PHM - NYSE

Good morning, and thank you for standing by. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup, Inc. Second Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. We do ask that you limit yourself to one question and one follow-up. Thank you. I would now like to turn the call over to Jim

Great. Thank you, Jeannie. Morning. Thank you for joining today's call. As we look forward to discussing PulteGroup's second quarter operating and financial results. With me today are Ryan Marshall, President and CEO, Jim Ossowski, Executive Vice President and CFO, and David Carrier, Senior Vice President of Finance. As always, a copy of our earnings release and this morning's presentation have been posted to our corporate website at pultegroup.com. We will also post an audio replay of this call later today. I would highlight that today's presentation includes forward-looking statements about the company's expected 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 within the company presentation. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now let me turn the call over to Ryan Marshall.

Alright. Good morning, and thank you for joining our call. As always, I appreciate the opportunity to update you on PulteGroup and our work in delivering outstanding business results. PulteGroup's earnings release details another quarter of positive financial performance as the company delivered strong closings, gross margins, and overhead leverage. Consistent with such results, we also continue to realize high returns as the company generated a return on equity of 23% for the trailing twelve months ended June 30. In a few minutes, I'll turn the call over to Jim for a detailed review of the numbers. Our results demonstrate that in an operating environment that has grown more challenging, our diversified and balanced operating model offers strategic benefits to help the performance. In this competitive operating environment, we are reaping the advantages of being diversified across all buyer groups, particularly our industry-leading position in serving active adult buyers. Specific to this group, I'm pleased to report that we are experiencing a great response to our newest Del Webb and Del Webb Explore communities as buyers embrace the active lifestyle at the core of both brands. As it relates to this part of our business, I would highlight that along with being among our higher-priced homes, these homes typically represent our highest margin closings. Along with the broad customer base, we have geographic breadth and market diversity that are again proving their value. Our business results continue to demonstrate the benefit of having large and stable operations in the Midwest, Southeast, and Northeast, as these work to offset some of the more challenging market conditions the industry is facing out west and in Texas. And I'm pleased to highlight the relative strength of our Florida operations, displayed in the quarter as net new orders increased 2% over last year. Beyond Florida remaining a beneficiary of long-established migration patterns in this country, we have exceptional land positions throughout the region. I would also highlight that our operating teams across Florida are second to none, and I truly believe we are seeing the importance of having such experienced leadership in place. And finally, our ability to serve both the buyer who needs the immediate delivery of an in-production spec home as well as the buyer seeking to build a more personalized home from scratch remains an important competitive advantage. The former allows us to effectively serve the first-time buyer and use our national rate incentive, while the latter allows the buyer to select the lot and options that they value most, which in turn provides margin enhancement opportunities for us. Through the first half of 2025, we realized an average of $109,000 of options and lot premiums, which is an important driver of PulteGroup's superior gross margins. With half the year, including the important spring selling season now complete, I thought it would be useful to offer a few high-level comments on the demand dynamics we have been experiencing. Over the past few quarters, our industry has routinely referenced demand conditions being volatile, and that remains the most accurate description of buyer activity in the first and second quarters. Within a market demonstrating a typical seasonal pattern from month to month, we do see days of strong demand followed by days displaying a step down in sign-up activity. Feedback from would-be home buyers indicates a variety of concerns ranging from affordability and the inability to sell an existing home to a slowing economy and the fear of potentially losing their job. In sum, I think consumer confidence is uncertain at best, and confidence is something difficult to solve with a lower price or higher incentive. This is where our disciplined approach to the market focuses on capturing incremental volume without giving up too much price. If we look beyond the day-to-day volatility, the overall demand environment isn't far off our historical pre-COVID absorption basis. Our Q1 absorption pace of 2.7 homes per month was consistent with our pre-COVID averages, while our Q2 absorptions of 2.4 homes per month were just under our 2.6 pre-COVID average. In other words, our demand is reasonable, but we are happy to compete for each home sale, and we are seeing meaningful differences in demand strengths and weaknesses from market to market. One of the most encouraging dynamics that I would highlight is that a drop in interest rates does stimulate traffic into our communities and a corresponding increase in sign-up activity. This was clearly evident as rates dropped in the last two weeks of June as well as at different points during our first and second quarters. I think this supports our view that people desire home ownership and remain actively engaged in the process. They just need the value equation to work and to have confidence in their financial circumstances to feel more secure. Given the demand conditions we have experienced in the first six months and an overall heightened sense of uncertainty among consumers, we have taken actions to adjust our operations to today's market conditions. We made the decision early in the year to slow our land spend, reduce our starts rate, and we have worked aggressively to sell excess spec inventory. We have been proactive and very tactical in responding to demand conditions as they exist in each market. Our focus on achieving high returns doesn't change, but the approach may as we balance the primary drivers of pace and price within each community. Before turning the call over to Jim, I do want to recognize and thank our incredibly talented team as they continue to deliver the highest quality homes and customer experience while still achieving exceptional financial results. Now let me turn the call over to Jim Ossowski.

