting out over your skis on community growth, et cetera, is your cash allocation starting to evolve a bit and starting to move away from reinvestment toward that debt paydown and return to shareholders?

Or are you still pretty much in the same type of mode, if you will?

Yes, Stephen, this is Richard.

I would say a couple of things.

We clearly intend and are optimistic that we can drive returns higher in the coming years.

We don't have a particular target out there other than that it is crystal clear throughout the organization that our number one goal financially is to drive higher returns.

With regard to allocation, we're very consistent with what we said at our December Investor Day.

Our first priority is to invest in the business.

And we are pleased with getting our communities open, and were pleased with the ability, we believe, to hit our targeted community count for the year.

That's our number-one goal.

Second is to continue to fund an increasing dividend.

Third is any opportunistic M&A, and then residual cash on a very systematic basis back to shareholders.

So that last one is going to fluctuate depending on our ability to invest in the business, and as Bob indicated, we've stepped up here the last couple of quarters.

So we feel like we're doing exactly what we said we would.

We're very pleased with our performance.

We're pleased with the environment.

We're pleased with the quarter.

We feel like we're doing exactly what we said would be doing.

The only thing I would add to that, Stephen -- because you had focused on the debt repayment -- we've got a maturity in the second quarter.

I think it's $238 million, not really a big enough bite for us to say let's refinance it.

So think what we're looking at is, we've got cash, we'll pay it down.

We've got a bigger maturity stack next year.

It's a little bit under $500 million.

So I think you'd see us looking at structuring leverage sometime over the next six to nine months.

It will be dependent on market conditions.

There was some activity this week that priced pretty attractively.

So the markets are still accommodative, so we'll be looking at that over the next, call it, year.

But for this maturity, it's just seems to us we've got the cash, we'll use it and then be opportunistic on the access after that.

Okay.

Yes, thanks.

And then just one more time on Centex.

You did -- push a little bit more.

You said you saw some better demand out there.

Maybe if you could talk a little bit about that, the demand that you're seeing.

And does Centex really become much more of a 2016- and 2017-type story versus later this year?

And if I can squeeze one other in, do you mind ranking -- on the cost, you said land, labor, and materials.

I assume the pressure on the gross margin is in that order, but if you could clarify it?

Yes, so from a Centex perspective, Stephen, we're pleased with what we've seen.

I think it's a little too early to say whether it's a 2016 or 2017 story more than this year.

We have some large communities that are absorbing nicely throughout Texas, throughout the Southeast, and in the Midwest, a number of markets, so we're feeling good about that.

And with regard to margins, just one comment over there.

We feel like land pressure is definitely coming through, but in terms of the comment that you're making, we're very pleased with the margins.

They're right in the guidance range that we have.

They continue to be among the industry leaders.

And we're guiding for flat to up margins from here.

So we're very pleased with that.

There's a lot of commentary out there about margins down, but we're right where we want to be, and we intend to stay at or near the industry leaders.

And then just one other thing on Centex: just to be clear, we've not invested a lot in Centex over the past couple of years, so the likelihood that Centex continues to be a smaller portion of our deliveries in the coming quarters is still there.

And that's okay.

It will take us some time to invest in Centex in the current timeframe before it manifests itself, and we're watching the markets, clearly, to see when that happens.

Susan Maklari, UBS.

Good morning.

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

Yes, we obviously keep track, just like everybody else.

And the good news is that for the significant majority of our material input cost, we see either flat, or even some relief.

Lumber gets talked about a lot.

The packages are trending nicely.

Maybe the one outlier to that is concrete, where we've seen some price pressure.

So all in all, I think we had talked about coming into the year maybe 1% increase in pricing, and we certainly see that or maybe even a little bit better.

I don't know if it goes backwards, but it's not working against us in a large sense.

So positive results there.

Okay, that's great.

And then in terms of the mortgage markets, there's some big changes that are coming later this year in the summer, in August.

Can you just talk a little bit about how you're working with your lenders to just make sure that some of the maybe potential short-term bumps that we see from that could be avoided?

Yes, it's a great question.

So RESPA-TILA or TRID, you'll hear it talked about.

August 1 is the day it goes live, and there are a lot of people in a lot of companies working really hard on this.

This is kind of a complete reboot of the documentation process.

