Q3 2022 Pultegroup Inc Earnings Call

October 25, 2022

[music].

Good morning, My name is Chris and I'll be your conference operator today at this time I'd like to welcome everyone to the multi group Inc. Q3, 2022 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there'll be a question and answer session.

If he would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

Your question. Please press star one again.

Thank you, Jim Zimmer, Vice President of Investor Relations and corporate Communications you may begin.

Great. Thank you, Chris and good morning.

Everyone to Pulte group's earnings call for our third quarter ended September 32022.

Joining me to discuss <unk> group's third quarter results are Ryan Marshall, President and CEO , Bob O'shaughnessy, Executive Vice President and CFO and Jim Most ASCII Senior Vice President Finance.

A copy of this morning's earnings release and the webcast slides that accompany this call have been posted to our corporate website at Pulte group Dot com.

We'll also post a replay of today's call later today.

As always I want to alert everyone that today's presentation includes forward looking statements about the company's expected future performance.

Results could differ materially from those suggested by the comments we make today.

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

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 Ryan. Thanks.

Thanks, Jim and good morning, I suspect it throughout this morning's call, we will find ourselves delineating between the favorable demand environment that existed earlier this year, which drove poultry groups third quarter earnings versus the more challenging market conditions, we are encountering today.

Stating the obvious the primary difference between the two periods is that mortgage rates have more than doubled since the start of the year to upwards of 7%.

Our Q3 earnings reflect the benefits of the strong demand and pricing conditions that existed at the end of 2021 and into the first few months of 2022.

The favorable demand and pricing dynamics dynamics dynamics, which existed at the time are reflected in the 15% or $71000 increase in the average sales price of closed homes that we reported for our third quarter.

Further even with tight labor and a difficult supply chain, we were able to leverage this pricing gain into a 360 basis point expansion of gross margin and an almost 50% increase in earnings to $2 69 per share.

Bob will provide more details on our third quarter results in a few minutes, but it is important to acknowledge the success and recognize the efforts of the entire Pulte group organization and delivering these great results.

If our income statement demonstrates prior demand strength third quarter order in cancellation rates show the more challenging market dynamics, we are operating under today.

As we move throughout the quarter, you could almost see demand ebb and flow with the movement of interest rates.

Softness in July as home buying demand eased as mortgage rates fell in August the positive trend in demand was short lived however, as interest rates surged higher in September in response to Federal reserve actions and hawkish commentary from Chairman Powell.

[music].

The pullback in demand was widespread across geographies and consumer groups as potential homebuyers move to the sidelines some because they can no longer afford a home and others because they were unsure if now is truly the best time to buy a home.

The impact of consumers dealing with issues of financing or fear also extended to our backlog as cancellation rates increased 24% in the quarter.

Well there are a number of factors influencing housing demand the rise in mortgage rates is likely had the most significant impact on today's consumers.

Based on their commentary expectations are that the federal reserve will continue to aggressively raise rates to control inflation for at least the remainder of 2022, and then likely hold rates higher for longer.

Given these market dynamics, we continue to meaningfully adjust our operating practices as we adapt to today's more challenging market conditions.

On the sales side, we are working closely with our divisions on a market by market and even community by community basis to find pricing our buyers are able and are willing to transact.

When demand first begin to slow in response to higher rates and incentives in most of our markets. We're focused on mortgage rate locks and buy downs as mortgage rates have moved even higher incentives have extended to other areas, including more aggressive discounting of standing inventory and price reductions.

As we move through the third quarter absorption paces were choppy, but on average slowed as the quarter progressed. This trend continued into October although ongoing adjustments to incentives and pricing are gaining some traction with consumers.

We've told our divisions to be strategic in their decision, making but we need to intelligently find the market and turn our inventory.

The reality is that we can't be margin proud, but rather we need to protect our share of sales within the markets.

Housing is front and center in the federal Reserve's battle against inflation as the fed clearly desires, new home sales rates and selling prices are in the process of adjusting lower in response to higher interest rates.

With home sales slowing we are adjusting how we approach ongoing land investment.

Okay.

At the end of the second quarter, we controlled 130000 lots under options.

Given the more challenging demand conditions, we face today, we are re underwriting our land deals using price pace and cost assumptions based on current market conditions with a view towards assessing whether expected returns still achieve or exceed our required hurdle rates.

As a consequence of these reviews in the third quarter, we canceled agreements accounting for approximately 19000 lots.

Or 14% of the lots, we held via option at the end of the second quarter.

In taking these actions, we walked away from almost $800 million of future land acquisition spend.

No one wants to write off $24 million of deposits and pre acquisition spend but the flexibility to exit these transactions reaffirms the strategic importance of building more optionality into our land pipeline.

Homebuyer demand clearly moved lower as the third quarter progressed with the dramatic and ongoing rise in interest rates likely being the biggest concern for most consumers.

However, there are certainly other factors at play, including inflation fear of recession or increasing concerns about job loss.

All of these considerations it is easy to understand why consumers have moved to the sidelines having.

Having said that people still desire homeownership and are prepared to buy when they find a compelling offer.

Operationally, we are appropriately taking a more defensive posture for at least the near term as we work to navigate today's more turbulent conditions.

We believe this approach is appropriate today and appreciate the stability, while theyre talking about mortgage rates the stock market or inflation, maybe what people will need to move off the sidelines and become homebuyers again.

Let me now turn the call over to Bob for a more detailed review of our Q3 operating and financial results.

Thanks, Ryan and good morning, there's a lot to review this quarter, so I'll dive right in.

Wholesale revenues for our third quarter totaled $3 8 billion, which represents an increase of 16% over the same period last year.

Higher revenues for the quarter was driven primarily by a 15% increase in our average sales price to $545000.