Thank you, and good morning. As Ryan indicated, while there are challenges within today's housing market, there are certainly positives to be taken from PulteGroup's second quarter results and how we have positioned our business for long-term success. Net new orders in the second quarter totaled 7,083 homes, which is down 7% from last year's second quarter. The year-over-year decline in net new orders for Q2 reflects a 13% decrease in overall absorption pace partially offset by a 6% increase in our average community count for the quarter to 994. As a percentage of starting backlog, our cancellation rate for the second quarter was 11%, which is consistent with Q1 and only a point and a half increase from Q2 of last year. Stability in the cancellation rate suggests that most home buyers remain comfortable and confident in completing their home purchase once they're under contract. Our second quarter absorption pace of 2.4 homes per month was down from 2.7 homes per month in Q2 of last year. The year-over-year differential of roughly three homes is fairly constant through the three months of Q2. Said another way, we experienced a typical seasonal trend; the core demand is simply running at a lower pace this year. Looking at our net new orders by buyer group, first-time and move-up buyers were down 9% and 14% respectively from last year, while our active adult business was up 9%. Specific to our active adult business, in addition to the underlying demand among these buyers, we're benefiting from new community openings coming online this year. To be clear, all these active adult orders make up 24% of the total this quarter. They will primarily deliver as 2026 closings. It's fair to say that we are pleased to see the new Del Webb community being well received. Second quarter home sale revenues of $4.3 billion were down 4% from prior year revenues of $4.4 billion. The decrease in home sale revenues was driven entirely by lower closing volume, as deliveries were down 6% to 7,639 homes. The decrease in closings was partially offset by a 2% increase in average sales price to $559,000. By buyer group, closings for the second quarter were 38% first-time, 42% move-up, and 20% active adult. In the second quarter of last year, closings mix was 40% first-time, 37% move-up, and 23% active adult. Given second quarter orders and closing activities, we ended the quarter with a backlog of 10,779 homes valued at $6.8 billion. In the comparable prior year period, the company's backlog totaled 12,982 homes valued at $8.1 billion. In the second quarter, we started 7,220 homes, which is down 11% from the 8,146 homes we started in the second quarter of 2024. Given the volatility in demand we've experienced thus far in 2025, we continue to carefully manage our start pace to better align our available inventory with the current rate of sale. As such, we ended Q2 with a total of 16,105 homes in production, of which 47% were spec units. On a sequential basis, our inventory of 7,606 spec homes under production is down 3% from the first quarter and down 13% from the start of the year. Based on expected home sales and starts, we anticipate our spec inventory to be within our target range of 40% to 45% of overall units in production by year-end. In managing specs, we are trying to achieve multiple objectives, including having enough units to meet buyer demand while still allowing our sales counselors to sell from a position of strength. As the market evolves over the third and fourth quarters, we'll be making decisions as to how much production to start as we plan ahead for 2026. Given the recent pace of sales and stage of units under construction, we currently expect to close between 7,100 and 7,600 homes in the third quarter. As it relates to the full year, given our level of backlog and the slightly lower absorption pace we have realized over the past several months, we are refining our full-year 2025 closing guide to 29,000 homes. We still expect the average sales price of closings to be in the range of $560,000 to $578,000 for each of the remaining quarters and in turn for the full year. Consistent with our prior guide, we expect our Q3 and Q4 average community count to be 3% to 5% higher than the comparable prior year period. For our second quarter, we are reporting a gross margin of 27.0%, which was at the top end of our guidance. Relative to our guidance, our Q2 gross margin reflects both the benefit of a favorable mix of homes closed as well as the headwind of higher incentives. Incentives for the second quarter were 8.7% of gross sales price, which is up from 6.3% last year, and on a sequential basis, up from 8.0%. As we assess the back half of 2025, we are affirming our guidance as we expect gross margins in the third and fourth quarters to be in the range of 26.0% to 26.5%. During our Q1 call, we indicated a potential impact of tariffs of approximately $5,000 per unit that could hit in the latter part of Q4. At this time, we now expect any impact from tariffs in Q4 to be lower, which will help offset the cost of elevated incentives. While we have reasonable visibility into giving this gross margin guide, I will note that we still need to sell and close a meaningful number of spec homes to achieve our closings guide. SG&A expense in the second quarter totaled $390 million or 9.1% of home sale revenues. In the prior year, our reported SG&A expense of $361 million or 8.1% of home sale revenues included a $52 million project insurance benefit recorded in the period. We remain diligent in controlling our overhead costs, and we expect SG&A expense for the full year of 2025 to be in the range of 9.5% to 9.7% of home sale revenues. For the second quarter, our financial services operations reported pre-tax income of $43 million, down from $63 million in the prior year. The decrease in pre-tax income for the quarter reflects the impact of lower closing volumes and slightly higher expenses. Capture rate in the second quarter was 85%, compared with 86% last year. PulteGroup reported pre-tax income for the second quarter was $807 million. For the period, we reported a tax expense of $199 million and an effective tax rate of 24.6%. We continue to expect our tax rate to be approximately 24.5% excluding the impact of any discrete period-specific tax events. On the bottom line, we reported second quarter net income of $608 million, or $3.03 per share. In the comparable prior year period, we reported net income of $809 million or $3.83 per share. Prior year results are inclusive of $0.25 per share related to an insurance benefit and favorable resolution of certain state tax matters. The second quarter earnings per share was calculated based on 201 million diluted shares, which is a decrease of 5% from the prior year as the company continues to execute its share repurchase program. In the second quarter, we repurchased 3 million shares for $300 million for an average price of $100.54 per share. Through the first two quarters of 2025, the company has returned $600 million to shareholders through its share repurchase activities. Along with allocating excess capital back to shareholders, we invested $1.3 billion in land acquisition and development in the quarter. Through the first six months of 2025, we invested $2.5 billion in land acquisition and development, which keeps us on track with full-year guidance of investing $5 billion in land acquisition and development. Inclusive of these most recent investments, we have further advanced our land pipeline in two critical areas. First, we increased the total number of lots under control to approximately 250,000. Second, we continue to make progress in becoming more land-light as option lots now comprise 60% of our total land pipeline. It's gratifying to see the progress we're making towards achieving our target of having our land pipeline be comprised of 70% options and 30% owned lots. Just in the past twelve months, we have added almost 30,000 option lots to the pipeline while reducing our owned lot count by approximately 4,000 lots. Relative to peers, our land options are differentiated in that the vast majority of Pulte land options are with the underlying land seller in one-off transactions as opposed to select land bankers. In assessing each and every land transaction, we strike a balance evaluating the cost versus the risk mitigation opportunities that result from optioning the land parcel. As Ryan noted earlier, in an operating environment that has become more challenging, we are adhering to our disciplined business practices and making any needed adjustments consistent with our focus on generating strong cash flow and high returns. Consistent with this focus, we continue to expect cash flow generation for 2025 to be approximately $1.4 billion. Looking at the balance sheet, PulteGroup continues to maintain a strong and highly supportive financial position. We ended the quarter with $1.3 billion of cash and a debt-to-capital ratio of 11.4%. Adjusting for the cash balance, our net debt-to-capital ratio at quarter-end was 2.8%. Now let me turn the call back to Ryan for some final comments.

