Jeff Mezger: I’ll leave the dollar value, Steve, to Jeff to talk about. But if you look at our fourth quarter, I don’t know the exact number is like 700 lots we purchased total and so you know our delivery numbers, so therefore your lot count went down, I would expect that it will go down further in Q1. I don’t know that we’ve looked at it, but we’re being pretty tight right now with any land spend and at the same time, we’re continuing to deliver on our backlog and our WIP. So I do think you’ll see our lot count go down. We own lots that support growth right now for ’23, ’24, ’25, so we’re in a good spot, with good basis on our lot portfolio, so we don’t feel the pressure to have to buy anything to grow and we’d rather hold our cash and wait for the right time to go back and redeploy. So we could, we will see a lot count down in Q1. It could continue for a little while. Jeff, you want to talk dollars?
Jeff Kaminski: Yeah. As far as dollars go, Steve. I mean we generally don’t forecast, things like that on the balance sheet. But I think it is a reasonable expectation to assume that our inventory investment would be lower at the end of the year end and generate some operating cash flow for the Company that we could redeploy into other uses as we move through 2023.
Operator: Thank you. Our next question will come from the line of Michael Rehaut, with J.P. Morgan. Please proceed with your question.
Michael Rehaut: Thanks, good afternoon, everyone. I appreciate you taking my questions. I wanted to circle back first to the gross margins and the guidance for the first quarter. Help me reconcile the statements that you’re protecting your backlog and not getting as aggressive or getting a least aggressive as you can on the backlog, maybe I guess you said in some instances where they’re smaller backlogs in certain communities maybe incentivizing a little bit but broadly, trying to maintain the gross margin of let’s say three or six months ago, and help me reconcile that statement with the first quarter guidance of 20% to 21%, which is several hundred basis points lower than a couple of quarters ago. I know you mentioned as part of the drivers there, mix and a lower amount of operating leverage, so it does sound like some of the delta is in that, I guess that’s my first question, I’ll go onto the second one.
Jeff Kaminski: Right. As we talked about in the prepared remarks, it really, it’s our outlook on the homes that are going to close, we have most of them in backlog right now, what those margins look like, we have an offering certain concessions pretty close to closing a lot of homes in order to basically convince buyers are closing their homes, and there’s a little bit of set aside for continued activity in that area. Higher construction costs are hitting in the first quarter, just based on when homes are started and keeping in mind that our lumber lags a little bit because of the way we lock lumber prices, so that trough that hit starting to go down about mid-year last year is more or less going to hit us more like the second quarter as opposed to the first quarter.
The lower pricing obviously, has been the main driver on the quarter-over-quarter decline in margin and we’re just basically call it like we see it right now and what’s expected to close in the first quarter.
Michael Rehaut: Well, I appreciate that. I guess maybe just as a follow on around that, it would be really helpful to kind of get a sense of, to the extent that again, you’ve tried to keep it to a minimum but what amount of incremental incentive on average is in the backlog today versus six months ago? And more importantly, you highlighted in your prepared remarks, the Inland Empire, where you’re starting to kind of work through the backlog more quickly and you said that in the last few weeks, you’ve generated better sales growth — sorry, better sales pace with what you said were solid margins, I’m kind of curious what solid margins mean there and perhaps that’s kind of a clue in terms of how we should think about margins going forward for the broader company?
Jeff Kaminski: Right. I’ll just reiterate my comments from earlier, Mike, I mean there’s a lot of uncertainty in the back half of the year and I think it’s too early to call a lot on very much on what could happen in Q2 through Q4 on margins. Well, there’s a lot of initiatives underway in the Company right now. We expect to see a lot of offset to whatever negative they come out of the general market. The largest difference between the margin in the first quarter and the expected margin in the first quarter and what we saw in the first half of last year, was the rate environment and the necessity to offer some concessions related to mortgage rate buy-downs to our buyers that we didn’t have at all in the first half of 2022. So that’s a pretty significant gating factor, very dependent on what happens with mortgage rates.
And if we see those coming back in, there is significant margin pickup from that type of activity that we might see in the general market. So that’s I guess that if you’re trying to really dial-in on back half and what could happen in second quarter and everything else, and we’re trying to provide as much information as we know today without seemingly having a crystal ball and what could happen, especially in the macro environment. So we’re just trying to call like we see it right now, Mike.
Operator: Thank you. And our next question comes from the line of John Lovallo with UBS. Please proceed with your question.
John Lovallo: Hi guys. Thank you for taking my questions. The first one is, rates have certainly come down in December and January, I mean, call it 100 basis points plus from the highs. I mean what are you seeing from an order pace, cancellation pace and is the volume, is the quality of traffic improving at all?
Jeff Mezger: Different topics, John, it’s the time of year when traffic improves anyway. So we are seeing a pickup in traffic certainly, after the first half of the year. But the summer was okay, I’ll call it with traffic, we shared in our prepared comments that cancellations are actually moderate, that’s a good thing. The wildcard is what do rates do versus how strong is the spring selling season? And rates have come down and the consumer is starting to digest the higher rate. So I think that’s a positive for the consumer, and then we’ll see how the spring selling season evolves, but so far so good.
John Lovallo: Okay, next question is, you know, just trying to better understand the sales approach heading into the spring selling season here, not lowering prices in the high backlog communities because the backlog would expect concessions. I mean intuitively that makes sense. But I guess the question is, what stops that backlog from going next door to a competitor if you’re not at the market price, I mean, does it make sense to define the market price in order to get closer to in each community.