The year over year increase in average sales price of $71000 was driven by improved pricing across all buyer groups. As first time was up 20% move up gained 16% and active adult was up 15%.

Unit closings in the quarter increased by 1% over last year to 7047 homes.

Worth, noting that approximately 200 closings that were slated for the fourth the third quarter were delayed due to hurricane in as we shut down or slowed operations across a number of our Florida and Carolina markets ahead of the storm.

[music].

Okay.

On a year over year basis, the mix of homes delivered in the third quarter changed slightly is 36% were first time buyers, 38% were move up buyers and 26% were active adult buyers.

In the prior year, 31% of homes delivered were first time, 44% were move up and 25% were active adult.

The shift in mix to more first time is in alignment with our strategy of having approximately one third of our business in the first time buyer space.

Net new orders in the third quarter totaled 4924 homes, which is decrease of 28% from last year.

The year over year decline in orders reflects softer demand, resulting primarily from higher interest rates as our absorption pace fell to 2.0 homes per month down from three homes per month for the same period last year.

Along with the slower pace of sales are reported net new orders in the third quarter were impacted by a significant increase in cancellations.

Our cancellation rate for the third quarter was 24%, which compares with 10% in the third quarter of last year and 15% in the second quarter of this year.

In the quarter orders among first time buyers increased 3% over the prior year sales benefited from a double digit increase in community count and the availability of quick move in homes as the majority of our spec production is in our centex communities.

Orders for move up buyers were lower by 45% in the prior year, while active adult orders decreased by 31%.

Changes in community count did not materially impact did not materially impact order rates among either of these buyer groups.

During the quarter, we operated from an average of 823 communities, which is up 7% from last year.

The increase in community count is consistent with our previous guidance and reflects both new store openings and the slower closeout of existing communities.

Average community count for the fourth quarter should increase slightly to 840.

At quarter end, our backlog totaled 17053 homes, which is down 14% for the same period last year.

While unit backlog is lower the dollar value of our backlog increased 3% over the prior year to $10 6 billion due to the rise in our average sales prices.

We ended the third quarter with a total of 23010 homes under construction, which is up 22% over last year.

Of the units under construction, 65% were sold and 35% respect.

Consistent with comments made on prior earnings calls we've been working to increase our inventory of spec homes, primarily in our centex communities to better serve first time buyers.

We continued starting specs in the third quarter as we've continued to see buyer preference for homes that can close in 30 to 90 days.

Cross all buyer groups.

At quarter end, we were still well below our commonly used metric of one finished spec per community.

However, with 8000 stacks in production, we believe we are well positioned to meet demand and to compete effectively in our markets.

Having achieved our targeted level of spec within our production universe. We have now lowered our spec starts and will manage our production to maintain the balance of our spec and dirt inventories with an emphasis on build to order production for move up and active adult consumers.

Based on the homes, we have in production and current sales rates. We now expect closings in the fourth quarter to be approximately 8000 homes.

The decrease in expected deliveries relative to our prior guide reflects the challenging sales environment higher cancellation rates and the ongoing impact of hurricane in on our Florida operations.

To the last point, while damaged Pulte communities in Florida, and the Carolinas was limited municipal resources are appropriately being diverted to the repair and restoration of services at the expense of getting power to new homes and communities.

Based on the mix of homes, we expect to deliver in the fourth quarter. We anticipate the average sales price on closings to be in the range of $560 to $570000.

At the midpoint of our range this would be up 15% over last year.

Please note that all of the guidance, we provide on this call, including ASP rift.

It reflects our current best estimate, but cancellation rates and pricing dynamics as we move through the quarter could impact our actual results.

For the third quarter, our homebuilding gross margin was 31%, which represents an increase of 360 basis points over the third quarter last year.

Referring back to Ryans opening comments, our third quarter gross margins benefited from the strong demand and pricing conditions that existed at the end of 2021 and into the first half of 2022.

These conditions supported the double digit price increases we show in the quarter and allowed us to cover higher material and labor costs, including elevated lumber prices.

The strength of demand in that period can also be seen in our sales discounts, which were only 1% for homes closed in the third quarter.

[music].

By contrast discounts on new orders taken in the quarter increased to 180 basis points over last year to two 5%.

It's worth noting that this increase in discounts as an addition to the higher financing incentives we've discussed during our Q2 Q2 earnings call.

Financing incentives on new orders in the third quarter were one 9%.

Which is approximately 80 basis points above last year and our historic average.

Given the demand and pricing dynamics. We are currently experiencing in the market. In addition to the increase in incentives needed to attract sales. We currently expect our fourth quarter homebuilding gross margin to be approximately 28%.

This would represent an increase of 120 basis points over last year, but would be lower sequentially and is down from our previous guide.

Good morning, My name is Chris and I'll be your conference operator today at this time I'd like to welcome everyone to the multi group Inc. Q3, 2022 earnings conference call.

Given the changing market dynamics, our procurement teams are already having discussions with suppliers and trade partners in an effort to identify opportunities to reduce our land development and house construction costs.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there'll be a question and answer session.

However at this point any savings we were able to realize would benefit our business in 2023.

If he would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

In the third quarter, our SG&A expense was $350 million or nine 1% of home sale revenues. This compares with prior year SG&A expense of $321 million or.

To withdraw your question. Please press star one again.

Thank you, Jim Zimmer, Vice President of Investor Relations and corporate Communications you may begin.

Great. Thank you, Chris and good morning, I want to welcome everyone to pulse the group's earnings call for our third quarter ended September 32022.

Or nine 6% of home sale revenues.

The company remains on track for full year SG&A to be in the range of nine two to nine 5%.

Joining me to discuss Pulte group's third quarter results are Ryan Marshall President and CEO .

Given the pullback in buyer demand and expectations that market dynamics will remain challenging for some or all of 2023, we are taking needed actions to better align overheads with current demand.