Thanks, Jim. As I discussed at the outset of this call, beyond the overall volatile demand dynamic, we are seeing meaningful differences in relative buyer strength across our portfolio. More specifically, in the second quarter, we experienced very positive demand conditions in key markets in the Midwest and Southeast, including Cleveland, Chicago, Indianapolis, Charlotte, and the coastal Carolinas. I would also call out the positive net new order numbers realized in Florida as our operations grew orders 2% over the prior year. Within the state, gains in our central, west, and southwest markets were partially offset by softer numbers in our Northeast and Southeast Florida operations. Fully appreciate there is inventory on the ground, and builders are competing hard. We are selling from exceptional communities following years of hard work to assemble the land. As shown in this morning's press release, we are experiencing less favorable demand out west and in our Texas markets. Within these geographies, we are seeing some of our biggest challenges in Dallas, Austin, and our northern and southern California markets, most notably among move-up buyers. While these are very different markets serving different buyers and price points, they do share some commonalities. These are markets that have realized significant price appreciation in recent years and have a meaningful tech employment component within their local economies. Given the tremendous variation in market conditions, it's so important to have experienced operators who know what actions are needed. In some markets, this means raising prices, starting homes, and pushing aggressively to get new communities open. In other markets, it means slowing starts, focusing on selling finished inventory, and taking the opportunity to retrade or even exit land deals. With an average tenure approaching twenty years among our division presidents, we have experienced leaders running our operations. And finally, before opening the call to questions, I want to note a press release issued earlier this morning announcing plans for Deb Still to retire at the end of this year. Deb is currently the Vice Chair of Pulte Financial Services. But if you have had any involvement with Pulte over the years, you know Deb is a force in the mortgage industry. We and the entire lending industry have benefited from Deb's four decades of insightful leadership and tireless work to make the industry better and more accessible to all home buyers. On behalf of our board, the company, and the shareholders of Pulte, I want to thank Deb for the success she has delivered and the foundation she established and upon which we will continue to build going forward. Now let me turn the call over to Jim

Great. Thanks, Ryan. We're now prepared to open the call for questions. So we can get to as many questions as possible during the remaining time of this call, we ask that you limit yourself to one question and one follow-up. Jeannie, if you could again explain the process, we will open the call for questions.

And your first question comes from the line of John Lovallo with UBS. Please go ahead.

Good morning, guys. Thanks for taking my questions. The first one I had is that you guys talked about some encouraging signs as the rates kind of pulled back in late June. Curious, you know, rates have been a little bit bouncy, but fairly stable, I guess, through the lives of the finish. If the improvement that you saw in June kind of carried through into July. And we've also seen some recent improvement in consumer confidence. Is that helping, you know, kind of support this demand in your view?

Yeah, John. We did see a real positive response from the consumer the last couple of weeks of June when rates came down. As we highlighted in the prepared remarks, it drove extra or incremental traffic into the communities, and we saw good conversion out of that incremental traffic. So we're certainly encouraged by the consumer response. July, you know, I would tell you July's been a little up and down. There's been just really good days and there's been, you know, some down days as well. The first week of July was, I feel like the entire country went on vacation with the way the Fourth of July fell. But, you know, we're encouraged by what we've been seeing the last couple of weeks.

Okay. No. That's great. And then maybe just on stick and brick cost, you know, maybe how they trended in the quarter? And then on the land side, we've heard some signs of perhaps a little bit of relief on the development side of the cost equation. Maybe if you can comment on both of those, that'd be great.