And we don't use a lot of outside lenders, obviously, so our mortgage company has been diligently working on this for, candidly, months since they announced it last year.

We feel good about our ability to serve under the new guidelines.

So I would tell you, it should be business as usual for Pulte Mortgage Company.

If you're looking for things that could happen, the possibility exists that not everybody is going to get there, because it is a big undertaking.

And so, for instance, if we've got consumer that's trading out of another home that has to sell their home, if their buyer's lender isn't able to close, so you might see some ripple through the industry around that.

So I think we feel good about our ability to meet and serve under the new TRID rules and regulations.

But this is a big deal.

I've had it characterized me as, it's more disruptive to the mortgage industry than the cumulative Dodd-Frank impact.

And think about all that Dodd-Frank encompassed.

So this is a big undertaking.

I've read certain surveys, and I don't know if these are right or wrong, that close to half of the mortgage lenders might not be ready to do this.

So we are.

We'll be ready to lend, but it's a big undertaking

Okay.

That's great color.

Thank you.

Nishu Sood, Deutsche Bank.

Thanks.

First question I wanted to ask was about SG&A.

You mentioned the $160 million to $165 million range persisting.

Typically, with your closings rising as the year went on, you would expect the variable components to drive that a little bit higher.

So I was wondering, how should we think about that?

The investments you mentioned, the community turnover -- are those going to decline at a rate that would then offset the closings-driven variable component of that?

Because you mentioned, obviously, that your communities are going to -- you're going to open 200 for the year.

You've opened, I think, 60 you said in the first quarter.

So how should we think about all that?

So if you look at the increase in our SG&A year over year, about one-third of that increase we would attribute to community account openings.

On top of that, you've got the other two-thirds being for people -- let's characterize it that way.

Some of them are community-oriented, so it's in relation to opening new communities.

And others are, as we've talked about, we've made investments in IT, training, quality.

And so I think what you've heard us say over time is that our SG&A spend is not as variable as many.

So this is something that we have pretty good visibility into.

The people and the processes that we're investing in to improve and to enhance the value creation initiatives we have underway are largely going to be fixed going forward.

So the people that we are hiring to work on the projects in IT, as an example, or to work on the training, will be ongoing costs.

And obviously, we have pretty good visibility into our planned openings and the spend on communities, so we think have pretty good insight into what's happening in 2015.

Going forward, obviously, depending on how many new communities we have, we'll give you some color into the variability of that expense each year.

Got it.

That's very helpful.

Second question: you mentioned, Richard, some weather effect the first quarter on closings, so I imagine there would be a little bit of a give-back in the second quarter.

My question was around demand, though.

Was there any effect related to weather as you saw it in demand through the first quarter?

And in that context, it might be helpful also if you have any comments about April and whether there was any snapback or rebound?

Nishu, just two comments there.

We did indicate we missed some closings in Q1, and you referenced them coming back in Q2.

We've been clear on this call, most of them are coming back in Q3 and 4, so just FYI.

No, there was no demand impact from the weather in Q1.

We're very pleased with demand; it exceeded our expectations.

And we're pleased with the sales volume we had.

And we're also pleased with April.

April appears to be unfolding at a normal seasonal rate, which is a good selling month.

Will Randow, Citigroup.

Good morning, and thanks for taking my question.

On the number of homes in control near developed or developed lots, can you talk about that's trended over the past 12 months?

And how that might impact the community count going forward?

I'm sorry.

I had a hard time hearing you, actually, Will.

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

I think I can answer the first part.

Community count, we still feel very good about our ability to be between 600 and 620 for each of the four quarters this year.

I think Bob has got a little commentary on controlled lots.

Yes, our controlled lots have been, for all intents and purposes, relatively flat for the last couple of years, Will.

We've been replacing lots as we deliver them.

We're up about 8,000 lots.

And in terms of -- if you think of what's happening inside that, were working through some older Del Webb communities, and you saw our Del Webb community count drop a little bit.

And we're replacing them essentially with Pulte communities, so you've seen that community count increase over the last couple of years.

But again, 8,000 lots in the last 12 months.

And I would characterize that as largely flat

Thanks for that.

And just one follow-up.

With option revenues reaching 13% in the quarter, what do you think that can go up in the next year, particularly as your mix of closings changes?