Bob O'shaughnessy, Executive Vice President and CFO , and Jim <unk> Senior Vice President Finance.

Copy of this morning's earnings release, and the webcast slides that accompany this call have been posted to our corporate website at Pulte group Dot com.

For the third quarter higher gross margin and greater overhead leverage helped Pulte group generated an operating margin of 21%, which represents an increase of 410 basis points over the prior year.

As opposed to replay of today's call later today.

As always I wanted to alert everyone that today's presentation includes forward looking statements about the company's expected future performance actual results could differ materially from those suggested by the comments we make today.

Turning to financial services, our operations continued to face extremely challenging market conditions in the third quarter. Our reported pre tax income totaled $28 million, which is down from $49 million last year.

Significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying webcast slides. 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 Ryan.

In the quarter lower loan origination volumes driven in part by a lower capture rate and decreased profitability per loan were the primary drivers of the decline in pretax income.

Capture rate for the quarter was 77% compared with 85% last year as our mortgage business seeks to be competitive, but not to chase unprofitable business.

Thanks, Jim and good morning, I suspect that throughout this morning's call, we will find ourselves delineating between the favorable demand environment that existed earlier this year, which drove FTSE group's third quarter earnings versus the more challenging market conditions, we are encountering today.

Our tax expense for the third quarter was $183 million, which represents an effective tax rate of 22, 6%.

Stating the obvious the primary difference between the two periods is that mortgage rates have more than doubled since the start of the year to upwards of 7%.

Our taxes in the third quarter include federal energy efficient home credits, which were extended as part of the inflation reduction Act that was enacted into law in August of this year.

Our Q3 earnings reflect the benefits of the strong demand and pricing conditions that existed at the end of 2021 and into the first few months of 2022.

In total Pulte groups reported net income for the third quarter increased to $628 million or $2 69 per share.

The company's prior year net income was $476 million or $1 82 per share.

In the third quarter, we continued our share repurchase activity by $4 4 million shares or another 2% of our outstanding common shares for $180 million or an average price of $41 20 per share.

Through the first nine months of the year, we have repurchased approximately 9% of the shares we had outstanding at the beginning of the year for $975 million.

Along with buying back stock, we invested $1 $3 billion in land acquisition and development in the quarter of which 56% for the development of existing land assets as.

As Ryan discussed in response to changing market conditions. We are re underwriting every land transaction based on current price pace and cost dynamics.

If our income statement demonstrates prior demand strength third quarter order in cancellation rates show the more challenging market dynamics, we are operating under today.

We ended the third quarter with approximately 232000 lots under control, which is down 11600 lots from the end of the second quarter of this year due in large part to the deals we elected to terminate.

As we move throughout the quarter, you could almost see demand ebb and flow with the movement of interest rates.

At quarter end, 50% of our total land pipeline was controlled via option and we continue to work toward our long term goal of getting 65% to 70%.

No centralized home buying demand eased as mortgage rates fell in August the positive trend in demand was short lived however, as interest rates surged higher in September in response to Federal reserve actions and hawkish commentary from Chairman Powell.

While we have terminated a number of transactions there are land positions that we have under control that we still project to achieve or exceed our required rates of return.

The pullback in demand was widespread across geographies and consumer groups as potential homebuyers move to the sidelines.

As a result, we currently expect to close on such transactions and expect our result in full year land investment to be approximately $4 8 billion.

Some because they can no longer afford a home and others because they were unsure if now is truly the best time to buy a home.

Which is in line with our prior guide.

Given the change in buyer demand and the resulting impact on the turning of our own land inventory.

The impact of consumers dealing with issues of financing or fear also extended to our backlog as cancellation rates increased 24% in the quarter.

We currently expect that our land spend will drop materially next year.

While we are still in the planning process. Our preliminary estimate is that land acquisition and development spend in 2023 will drop by $1 $5 billion to approximately $3 3 billion.

While there are a number of factors influencing housing demand the rise in mortgage rates is likely had the most significant impact on today's consumers.

Based on their commentary expectations are that federal reserve will continue to aggressively raise rates to control inflation for at least the remainder of 2022, and then likely hold rates higher for longer.

Of this spend we expect that upwards of two thirds will be for the development of existing land assets.

We'll provide more details on next year's planned land acquisition and development spend during our Q4 earnings call.

We ended the quarter with $291 million in cash and had $319 million drawn on our revolving credit facility.

Given these market dynamics, we continue to meaningfully adjust our operating practices as we adapt to today's more challenging market conditions.

Our drawings under the revolving credit facility were driven primarily by our land acquisition and development spend and increase in our house inventories as we move homes through production and the delay in closings related to hurricane Ian.

On the sales side, we are working closely with our divisions on a market by market and even community by community basis defined pricing our buyers are able and are willing to transact.

Our debt to capital ratio at quarter end was 22, 5%.

When demand first begin to slow in response to higher rates and incentives in most of our markets. We're focused on mortgage rate locks and buy downs as mortgage rates have moved even higher incentives are extended to other areas, including more aggressive discounting of standing inventory and price reductions.

Wrapping up the higher interest rates being orchestrated by the federal reserve are achieving the fed's objective in terms of slowing demand and negatively impacting price appreciation in the market.

While conditions have gotten tougher I am confident in pulte group's competitive position and in our ability to successfully work through this phase of the housing cycle.

Now, let me turn the call back to Ryan.

Looking at the tables in this morning's press release, you can see that on a year over year basis, our net new orders were lower across the country.

Although we continue to see relative outperformance in Florida, Texas and the southeast generally we are fairing better end markets, where buyers can still find affordability.

We've told our divisions to be strategic in their decision, making but we need to intelligently find the market and turn our inventory.

The reality is that we can't be margin proud, but rather we need to protect our share of sales within the markets.