Sure. Thanks, John. The sticks and bricks, they were at $79 per square foot. So consistent with last year and sequentially the same as Q1. So they're holding firm for us. On the development side, yeah, we're hearing some of the same things, a little bit of opportunity on the development side. You've got trades out there, a lot of heavy machinery. People want to put it to work. So it's encouraging with what we're seeing. Don't really see that coming through in kind of our quarterly results, but as we look forward, you know, we're hoping that we see some benefit from that going forward.

Appreciate it, guys. Thank you.

Your next question comes from the line of Ivy

Good morning. Great quarter, guys. Congrats. Really strong performance. Maybe we can start with the comments you made, Jim, as it relates to the land options that you're predominantly utilizing land developers as your the one selling you those options as opposed to land bankers. Can you elaborate as to why you think that's better? Or maybe there's it's a lower cost, I presume. Can you just go through your rationale there?

Yeah. Hi. It's Ryan. Good morning. Good to hear from you. And we've made optionality specific with land bankers a piece of our business. Our primary focus is with underlying land sellers, and with those individual families or owners that own that land, we think in those the reason that we like that, Ivy, is we end up with a more diversified risk profile. And we also get better execution of price with those underlying land sellers and what it costs us to get the options. We found that we ran into natural resistance somewhere between fifty and, you know, around fifty percent is kind of where it was about as high as we could get. And so to get more optionality, we went to, you know, the idea of using land bankers in a moderate way. And we think that that's the tool that allows us to go from fifty percent option to seventy percent option. You know, the other and the reason that we've kind of elected this type of mix is we think that it's the best tool to give us risk mitigation, which is the primary thing that we're looking for when we think about optionality. Certainly, there is a trade-off. You give up a little bit of return or a little bit of margin to get a better return. And we know that return is what creates value for our shareholder. That we think that's the second order or a follow-on benefit. The primary benefit we're after with optionality is risk mitigation.

No. That's really helpful. And thinking about you spent $1.3 billion invested in land acquisition development. Are you able to take some of the options that you have right now and retrade them and get better pricing because the market's been soft? We've been hearing from our land contacts that there is a lot of trading going on, retrading, I should say.

Yeah. We're definitely taking advantage of that. Where appropriate, Ivy, we value the relationships that we have with land sellers. So, you know, I think we're being responsive to the current market conditions, and I think land sellers recognize that as well. In some cases, we're getting better price and we're closing. In other cases, you know, price might be staying similar to what it was in the underlying contract, but we're getting more time. And so I think our really experienced operators in the field are picking the lever that needs to be pulled in order to yield the best outcome for the company.

That's great. One quick last one. We've seen news about Canadian tariffs potentially doubling. Can you comment on I don't even know if you guys are using US source lumber or what percent is Canadian, but maybe you can give us perspective on what that doubling impact might be to your direct cost?

Great question, Ivy. You know, today, about 20% to 25% of our lumber comes from Canada. The rest of it, we're domestically sourcing.

Got it. And therefore, the ones that you're acquiring from Canadian, how much will that impact just double? Assume that 25% will go up by double, or you think you'll get better pricing despite that?

Yeah. You know, hard to say where that ultimately kind of plays out, Ivy. If tariffs double on 25% of our lumber load, we would see, you know, a higher cost load. So, you know, it would have an impact. I don't know that it would necessarily, you know, there I know there was an article, and it was out last night or this morning early that was talking about adding significant cost to housing. You know, I think that article likely alluded to the fact that the entire lumber package would be Canadian lumber, which in our case is not true.

Great. Well, good luck, guys. Thanks again. Appreciate taking my questions.

Your next question comes from the line of Michael Rehaut with JPMorgan. Please go ahead.

Thanks. Good morning, everyone. Wanted to first just kind of talk about the pluses and minuses on gross margins in the second quarter. Came in at the high end of guidance. And just kind of curious about how you saw incentives trend during the quarter, maybe compare it to the first quarter? And if there were any outliers in the kind of drivers to, you know, I know it's only, you know, 25 bps from the midpoint of guidance to the high end, but if there's any kind of additional tailwinds or headwinds, even that you saw in the quarter relative to what you were expecting three months ago?

Yeah. Great question, Mike. You know, as we looked at the quarter, you know, we really just had a different mix of product and geography in the quarter. You know, to give you a frame of reference, there were 1,200 homes that we built, sold, and closed within the quarter. So, you know, we make assumptions about where we're gonna sell and when we're gonna sell and what costs are associated with that. It fared a little bit better than we thought. So, you know, as we looked at it, you know, incentives were 8.7% on what we closed for the quarter, and, you know, again, the mix gave us a little lift and got us to the top end of our guide.

Right. Great. And then maybe just kind of looking forward, reiterating the 3Q and 4Q gross margin guidance, I know you talked, I believe I heard that you said maybe incentives at least, I'm sorry, tariffs headwinds as they are today, maybe outside of the recent headlines around Canadian lumber, it sounded like, you know, you talked about maybe tariff headwinds being a little less than expected, offsetting maybe a little bit higher incentives than maybe you were at the beginning of the year. Is that the right way to think about it? In terms of, you know, being able to reiterate that back half gross margin guide? You know, in other words, maybe if you know, and specifically, I guess, I'm just wondering around the incentive loads, you know, if that has maybe been a little bit higher, it almost sounded like you said, you know, incentives are a little higher, but tariffs are a little lower, and hence we're able to reiterate the back half guide. Wasn't sure if that was the right way to think about it or if there are other pluses and minuses to consider.

