Alex Barron: Got it. Okay. Thanks a lot.
Phillippe Lord: Thank you.
Operator: Thank you. Next question today is coming from Jay McCanless from Wedbush Securities. Your line is now live.
Jay McCanless: Thanks for taking the questions. Just to clarify what you’re saying earlier, Phillippe, are you guys seeing kind of the slowdown in April foot traffic and demand that some of your competitors have talked about?
Phillippe Lord: No.
Jay McCanless: Okay. And then in terms of pricing power, where do you think you’re getting better pricing power right now? Is it on the entry level, first move-up? How has that been trending? And I guess also, how has that been trending thus far in April?
Phillippe Lord: Jay, we’re mostly entry level at this point, although we’re trying to source some more what we call 1 MU land, which we’re having some success doing. So primarily, we’re entry level. So obviously, the pricing power we experienced in Q1 was entry-level pricing power. I would say to give you some more information, it’s more geographical and community by community. Certain communities, certain markets are really strong and very – there’s a lot of pricing power. And then other markets that are more price sensitive, we don’t have as much.
Jay McCanless: And then just the last question I had. With the pretty large increase that the Board put in with the dividend, maybe walk me through that from a capital allocation standpoint because that seems like a pretty big burden to put on the company, especially with a cyclical industry. So maybe some of the thought process and why make such a big increase right now, especially with rates at this point, not having affected your business, but they might in the future.
Phillippe Lord: So we talked a lot about this through our organization as well as with our Board and Steve here at German. But at the end of the day, we felt that there was a benefit to returning shareholder equity in two different ways, not just buying back shares where we have a limited float but also providing a dividend. We think the dividend signals to the Street that we have tremendous conviction in the cash flow of our business. Our operating model has dramatically changed from where it was seven years ago. You can see our backlog conversion. We’re generating a much stronger cash flow quarter-to-quarter. And so we felt strongly that that was the signal we needed to send to the Street that we believe our operating model, our business is less cyclical than it was before. There’s been a lot of conversations about the industry being rerated because our balance sheets are stronger, but we think paying a dividend tells you exactly how strong our balance sheet is.
Hilla Sferruzza: I think it’s important to note that the dollars, while it’s a very impressive increase, we just reiterated our $2 billion to $2.5 billion annual land spend commitment. Our dividends are around $100 million a year. So I think just to put everything in perspective, that’s a pretty small portion and a pretty small commitment for us to be making of the entire capital outflow for the company.
Jay McCanless: Okay. Great. Thanks for taking my questions.
Phillippe Lord: Thanks, Jay. Appreciate it.
Operator: Thank you. Next question is coming from Ken Zener from Seaport Research Partners. Your line is now live.
Kenneth Zener: Good morning, everybody.
Phillippe Lord: Good morning.
Kenneth Zener: I wonder if you could go into – look, the beat was very good, both the units and the margins. I’m just trying to understand a little more specifically backlog, I assume converted at the margins you offered at the end of January. So it’s – and there’s a certain spread there. Could you kind of talk about that implied spread? I think I can do the math, half of your units were backlog, half for closings. So I’m trying to – the initial spread.
Phillippe Lord: Obviously, you know what we guided to and then what we delivered. So if you came into the quarter with a backlog, that’s generally what we guided to, but then we closed 148% of that backlog. So we closed an extra 2,000 houses in the quarter than we were expecting. That’s the spread.
Kenneth Zener: So it seems like was it the spread on the implied margins for the spec actually improved quite a bit first what you expected plus the units, correct?
Phillippe Lord: Absolutely. As we came into January, our ability and the demand for move-in ready inventory that we were able to close intra- quarter was really strong, which allowed us to increase the pricing of that product as well as use less incentives on that product.
Hilla Sferruzza: Yes. And the sheer fact that we closed many homes allowed us to leverage and gain incremental benefit in the margin. So it’s a combination of all of those coming together that drove margin.
Phillippe Lord: So when we guide, we’re going to guide to what we know. But if there’s a big intra-quarter movement like we saw in the spring selling season, it’s either going to benefit us or maybe not.
Kenneth Zener: Yes. And the reason I ask is, I think where you have – I prefer looking at inventory, so your backlog plus your spec units, but the math, it seems like you’re doing like 27% gross margin on your backlog units and it implies roughly 300 bps lower on your spec. Is that something that you would be willing to comment on?
Hilla Sferruzza: Yes. I think we’re getting really granular. So we’re just going to pull back from there. I think that’s kind of what we said a couple of times in the Q&A, I think we’re really comfortable with what we guided. That was what we knew. The incremental volume in the intra-quarter improvement is what you’re seeing come through in our actuals.
Kenneth Zener: Right. No, I think it’s good. I’m just trying to…
Phillippe Lord: We do too. Did you have another question? Thank you. Operator, is that it?
Operator: Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to Philippe for any further or closing comments.
Phillippe Lord: Thank you, operator. I’d like to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a great rest of your day and a great weekend. Thank you.
Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