In contrast conditions in our western markets are clearly more difficult as price appreciation generally higher selling prices and the spike in mortgage rates are forced buyers to pause their buying plans.

The softer demand conditions that we experienced in the third quarter continued into October and have likely gotten even more challenging with mortgage rates now pushing 7%.

With home sales slowing we are adjusting how we approach ongoing land investment.

Okay.

Running a homebuilding company during this part of an economic cycle as complicated, but we are fortunate to have an experienced leadership team that knows how to operate the business. We are taking action to impact the critical areas of the business, including.

At the end of the second quarter, we controlled 130000 lots under options.

Finding price at a community level, where we can sell homes, we will do the best we can to protect backlog, but we won't sit on inventory.

As a consequence of these reviews in the third quarter, we canceled agreements accounting for approximately 19000 lots.

What the right level of home inventory to meet demand and to compete effectively.

We're aligning starts with the ongoing pace of sales and remain committed to our build to order model.

Or 14% of the lots, we held via option at the end of the second quarter.

In taking these actions, we walked away from almost $800 million of future land acquisition spend.

We remain disciplined in our approach to land acquisition, it's hard to cancel a land deal you've worked on for months or even years, but if the returns no longer pencil then we will walk away.

No one wants to write off $24 million of deposits and pre acquisition spend.

The flexibility to exit these transactions reaffirms the strategic importance of building more optionality into our land pipeline.

We will work intelligently with our suppliers and trade partners to adjust costs, given the new market pricing dynamics.

Homebuyer demand clearly moved lower as the third quarter progressed with the dramatic and ongoing rise in interest rates likely being the biggest concern for most consumers.

And we will continue to evaluate and adjust our overhead spending and changes in current.

Two changes in current and expected construction volumes.

However, there are certainly other factors at play including inflation fear of recession, we're increasing concerns about job loss.

For all of the defensive actions, where youre implementing I remain constructive on long term housing demand.

While we expect the coming quarters will be difficult for the industry long term dynamics for housing remain positive.

Given all of these considerations it is easy to understand why consumers have moved to the sidelines.

The Federal reserve, just pauses or if the stock market doesn't swing, 5% in a single day.

Having said that people still desire homeownership and are prepared to buy when they find a compelling offer.

Or if inflation starts to ease that might go a long way towards giving consumers enough confidence to get back into the market.

Operationally, we are appropriately taking a more defensive posture for at least the near term as we work to navigate today's more turbulent conditions.

While we wait for conditions to stabilize we will be aggressive in managing our day to day business to sell homes efficiently run our operations intelligently manage land investment and work to deliver high returns.

We believe this approach is appropriate today and appreciate that stability, while theyre talking about mortgage rates the stock market or inflation, maybe what people will need to move off the sidelines and become homebuyers again.

I want to recognize our employees for their tremendous work in delivering a great third quarter.

Let me now turn the call over to Bob for a more detailed review of our Q3 operating and financial results.

I also want to call out our teams impacted by Hurricane Ian.

Thanks, Ryan and good morning, there is a lot to review this quarter, so I'll dive right in.

You have done tremendous work taking care of each other and the communities you serve.

Wholesale revenues for our third quarter totaled $3 8 billion, which represents an increase of 16% over the same period last year.

Before opening the call to questions I want to provide a quick comment on the second press release, we issued this morning.

Our revenues for the quarter were driven primarily by a 15% increase in our average sales price to $545000.

After a 30 plus year career with our company John Chadwick Pulte Group Executive Vice President and Chief Operating Officer has announced his plans to retire in 2023.

The year over year increase in average sales price of $71000 was driven by improved pricing across all buyer groups. As first time was up 20% move up gained 16% and active adult was up 15%.

John has had an amazing career with our organization and has been instrumental in our success and its success over the years.

I know I speak for our board and our entire company and wishing John all the best in retirement.

Unit closings in the quarter increased by 1% over last year to 7047 homes, it's worth noting that approximately 200 closings that were slated for the fourth the third quarter were delayed due to hurricane in as we shut down or slowed operations across a number of our Florida and Carolina markets ahead of the storm.

Brandon Jones Senior Vice President of field operations has been named to replace John effective January one 2023, as Chief operating officer.

Brandon begin his pulte career 18 years ago as the director of operations in Arizona and has held a series of field positions of increasing responsibility, including division President and several markets in an area president of our southeast area.

On a year over year basis, the mix of homes delivered in the third quarter changed slightly at 36% were first time buyers, 38% were move up buyers and 26% were active adult buyers in.

Since being named senior Vice President of operations in 2021, Brandon has been managing our construction operations throughout the country. So I expect a seamless transition into his new role.

In the prior year, 31% of homes delivered were first time, 44% were move up and 25% were active adult.

The shift in mix to more first time is in alignment with our strategy of having approximately one third of our business in the first time buyer space.

John will remain with the company through April of next year to assist with the changeover. We are fortunate to have a deep and talented bench within Pulte group and I look forward to advancing the great partnership branded and I have built over the years now let me turn the call back to Joe Great. Thanks, Brian We're now prepared to open the call for questions. So we can get to as <unk>.

Net new orders in the third quarter totaled 4924 homes, which is decrease of 28% from last year.

Any questions as possible during the remaining time of this call. We ask that you limit yourself to one question and one follow up thank.

Thank you and now Chris if you'll explain once again added how to ask questions. We will get started with Q&A.

Along with the slower pace of sales are reported net new orders in the third quarter were impacted by a significant increase in cancellations.

Certainly as a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.

Our cancellation rate for the third quarter was 24%, which compares with 10% in the third quarter of last year and 15% in the second quarter of this year.

Our first question is from Carl Reichardt with <unk>. Your line is open.

Great. Thanks, good morning, everybody.