Yeah, Mike, I think it's really as simple as exactly what you laid out there. Our procurement teams are the best in the business. They've done a wonderful job navigating, you know, another difficult procurement environment. You know, I think we've also got a little bit of luck on our side with there being more inventory in the supply chain. It has allowed prices to stay stable longer. You know, I don't think anybody believes that's going to last forever, and we're certainly anticipating, you know, a tariff load hitting our closings in the next year, but, you know, we think for this year, it's gonna be minimal and mostly in the back half of Q4. So a little bit of the upside, a little bit of upside to our expectations from a quarter ago on that. You can see the sequential lift in incentives. You know, I think you're hearing from some of our competitors as well that are seeing, you know, similar elevated incentive loads as we work to solve the affordability equation for customers. And, you know, in total, we think that balances out, and we're able to maintain, you know, our margin guide, which continues to be the best in the business.

Great. Really appreciate the color, Ryan. Thanks for that. It's all for me. Good luck for the rest of the upcoming quarter.

Your next question comes from the line of Stephen Kim with Evercore ISI. Please go ahead.

Yeah. Thanks very much, guys. Ryan, I think you mentioned in your press release that you're positioning to grow market share as demand strengthens in the future. And I wanted to see if you could elaborate on what you mean and maybe also what you don't mean with respect to that statement. About growth instance, I guess my question would be, like, are you planning for spec homes to be up on a year-over-year basis as you head into next spring? Or are you willing to carry more owned land in the near term in order to accelerate community count next year? I just wanted to try to frame out what you mean by, you know, looking to grow market share as demand strengthens in the future. Thanks.

Yeah. Stephen, it's really around the strength of our land pipeline. We've got 250,000 lots that we control now, which is, you know, we're up about 25,000 total lots that we control compared to, you know, this time last year, probably even a little bit more than that. So I think our division team has just done an outstanding job putting new communities in the pipeline that are going to be great performers. The most recent, you know, the most recent quarter that we just reported, our Del Webb new Del Webb communities are a great example of that. So, and no, I don't think it means that we'll have more owned land. In fact, we've gone the other direction. We own less land. We control more via option. And our option percentage is as high as it's ever been. So I feel like we're doing all the things that we want to do. Where, you know, we continue to think that we have the opportunity to grow this company long term five to ten percent. So I continue to reiterate that. And we're seeing in this type of difficult market quality sells. And we have high-quality land positions. We have high-quality homes delivering great customer experience. And all of those things we think yield in the ability to take market share, and so, you know, my comments about being positioned and prepared to do that were really alluding to those things.

Okay. That's helpful. And then one other question. You talked about again today a lot about your land positions and how proud you are of them. And this has brought to mind something that we fielded a lot of questions from regarding your land positions, from investors. A lot of people seem to have this view that you have a lot of land that's maybe legacy land from, you know, sort of pre-COVID type vintages and that that's supporting your margin, your gross margin specifically. I was wondering if you that that is not by the way, what we see running our, you know, sort of quick analysis. Was curious if you could elaborate a little bit more on what you see in your land positions. You know, how much of your active communities would you say are actually from, you know, kind of pre-COVID vintage land?

In terms of pre-COVID vintage land, Stephen, we really have very little left. I mean, there's probably a few stragglers here and there, but we're turning our land pipeline every three and a half years. So, you know, we're on fresh land, I think, just like the rest of our competitors. Do we have, you know, some bigger, longer legacy communities? Sure. But it's, you know, it's a very small number of our actual closings and a very small number of our total 250,000 lots that we control. So, you know, this myth that, you know, some continue this narrative that some continue to push, I'm gonna see if I can get that Discovery TV channel, MythBusters, to come in, you know, do a show on the idea that our margin performance comes from old land. It's just simply not true.

Yeah. That's what I was hoping you'd say. Alright. Great. Appreciate it, guys. Thanks a lot.

Your next question comes from the line of Matthew Bouley with Barclays. Please go ahead.

Good morning, everyone. Thank you for taking the questions. I wanted to ask a question around product mix and how that's going to impact your margins. I know you mentioned some of the improvements in the active adult business and the new community openings, and it sounded like you're speaking to the benefit of that mix as that delivers in early 2026, if I heard you correctly. I think at the same time, you're seeing some of that pressure on the move-up business as you spoke to. So I guess my question is, I guess, number one, how do move-up margins compare versus active adult margins? And, I guess, any additional color on how that mix of your product types may affect the gross margins here over these next several quarters? Thank you.

Yeah, Matt. Good morning. Thanks for the question. We had a really good performance with our new Del Webb communities. And as we've highlighted in the prepared remarks, those will be next year's closings. We haven't given any kind of a guide to next year's margin. We'll do that as we get towards the end of the year. What we have talked about in the past is our when you look at our three consumer groups, the entry-level first-time buyer group, that's our lowest margin performer or lowest margin buyer group, the move-up communities generate about 200 basis points higher than that. And then we get an incremental 200 basis points out of the active adult community. So they are, you know, and I mentioned it in my prepared remarks, they are among our higher-priced homes. They're also our highest margin homes. So, you know, it's certainly favorable to our overall margin performance, and it's part of the reason that we've been highlighting and sharing. Today, the overall mix of our Del Webb business is 20%. We'll see that going back to the more traditional 24% to 25% in 2026 as these new communities came online, which, you know, we're certainly going to see that coming. But, you know, I'd reiterate, we haven't given a margin guide for 2026. We'll do that as we get later into the year.