Yes, Will, that's tough to put a number on, candidly.

We do track every single market and every single community, and we still have an emphasis in that area, and I would say we still have some opportunity.

I can't give you a specific number.

I will just tell you that it's crystal clear around the organization that we're doing our best to drive returns, and clearly, option revenue and lot premium revenue help.

Jay McCanless, Sterne Agee.

Good morning, everyone.

First question: with the incentives going up on a year-over-year basis, do you guys expect that to continue through the year?

We've talked about this for probably 18 months now, Jay.

We had gotten incentives down to -- I think the low point was maybe 1.5% or 1.6%, which might be the comp we're working against here year over year.

And we were at 2.1% last fourth quarter.

We're 2.2% now, running between $5,000 and $7,000 a unit.

We're not seeing anything -- I think you heard Richard talk about the current sales environment.

We're not seeing big increases in incentives.

So our expectation, since we're not doing spec business, is that you wouldn't see that move materially.

Okay, great.

That's all I have.

Thanks.

Megan McGrath, MKM Partners.

Good morning.

Thanks.

Just wanted to get a little bit more clarity on the Centex comment, to beat that dead horse.

I just wanted to clarify -- you did say that absorptions were flat year over year in the quarter in Centex?

No, we said they were up 8%, Megan.

Up 8%.

Okay.

They were flat for Webb and Pulte.

Flat for Webb and Pulte.

Okay.

And then could you talk about that a little bit more?

Was any geography that you saw a big pickup?

Or was it really nationwide that you saw that incremental improvement?

Well, we don't have Centex communities in all of our markets, but where we did, we saw pretty robust change.

Texas was good; the Southeast was good.

That's where a lot of our Centex product is.

So it wasn't isolated to any one market.

Great.

And then could you, just for clarification, give your cancellation rate for the quarter?

We were 11%.

Mark Weintraub, Buckingham Research.

Thank you.

Just on the materials side, where we have seen pretty dramatic drops in lumber and structural panels pricing in the last couple of months, where would that show up in your cost of goods sold?

Is that going to be six months from now or so?

Is it really third quarter, fourth quarter where you would potentially see the benefits of that?

Yes, typically, you're going to see what we're contracting today will deliver in six months.

And so I think that's pretty fair to say.

And based on way we buy, we have a trailing pricing grid, so you would see benefit for current sales, or I should say changes in commodity pricing, out two quarters from now

And then how much of an offset, if any, might the tightness in labor that you were talking about factor in, relative to where your expectations have been?

Because certainly it does seem that materials may be lower than you thought, but is labor potentially going to be an offset?

Or do you have any view on that?

Yes, that will be market by market, candidly.

So in markets that are busier, you're going to see more labor pressure.

Obviously, we still -- we're one of biggest builders in every market we operate in, so we've got leverage capability with our trades.

But if there's a lot of activity out there, sometimes we have to pay to get them.

Buck Horne, Raymond James.

Thanks.

Good morning.

I wanted to talk a little bit about Del Webb.

I'm just wondering -- what do you think the biggest impediment is to improving absorptions at Del Webb right now?

I'm a little surprised, given the demographics and the weather patterns and the strength of Florida and some other markets, why you're not getting a little bit more improvement there?

Can you give us a little more explanation what you think is going on at Del Webb?

Buck, again, absorptions have been steadily increasing throughout the last couple of years there, and they were flat this time, so we're not disappointed in Del Webb overall.

We did have quite a few community absorption selling efforts that rolled off, as Bob indicated.

And we do have some coming in the future, so it's very difficult to say.

I'm not exactly sure what's happening in Del Webb collectively other than that it continues to be a good performer.

We just didn't particularly see the outsized performance this quarter.

And the pricing there is still strong.

The margin generation and ASPs that we're getting from that buyer group, they're still healthy.

And if and when they start to buy more actively, it would really be beneficial.

One other comment there, Buck.

In talking to some of the operators, in some of our strong Del Webb communities we do limit lot sales quite a bit.

We don't want to get too far out of our ability to produce and protect our ability to drive price forward.

And there's a number of communities where we have had excellent performance that we're holding the line.

So a little bit of this is self-induced, just to ensure we don't get, say, a backlog that's out a year, as an example, versus, say, six or seven months.

Okay.

Thanks.