Brian can you talk a little bit you mentioned October pricing and it's October has some pricing and incentives in certain markets starting to have some traction can you expand a little bit on that sort of where and what you're doing where you might be seeing at least a little bit of stabilization in absorptions.

In the quarter orders among first time buyers increased 3% over the prior year sales benefited from a double digit increase in community count.

And the availability of quick move in homes as the majority of our spec production is in our centex communities.

Yes, Carl I. Appreciate the question this morning, and as I mentioned in my prepared remarks.

Orders for move up buyers were lower by 45% in the prior year, while active adult orders decreased by 31%.

<unk> worked through the change in market conditions over the last three to four months early on or incentives were largely financing related incentives.

Changes in community count did not materially impact did not materially impact order rates among either of these buyer groups.

During the quarter, we operated from an average of 823 communities, which is up 7% from last year.

We felt early on that we were getting traction with consumers, especially when you could.

The increase in community count is consistent with our previous guidance and reflects both new store openings and the slower closeout of existing communities.

Average community count for the fourth quarter should increase slightly to 840.

At quarter end, our backlog totaled 17053 homes, which is down 14% for the same period last year.

While unit backlog is lower the dollar value of our backlog increased 3% over the prior year to $10 6 billion.

Due to the rise in our average sales prices.

We ended the third quarter with a total of 23010 homes under construction, which is up 22% over last year.

So the units under construction, 65% were sold and 35% respect.

Consistent with comments made on prior earnings calls we've been working to increase our inventory of spec homes, primarily in our centex communities to better serve first time buyers.

We continued starting specs in the third quarter as we've continued to see buyer preference for homes that can close in 30 to 90 days across all buyer groups.

At quarter end, we were still well below our commonly used metric of one finished spec per community.

However, with 8000 stacks in production, we believe we are well positioned to meet demand and to compete effectively in our markets.

<unk> achieved our targeted level of spec within our production universe, we have now lowered our spec starts and will manage our production to maintain the balance of our spec and dirt inventories.

With an emphasis on build to order production for move up and active adult consumers.

Based on the homes, we have in production and current sales rates. We now expect closings in the fourth quarter to be approximately 8000 homes.

The decrease in expected deliveries relative to our prior guide reflects the challenging sales environment higher cancellation rates and the ongoing impact of hurricane in our Florida operations.

So the last point, while damaged 40 communities in Florida, and the Carolinas was limited municipal resources are appropriately being diverted to the repair and restoration of services at the expense of getting power to new homes and communities.

Based on the mix of phones, we expect to deliver in the fourth quarter. We anticipate the average sales price on closings to be in the range of $560 to $570000.

At the midpoint of our range this would be up 15% over last year.

Please note that all of the guidance, we provided on this call, including Asps rift.

Yes, Thanks, a lot guys for all the color and good job in the quarter in a tough market.

It reflects our current best estimate, but cancellation rates and pricing dynamics as we move through the quarter could impact our actual results.

For the third quarter, our homebuilding gross margin was 31%, which represents an increase of 360 basis points over the third quarter last year.

Referring back to Ryans opening comments, our third quarter gross margins benefited from the strong demand and pricing conditions that existed at the end of 2021 and into the first half of 2022.

There's a lot of thought.

Might see a drop actually in mortgage rate that some point tough to predict you don't want to.

These conditions supported the double digit price increases we show in the quarter and allowed us to cover higher material and labor costs, including elevated lumber prices.

So do you have a marketing plan to be proactive in the event you do see rates drop, let's say mortgage rates dropped back into the low sixes, let's say.

The strength of demand in that period can also be seen in our sales discounts, which were only 1% for homes closed in the third quarter.

By contrast discounts on new orders taken in the quarter increased to 180 basis points over last year to two 5%.

It's worth noting that this increase in discounts as an addition to the higher financing incentives we've discussed during our Q2, our Q2 earnings call.

Financing incentives on new orders in the third quarter were one 9%.

Which is approximately 80 basis points above last year and our historic average.

This would represent an increase of 120 basis points over last year, but it would be lower sequentially and is down from our previous guide.

Are we really emphasize and push with our local sales professionals as well to maintain the relationships with our lead banks and with our interested buyers at a very local and personal level. So.

However at this point any savings we are able to realize would benefit our business in 2023.

There is multiple ways using kind of the big bullhorn of corporate marketing platform, but you've also got the grass roots local relationships with our sales professionals maybe.

In the third quarter, our SG&A expense was $350 million or nine 1% of home sale revenues. This compares with prior year SG&A expense of $321 million or nine 6% of home sale revenues.

Maybe just the last thing is I think the market itself.

If we were so fortunate to see rates come back I think will probably be the greatest marketing machine.

The company remains on track for full year SG&A to be in the range of nine 2% to nine 5%.

Of them.

Yes, yes, hopefully people have their ear to the ground.

Given the pullback in buyer demand and expectations that market dynamics will remain challenging for some or all of 2023, we're taking needed actions to better align overheads with current demand.

Secondly, can we talk about production could you give us your sticks and bricks figure to start with and then.

When I look at your level of.

For the third quarter higher gross margin and greater overhead leverage helped Pulte group generated an operating margin of 21%, which represents an increase of 410 basis points over the prior year.

Homed under complete homes under construction your inventory homes.

Or I'm, sorry, your spec levels per community. The number of total specs you have per community. You are you are at 9.8.

If I if my math is right.

That's pretty significantly higher than what you were running at pre pandemic, but youre also intentionally doing more spec so I'm curious.

What is the level of specs per community that this is total specs by the way that we could expect.

In the quarter lower loan origination volumes driven in part by a lower capture rate and decreased profitability per loan were the primary drivers of the decline in pre tax income.

By the end of the year.

Steven Jim will give you the sticks and bricks and then I'll take the second piece of the question under production, we've got $3 billion $164 million and then we have another $328 million and models for sticks and bricks.