Understood. Yeah. And even still, that was very, very helpful color. So then secondly, I wanted to ask back on construction costs. You know, we've certainly seen from a couple of your peers that, you know, they've been able to push back a little bit on construction costs. It sounded like you guys were seeing flat stick and brick and appreciating obviously, regional differences and product type differences and all that. My question is if there is room for you guys to drive construction costs lower at some point. And, you know, if so, when might we begin to see that? Thank you.

You know, as Ryan said earlier, our procurement teams are all over this stuff. You know, best in the business as it relates to it. Similar to my comments a little earlier on land development, you know, you'd hope to see some opportunity. Our teams are certainly working to see what they can do. Again, the $79 a square foot that we have now, these are, you know, homes that we contracted six months ago and started. So as we go forward, our teams are certainly pushing for opportunity, and we'd like to see that opportunity come through in the future.

And we have seen, you know, in certain categories, prices come down. You know, we've taken cost decreases. There's been other things where we've had offsetting increases. To Jim's point, you know, we're gonna continue to push, you know, to get the best prices that we possibly can so that we can pass that value onto the consumer. Affordability's tough out there for everybody, and we want to do, you know, everything in our power to, you know, pass that savings onto the consumer.

Alright. Thank you both. Good luck, Ed.

Your next question comes from the line of Anthony Pettinari with Citigroup. Please go ahead.

Hi. Good morning. Just staying on the cost side. I'm wondering if you could talk a little bit about labor availability and maybe where labor costs might shake out for the full year. And if that's changed, you know, maybe relative to expectations on January first.

Yeah. Labor's available, Anthony. We haven't seen any change there. We continue to be an employer of choice. We've got consistent, predictable work. We pay on time. We pay well and fairly. So I think we'll continue to be a place that will attract available labor. You know, in terms of our cost assumptions, really no change from what we rolled out at the beginning of the year on the labor front.

Got it. Thank you. And I'm just curious on ICG and off-site manufacturing. How is that business performing? And are there any kind of learnings about off-site as we've moved from kind of this, you know, white-hot market in the pandemic to kind of more of a choppy volume environment today? How that fits in the portfolio.

Yeah. I think the things that, you know, we've learned are consistent with what we've shared in kind of previous cycles. So I wouldn't suggest that there's a lot that's different today. Getting a lot of benefit out of cycle time improvements with the amount of work that can be done ahead of time in a factory. We're getting really good product quality. You know, we're certainly getting some efficiencies and economies of scale based on the way that we buy lumber when we're bringing it into the factory as opposed to, you know, buying a load of lumber for a specific house. So I think there's a lot of benefits that we continue to get from it. You know, it's been an important part of our overall innovation work, and, you know, we look forward to continue to see that part of the business expand.

Okay. That's helpful. I'll turn it over.

Next question comes from the line of Mike Dahl with RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking my questions. Just to go back on labor quickly, anecdotally, it sounds like maybe a little more noise in the market in terms of some ICE-related dynamics. It doesn't sound like you're necessarily seeing that on your job site. But can you just give us your view on, or take from the market in terms of any impact there?

Yeah. You know, really nothing that I'd probably share with you that's different than, I think, what you're seeing play out, you know, in the news media. We have always and continue to verify the labor that's on our job site to be able to work legally in the country. That's always been the case. We continue to make that a priority. You know, there certainly is, I think, disruptions within the broader labor force, not just in construction related to kind of ICE enforcement, and, you know, that's something that I think the country is going to have to grapple with. And, you know, as that impacts the total available labor force, I don't think it'll be specifically just a construction challenge depending on what level of enforcement and deportation ultimately happens.

Got it. Okay. Thanks. And shifting gears, your order ASP was down a decent amount of 5% sequentially, 4% year on year. Obviously, there's always a lot of mix dynamics in there. Can you help us understand kind of what's like for like versus what's mix-related in that and maybe how to think about just the back half of the year from obviously your closings ASP reported by a backlog to a certain degree, but public been through. On the ground, how your order ASP is shaking out.

Sure. You know, as we look at order ASP in the quarter, what we saw there was both mix in product and geography. If you look at our west business, and Ryan alluded to it, was the softest in particularly in some of the move-up segments. If you look at places like California, our two regions out there. So you've got a mix influencing that with some of the move-up taking a little bit of a step down in some of our higher-priced markets. And then as well, you've got the incentives that are underneath that as well. So primarily the mix and then as well the incentives played into the $549,643 quarter as quarter ASP.

Okay. Alright. Thanks, Jim. Thanks, Ryan.

Your next question comes from the line of Kenneth

Morning, everybody. What do you expect your inventory units? I know you talked about the spec mix, but what do you expect your inventory units to be roughly at the end of the year? And then in Florida, how many of those buyers, which are largely active adult, are actually coming from Florida as opposed to from other states?