I wanted to follow up on Nishu's question a little bit on the SG&A, because I think what we're getting at with this question about your variable cost just on commissions should be increasing as you have more closings in the back half of the year.

The component you said about your community openings, you're certainly planning on continuing to open a few -- a good number of communities later this year.

So what I'm trying to understand is, implicitly, are you forecasting that the people costs you described are actually going down in the back half of the year to hit to that $160 million to $165 million number?

Or do the people costs--

You have to remember, we actually run our commissions through margin, so cost of goods sold.

So that's not a variable of our SG&A.

That's the difference between what you're asking.

Ken Zener, KeyBanc.

Good morning, gentlemen.

Looking at gross margin, the interest that you're capitalizing was down about 80 bps year over year.

And I'm just wondering if you can give us a view on structural elements in gross margin that you know about?

So if you're going to be doing about 23% gross margin this year, we know there's a tailwind of, in 1Q's case, 80 basis points from interest expense.

Is that what you would expect it to be for the year?

And then, could you maybe talk about other factors that -- if that's a tailwind, could you highlight what some of these other factors are that you are seeing or thinking about?

Are you saving more on commissions, or are commissions costing you more?

Does land -- does that change?

As well as giving the 1Q price, are you willing to -- and I'm sorry if I missed it -- but did you give a fiscal-year ASP or a year-end ASP that you would be willing to guide us towards?

Thank you very much.

Hello, Ken.

We did not give a total-year or forward-looking ASP number.

We're going to continue to get the interest benefit through the year with regard to margin.

And then all the other components collectively, obviously, add up to that 23% number -- so a component of price, a component of cost, et cetera.

I don't know, Bob, if you have any more granularity there you want to share?

No, we don't give quarterly views on the interest, but we've talked about the fact that we'd have a $40-million, $50-million-plus benefit this year in expense versus last year.

And so you'll see that come through the income statement, and it will vary based on closings on a quarterly basis.

The one question I have, then, to follow up -- as you move toward the common plan, which I think you guys have obviously highlighted a lot of the benefits there, part of it being cost -- is there a way that you could quantify how much that delta is benefiting you guys in terms of vertical costs or something?

Ken, this is Richard.

There's so many moving parts there between mix, between cost, between price, between all of those components.

It's difficult to give an exact number.

I will just leave it with this.

We're very pleased with our margin performance.

We're at or near the top of the industry, and we're very confident in our margin trajectory from here.

In terms of exactly which components are driving the margin performance, it's tough to put a handle on, given the quarter-to-quarter variability

Jim Krapfel, Morningstar.

Thanks for taking my question.

So you mentioned challenging entitlements in the early part of the remarks.

I'm just curious to hear which markets are you seeing this mostly?

What you think the underlying drivers are for the more challenging entitlement process?

And then, what do you expect the course of this trend, say, over the next several years?

Yes, Jim, entitlements are incredibly difficult in every market.

They tend to be a lot tougher on the Coast and they are, say, in Texas, as an example, which is an easier entitlement market.

But the trend continues to elongate across the country, and that's likely to continue.

It's simply a combination of lack of folks at the municipality that are available to approve both zonings, if you will, as well as land development approvals, along with the fact that municipalities in general are being conscious of smart growth.

And the hit rate for entitlement for new communities continues to be very challenging.

This is not a new story.

This is something that I think the industry has talked about a lot, we've talked about a lot.

So again, it's having some impact on our ability to get our communities open and get our land spent on time.

So it's more of a transition problem in terms of timing than it is a big picture issue, but I doubt the entitlement market ever gets better, candidly.

Thanks for that.

And then second question -- what were the commonly-managed floor plans as a percent of closings this quarter?

Do you still expect that to get to 70%?

And if you could at all ballpark how much incremental margin you could get remaining from getting to more commonly-managed floor plans, holding other factors constant.

We delivered 54% of our closings through commonly-managed plans in the quarter, and we feel very good about our ability to get to 70% in the timeline that we indicated, over the next 18 to 24 months.

We have no further questions in the queue.

I'd like to turn our call back over to our presenter.

Thanks, everybody, for your time this morning.

We will be available for the remainder of the day if you have any follow-up questions.

Otherwise, we'll look forward to speaking with you on the next call.

This concludes today's conference call.

You may now disconnect.