Capture rate for the quarter was 77% compared with 85% last year as our mortgage business seeks to be competitive, but not to chase unprofitable business.

Our tax expense for the third quarter was $183 million, which represents an effective tax rate of 22, 6%.

And then Stephen is as to your question on our level of spec inventory.

Our taxes in the third quarter include federal energy efficient home credits, which were extended as part of the inflation reduction Act that was enacted into law in August of this year.

We've been talking for the better part of the last two to three quarters about our desire to have more spec inventory in the system over the last three to four months as the market has slowed we've seen a real preference for homes that are able to deliver in the next 30 to 90 days and that continues.

In total Pulte groups reported net income for the third quarter increased to $628 million or $2 69 per share.

The company's prior year net income was $476 million or $1 82 per share.

To this very moment in terms of the inventory we have in our system, 35% of our lip.

In the third quarter, we continued our share repurchase activity buying $4 4 million shares for another 2% of our outstanding common shares for $180 million or an average price of $41 20 per share.

As spec and that is right, where we want to be so we feel very comfortable with respect to that looking at the finished inventory we continue to have less than one.

Finished home per active community, which has always been our historical kind of benchmark. So.

Through the first nine months of the year, we have repurchased approximately 9% of the shares we had outstanding at the beginning of the year for $975 million.

We also feel comfortable that were not under any pressure was finished inventory.

Along with buying back stock, we invested $1 $3 billion in land acquisition and development in the quarter of which 56% for the development of existing land assets as.

We continue to see good flow through of our sales rate of specs that are being sold and that are delivering in the near term, which is a real positive for us and then maybe just the last thing Stephen and you've seen this transition over the last couple of years as we've moved more of our business to the first time entry level product we have.

As Ryan discussed in response to changing market conditions. We are re underwriting every land transactions based on current price pace and cost dynamics.

Intentionally put more spec inventory into those first time entry level communities.

And certainly that's where the higher percentage of our spec inventory resides.

At quarter end, 50% of our total land pipeline was controlled via option and we continue to work toward our long term goal of getting to 65% to 70%.

So.

We feel comfortable with that the last thing and I highlighted in my prepared remarks.

While we have terminated a number of transactions there are land positions that we have under control that we still project to achieve or exceed our required rates of return.

As it relates to do forward starts of new inventory, we have significantly slowed that and we're matching that to what our sales rate is so.

As a result, we currently expect to close on such transactions and expect our result in full year land investment to be approximately $4 8 billion.

We think we've done exactly what we said we were going to do.

Which is in line with our prior guide.

And we've made additional kind of.

Given the change in buyer demand and the resulting impact on the turning of our own land inventory.

Adjustments based on how we see the market conditions at the moment.

Great. Thanks, very much guys.

We currently expect that our land spend will drop materially next year.

The next question is from Michael Rehaut with JP Morgan Your line is open.

While we are still in the planning process. Our preliminary estimate is that land acquisition and development spend in 2023 will drop by one 5 billion to approximately $3 3 billion.

Great. Thanks.

Thanks, Good morning, everyone. Thanks for taking my questions.

I wanted to start out and I apologize I missed this earlier, but.

Of this spend we expect that upwards of two thirds will be for the development of existing land assets.

Just as a percent.

Price our sales price.

We'll provide more details on next year's planned land acquisition and development spend during our Q4 earnings call.

<unk> was running.

During the quarter and where did you end.

We ended the quarter with $291 million in cash and had $319 million drawn on our revolving credit facility.

If that includes.

Price adjustments as well.

Yes, so in the in the most recently <unk>.

<unk> quarter today third quarter, our incentive load was 1%.

Closed enclose the closings right.

Our debt to capital ratio at quarter end was 22, 5%.

That is.

A little bit better than last year, 30 basis points better than closings during the third quarter of last year.

Wrapping up the higher interest rates being orchestrated by the federal reserve are achieving the fed's objective in terms of slowing demand and negatively impacting price appreciation in the market.

What we did highlight was on the sales in this quarter, so not the closings, but the sales.

That rate ran up to about two 5%.

While conditions have gotten tougher I am confident in <unk> competitive position and in our ability to successfully worked through this phase of the housing cycle.

So running higher.

And also that financing incentives and we've talked about this in the second quarter.

Now, let me turn the call back to Ryan.

Looking at the tables in this morning's press release, you can see that on a year over year basis, our net new orders were lower across the country.

We're up over sales in the third quarter of last year.

So the total load of incentive is up on current sales.

Although we continue to see relative outperformance in Florida, Texas and the southeast generally we are faring better end markets, where buyers can still find affordability.

By a couple of hundred basis points versus the closings that we had in this quarter. So then that will influence our business over the next couple of quarters as those homes close Mike. The only in addition to Bobs comments I would just highlight that as we make price adjustments.

Adjustments are made to base price and so those adjustments arent going to necessarily show up in the incentives that Bob just described.

The softer demand conditions that we experienced in the third quarter continued into October and have likely gotten even more challenging with mortgage rates now pushing 7%.

We've and we've talked about it for the last several quarters as well as we are opening new communities, which there are a fair number of those we've been very intentional in pricing to the current market.

Such that you have what we believe is a more normal incentive load.

Right.

Finding price at a community level, where we can sell homes, we will do the best we can to protect backlog, but we won't sit on inventory.

I appreciate that I mean, that's exactly kind of what I was trying to get at.

In terms of where you are today, you know you kind of mentioned that as the quarter progressed.

What the right level of home inventory to meet demand and to compete effectively.

You took.

Perhaps a little bit more of an aggressive posture.

We're aligning starts with the ongoing pace of sales and remain committed to our build to order model.

Said trying to meet the market.

With price reductions and Im sure price adjustment, so just trying to get a sense I guess.