Yeah, Ken. Inventory finished inventory at the end of the year is not a number we guide to. So let me start with that. That said, you know, we have guided that overall spec inventory will be in the 40% to 45% range. Our finished inventory today is running a little higher than what we'd normally like to see. We typically like it to be around one and a half, you know, one and a quarter to one and a half finished units per active community. So, you know, we're probably 400 units north of kind of where we'd like to be optimally, but, you know, on the margin, I just don't think it's moving the needle one way or the other. But I think our bias would be to continue to work that down. And then in terms of kind of Florida, you know, I mentioned in some of my prepared remarks, we're really happy with the performance that we're getting there. And then where those buyers come from, you know, Florida's a big melting pot. And so we see a lot of buyers coming from all over the country. The, you know, the Midwest, the Northwest, Canada, foreign, we get buyers from all over the country, all over the world that come into Florida. We also see a healthy mix of folks moving within Florida as well. We can certainly follow up with you on specific numbers.

That would be great. My fingertips, but I know, I think what you'll find is that it's a melting pot of buyers.

I would also kind of, you know, I would add that because you made reference to it being heavy active adult. I mean, there's parts of it. So if you look at our, you know, our southwest business area, you may be more active adult. You get into Orlando, you get up into Jacksonville, you get into Tampa. It's pretty well diversified across first-time move-up and active adult. Again, you obviously get a draw because of the weather down there, but it is we've built a business with it. The divisions have a very diversified business down there. It is not just, you know, Del Webb, Del Webb, or anything.

Thank you very much.

Your next question comes from the line of Paul

Thank you. Good morning. I guess to start off, are you seeing any difference in the elasticity of incentives between, you know, your different consumer segments? And then if you could provide some color on the incentive levels across the consumer segments relative to the 8.7% average in the quarter?

Yeah. Paul, I think the commentary that you've heard from us is that there's actually inelasticity in, you know, pricing. And that more incentives don't necessarily translate into incremental volume. So we're trying to get incentives, you know, to the level where we get the appropriate level of volume. But pouring more incentives on top of that doesn't necessarily translate into the incremental volume that would justify those incentives. So, you know, that's why we've tried to continue to maintain some discipline around what we're doing on the incentive load. I'd continue to reiterate, we think the opportunity is to bring incentives lower over time. We're clearly not there right now, but, you know, I would long for the days of, you know, more normal incentive loads. It's kind of three to three and a half percent. You know, hopefully, as we get out into kind of future years, that will become possible again. And then in terms of kind of where the incentives are, you know, they're everywhere. They're in all buyer groups. They just come in different shapes and sizes. When we're in the, you know, the first-time buyer, those incentives predominantly are in our forward commitments and interest rate incentives and things of that nature. When you're getting into the, you know, the active adult to move up, they tend to come in the form of either just outright price discounts or lot premium incentives or option incentives or, you know, contributions toward financing and financing-related incentives that aren't necessarily forward commitments. So it's a, you know, it's fairly consistent. It's just in different shapes and sizes based on buyer group.

Oh, okay. And did you see any impact on orders this quarter from the change in FHA eligibility for nonresident buyers? Any pull forward maybe before the May 25th deadline and then, you know, slowness afterwards?

Yeah. We really didn't see an impact. It's a very small portion of our business.

Okay. Thank you. Appreciate it.

Your next question comes from the line of Susan Maklari with Goldman Sachs. Please go ahead.

Good morning, everyone. My first question is on the SG&A, which came in a little lower than we had modeled in terms of both dollars and as a percent of the revenue. Can you just talk about maybe some of the puts and takes there and how we should be thinking about the next two quarters?

You know, great question, Susan. You know, we stay very diligent all the time. As we look at our SG&A, you know, we talk with their teams constantly about the discretionary spend that they have. We look at our people costs. So I think we're running a very effective and efficient business that we have. You know, we reiterated our guide of 9.5% to 9.7%. We still think that's a good guide, but, you know, again, it's something we talk about all the time, and I think our experienced operators do a nice job in this space.

Okay. That's helpful. And then I guess maybe just thinking about capital allocation, you know, with the operating environment being what it is, the guide for the land spend that you reiterated. Any thoughts on just buyback activity in the next couple of quarters and how you're thinking about that given valuation relative to the outlook for the business?

Yeah. So, you know, on share buyback, the way we operate there is we report what we do in the quarter. You know, I would reiterate that we've been a consistent buyer of our equity. And we're using it as an opportunity to return excess capital back to the shareholders. So, you know, we did another $300 million in the most recent quarter following $300 million in Q1. And, you know, I think our practice will be to, you know, share Q3 and Q4 results if they happen.

Okay. Thank you. Good luck with everything.

Your next question comes from the line of Jay McCanless with Wedbush. Please go ahead.

Hey. Good morning, everyone. So the first question, what percentage of communities were able to raise price this quarter?

Probably about 10% for the quarter.

And then, you know, you talked about Del Webb a lot, but when we think about the communities coming online, does the bulk of these new Del Webb communities come online by year-end, or is it gonna go into maybe the first half of 2026?

Well, you saw, Jay, in this quarter, the percentage of sign-ups in the quarter were 23%. Twenty-three or 24% of this quarter's sign-ups. So, you know, typically, from the time we sell until delivery, it's about six months. So this quarter's sign-ups will end up being first-quarter 2026 closings. So what you should expect is that we'll get back into the, you know, the Del Webb closing mix being about a quarter of our business once we hit 2026.

And we'll see those communities coming in over the balance of this year and next year. I mean, I'd tell you that a lot of excitement, you know. We got a couple more that are opening in the Tampa market, the first one in Greenville, another one opening in Charleston, another one out in Southern California. So I think in the coming quarters, we're gonna have a, you know, kind of a good flow of new Del Webbs coming online.

Great. That's what I was looking for. Appreciate y'all taking the questions.

Your next question comes from the line of Rafe Jadrosich with Bank of America. Please go ahead.

Great. Thanks. Thanks for taking my question. I just wanted to, you spoke a little bit about land seeing some relief on the land cost and development side. And some more new trading there. Can you talk about when that would potentially start to flow through your P&L and on the actual cost side?

Yeah. You know, Rafe, it typically land development occurs, you know, roughly six to twelve months before you see the closings hit. You know, a typical land development cycle is six to nine months. Then you have, you know, the home construction period of, I'll call it, four months, and then you start to see those closings. So it depends on how big the phase is. It depends on, you know, there's a lot of variables, but I think if you got savings today at this moment in time, you're likely, you know, back half of 2026 is when you'll start to see the benefit of those lots closing that had lower land development costs.

Okay. That's helpful. And then you spoke a little bit about the Del Webb Explore that launched earlier this year. Can you sort of how that differs from, like, the legacy Del Webb business and what the size of that is? Like, how you're planning on growing that?

Yeah. We think it's a huge growth opportunity for the Del Webb kind of overall brand. And the difference between Del Webb Explore and our traditional Del Webbs, the Del Webb Explores are not age-restricted. The target consumer for that is the Gen X buyer. So think about buyers that are over the age of 45. They're high on homeownership. They've got wealth. You know, they may be looking to start to make that semi-retirement type transition. But they still consider themselves to be very young and active, and so they're looking for a community that gives them all those benefits without the restriction of being age-restricted or they don't qualify just through physical age. They're not 55 yet. And two, mentally, they don't see themselves or think of themselves anywhere near the age of 55. And so, but they love the, you know, the way that the Del Webb communities provide lifestyle, and that's what it's really intended to be. You will see some changes in the programming, so while still heavy on lifestyle, the types of physical activities, the types of physical fitness will be slightly more geared to that demographic. And then you'll see more in terms of kind of dining and social, almost private club type dining and social as opposed to, you know, in our Del Webb communities, you see more large community, large-scale community gatherings. So a lot of similarities with some nuances around how the programming is actually rolled out and implemented.

Thank you. It's really helpful.

And your final question comes from the line of Buck Horn with Raymond James. Please go ahead.

Hey. Thanks. Good. Appreciate it. Good morning. Just wanted to go back to Florida real quick and the positive shift you're seeing in those regions or in those markets there. Specifically, just wondering for a little extra color if you can provide it in terms of, like, you know, buyer segments. You know, are we seeing any particular buyers responding more positively right now? It seems to be coinciding with a decline in resale inventory in Florida, which seems to be a little bit, you know, happening sooner than seasonal patterns would project. So just wondering if you've noticed any particular dynamics within Florida within the buyer groups or any other, you know, characteristics you can explain why that shift is occurring now?

Yeah. Buck, we're, you know, we're really happy with what we saw out of Florida. Don't know that I'm terribly surprised. We're just think we're bullish on Florida. And then your comment about buyer groups, the move-up buyer in Florida was up 18% for us year over year. So we're pretty pleased with what we got out of move-up. The active adult buyer performed very well in Florida. I highlighted that, you know, the Northeast Florida market was a little slower for us, but tends to be, you know, a part of the state where we have a little bit more entry-level product. So I don't know that it was, I don't know that I would consider it to be down, rather it's, you know, that's a buyer group that continues to be challenged by affordability. No matter where you live in Florida, certainly the Florida entry-level buyer is not immune to some of those affordability challenges. Overall though, I'm very pleased with how the inventory has started to clear up in Florida. And we've certainly seen our business perform incredibly well in the most recent quarter.

That's great news. Appreciate the additional feedback there. And just lastly, in terms of single-family rental partnership, just wondering if you're getting any further, you know, opportunities, inquiries of interest, you know, how you're thinking about, you know, blending single-family rentals into the operating platform? What's your kind of current line of thinking on rentals right now?

Yeah. Even going back to the go-go days of single-family rental, we wanted to be a fairly small part of our business. We were targeting somewhere around 5% of our total volume. You know, in terms of what we're delivering today, Buck, it's, you know, in that kind of 3%, 4% of our total volume, the single-family rental. On new orders for kind of future business, it's certainly been slower, and those buyers are not as active. But, you know, in the last couple of quarters, we started to do some more deals, you know, not back to the level we were doing a couple of years ago, but there's activity out there, and we'd expect it to still be, you know, a small part of our business, you know, today and well into the future.

Appreciate the color. Congratulations. Thanks.

That concludes our Q&A. I will now turn the call back over to Jim

Appreciate everybody's time this morning. I know it was a busy morning for everyone. We're available for the rest of the day if you have any other questions. Otherwise, we will look forward to speaking with you on our next earnings call. Thank you.