We remain disciplined in our approach to land acquisition, it's hard to cancel a land deal that you've worked on for months or even years, but if the returns no longer pencil then we will walk away.

Uh huh.

<unk> taken those actions maybe over the last.

30, 45 days, if you could give us any sense in terms of what.

Percent of Asps, those price adjustments or reductions.

We will work intelligently with our suppliers and trade partners to adjust costs, given the new market pricing dynamics.

Might have amounted to at this point and I would assume that that's something that we wouldn't see in the gross margin until the first half of next year.

And we will continue to evaluate and adjust our overhead spending and changes in current.

Two changes in current and expected construction volumes.

Yes, Mike.

There is so much detail behind that where what the price points are.

For all of the defensive actions, where youre implementing I remain constructive on long term housing demand.

You can see though our sign up average price for sign ups is down.

While we expect the coming quarters will be difficult for the industry long term dynamics for housing remain positive.

By about 6% that certainly reflect some of the current pricing.

The Federal reserve, just pauses or if the stock market doesn't swing, 5% in a single day.

You have to be a little bit careful because our sign ups were a little bit more skewed towards first time, and so mix matters in that.

Or if inflation starts to ease that might go a long way towards giving consumers enough confidence to get back into the market.

So I wouldn't I wouldn't want to put a number on X percent down because it really varies.

By market by community.

But again you can see you can see that ASP is.

It is likely to come down and there will be some.

Margin consequence, and you can see it in the guide that we gave we were at 28% and then Mike to your margin question, Yes, a lot of that will certainly be next year for homes that are on a build to order model. If it was a spec home than those will potentially those will show up more likely than not in the fourth quarter and.

I want to recognize our employees for their tremendous work in delivering a great third quarter.

I also want to call out our teams impacted by Hurricane Ian.

You have done tremendous work taking care of each other and the communities you serve.

Before opening the call to questions I want to provide a quick comment on the second press release, we issued this morning.

That is incorporated into the margin guide that Bob gave for the fourth quarter.

Depending on kind of the nature of the adjustments we've made.

After a 30 plus year career with our company John Chadwick Pulte Group Executive Vice President and Chief Operating Officer has announced his plans to retire in 2023.

Some of those incentives also have flown into backlog.

As we work to protect our backlog and get those homes closed as well. That's also incorporated into the guide for the fourth quarter.

John has had an amazing career with our organization and has been instrumental in our success and its success over the years.

Great.

Last quick one if I could.

I know I speak for our board and our entire company and wishing John all the best in retirement.

Order trends by month at sometimes Youre able to give that out just you kind of mentioned that there was an differences a little bit as rates kind of fluctuated a little bit during the quarter I'm, just trying to get a sense of year over year trends.

Brandon Jones Senior Vice President of field operations has been named to replace John effective January one 2023, as Chief operating officer.

And as you say that.

October kind of remains a little soft.

Any sense of that type of number as well.

Yes, without getting into the detail month by month, I think you heard it in Brian's prepared comments.

Since being named senior Vice President of operations in 2021, Brandon has been managing our construction operations throughout the country. So I expect a seamless transition into his new role.

The demand equation, followed the rate movements and so you saw a little bit of a dip in rates in August we saw some activity around that where people came off the fence as rates progressed higher after that solve relative.

A decrease in demand.

Next question is from Matthew Bouley with Barclays. Your line is open.

Good morning, everyone. Thanks for taking the questions.

Wanted to ask on this $24 million write down.

Any questions as possible during the remaining time of this call. We ask that you limit yourself to one question and one follow up.

Small kind of in and of itself, but can you can you kind of speak or sort of how do you think about the risk of maybe larger write downs occurring in that particular bucket, where you saw it in the deposits bucket and then ultimately as this market evolves from here, what's the risk of write down spreading to sort of the <unk>.

Thank you and now Chris if you'll explain once again added how to ask questions. We will get started with Q&A.

Certainly as a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.

Our first question is from Carl Reichardt with <unk>. Your line is open.

Land portfolio. Thank you.

Yeah, it's interesting.

Great. Thanks, good morning, everybody.

Brian can you talk a little bit you mentioned October pricing and it stayed activities has some pricing and incentives in certain markets starting to have some traction can you expand a little bit on that sort of where and what you're doing where you might be seeing at least a little bit of stabilization in absorptions.

The market will tell us that I don't want to predict we've got.

Obviously.

Call. It 400 $450 million of total money at risk around option deals. So that's going to be pre acquisition spend legal et cetera, as well as deposits.

Yes, Carl I. Appreciate the question. This morning as I mentioned in my prepared remarks is we.

You heard us say in <unk>.

Work through the change in market conditions over the last three to four months early on or incentives were largely financing related incentives.

Been doing this for a while now we're reevaluating every land transaction.

And it's interesting because we made the point in the prepared remarks, we have been closing out a lot of transactions and our expectation is that we will for the balance of the year. There there will be some stuff that we walk away from I wouldn't want to try and quantify it.

Things that aimed at buying the right down extended rate locks things of that nature.

We felt early on that we were getting traction with consumers, especially when you could provide interest rates that were sub 5% in some cases, we were able to even get sub 4% with the incentives.

But.

Part of the reason our land spend is projected to go down next year is because it's getting harder to make stuff work, especially in things that were negotiated more recently and so as that stuff comes to the table.

As rates have pushed up into the 7% range, we're finding those things to be less effective.

I think we're going to have some questions to answer internally as to whether it's still meets our return requirements.

And so we've really focused the majority of our energy on.

Reising to what we believe current market conditions are so.

The good news is and again it was in Brian's prepared remarks.

The 11600 lots that we walked away from had a had a land act spend of $800 million and if we had bought all that land at a point in time.

Price rollbacks and price drops.

We have been.

Strategic in those Carl but as I've talked about we've worked to protect backlog as best we can.

That might have been some some tough tough markets that we would have to work through so we feel.

But we really feel it's important to continue to move inventory and to maintain the market share that we've worked so hard to get in the market.

Ryan said, if we don't feel good about a $24 million charge, having said that having to work through $800 million of land with Oh by the way a lot of development spend on top of that.

It's really those price rollbacks that we've seen gets some traction over the last two to three weeks in.

So we do feel.

While it's tough we are encouraged with the activity that we're seeing.

So we feel like it's actually operating the way we are as we look at the market. We're trying to get more of that optionality into our book, we've targeted 65% to 70%.

Alright, Thanks, and then can you talk a little bit about can rates by buyer segment and how those might compare currently to what your long term averages are.

We're pushing our teams to look for optionality, whether it be in time.

Yes, we typically don't give that level of detail Karl.

Or take down.

So I think.

What we have seen with cans is a little bit of a change versus where we were three months ago. We were seeing churn in the 30 to 60 days.

I don't want to guess at what the market is going to bring to us.

We will work through each transaction as we go.

Got it.

What we have seen is a little bit more cancellation for folks that had been in backlog a little bit longer and it's that rapid and substantial rate increase from when they signed.

Very helpful. Thanks for that Bob and then I guess, just second one zooming into the margin guide.

I think the Q4 guide is for our margins down 200 basis points sequentially.

<unk>.

No.

At the end of the day.

I know you mentioned everything around incentives and the change in.

I don't think we're surprised by that but.

Price.

We have seen a little bit movement from people that have been in backlog a little bit longer.

Perhaps more impactful to 2023 I think Ryan you just said that there is certainly some some spec impact there in the Q4 guide, but just given that given a lot of these changes won't flow through into 2023 I'm. Just curious if you can kind of sort of bridge us to that 200 basis points declining in Q4 and sort of why that this margin decline.

Okay. Thank you.

<unk>.

The one comment I would offer to that Carl is we have historically seen the lowest can rate out of our active adult consumer.

That's a buyer thats not as heavily dependent on financing that's been consistent over the years and the trends that we're seeing today continue to support that.

That is kind of happening this quickly thank you.

Yes, it was really wrapped up and I think the prior answer I gave.

Great Brian Thanks, a lot guys appreciate it.

As we looked at what will close in the in the fourth quarter.

Carl.

The next question is from Stephen Kim with Evercore ISI. Your line is open.

It incorporates specs that.

Yes, Thanks, a lot guys for all the color and good job in the quarter in a tough market.

Have been sold some stocks that still need to be sold.

As well as some adjustments.

Wanted to ask you a question related to your strategy going your strategy in light of the tremendous mortgage rate volatility that we've seen obviously in the last couple of months, it's just been volatility to the upward direction, but with the spread over the 10 year treasury being what they are.

That flowed through to backlog.

Just on pricing adjustments that we made inactive communities.

Those are the big drivers that are that are influencing the Q4 guide.

There's a lot of thought that you might see a drop actually in mortgage rates at some point tough to predict you don't want to.

The only other kind of piece that I would I would add is there is a little bit of Av.

Continued labor pressure with backend trades.

Assume that but I was curious to what degree you're ready for that if it were to happen in the next several months.

Specifically the finished trades for what is still a pretty heavy load of inventory, that's moving not only through our production machine, but the industry's production machine.

So do you have a marketing plan to be proactive in the event you do see rates drop, let's say mortgage rates dropped back into the low sixes, let's say.

No.

We're starting to see some of that subside on the front end of things.

Do you have a list of buyers, who can who couldnt qualify today, but could if you had a lower 6% rate and can you give us a sense for how big that less might be.

As starts have started to come down.

And it's given us.

Well, Stephen let me, maybe just start with saying we've got outstanding we've got a really outstanding sales and marketing team that has always focused on the basics of working our entire lead funnel.

Better ability to have productive conversations with front end trades as we work to pull cost back that are responsive to the dynamic environment that we're seeing.

Got it thanks, Brian .

And that Hasnt changed in and good market times or even these more challenging market times.

The next question is from Anthony Pettinari with Citi. Your line is open.

Hi, good morning.

So our ability to get relevant and timely messages outdoor our sales funnel.

As demand has slowed and you pulled the price lever to maintain volumes is there a base level of absorptions, we should think about as being four before you start to maybe see some diseconomies of scale is it possible to talk about what you see as maybe an ideal absorption pace understanding it's a very dynamic market.

I am very confident in our ability to do that so.

Were so fortunate to see rates drop.

Know that we can get the right messaging out to let folks know.

Are we really emphasize and push with our local sales professionals as well to maintain the relationships with our lead banks and with our interested buyers at a very local and personal level. So.

Yes Anthony.

It's a fair question.

And I'll go back to what I think we've talked about for years, we really look to maximize return.

There is multiple ways using kind of the big bullhorn of corporate marketing platform, but you've also got the grass roots local relationships with our sales professionals maybe.

And so we're focused on both the pace and the price.

Kind of levers.

I would tell you.

We'd like to see more volume than what we're currently seeing.

Maybe just the last thing is I think the market itself.

If we were so fortunate to see rates come back I think will probably be the greatest marketing machine.

But as I highlighted in our prepared remarks, we're trying to be strategic and take a long term view of.

Any of them.

[laughter], Yeah, yes, hopefully people have their ear to the ground.

That's really underpinned by what we still see as a very.

Secondly, can we talk about production could you give us your sticks and bricks figure to start with and then.

Positive housing market.

Unfortunately, we've had a doubling of interest rates in 10 months, which we've never seen in this country at least not in the last 40 years.

When I look at your level of.

Homes under complete homes under construction your inventory homes.

Or I'm, sorry, your spec levels per community. The number of total spec per community. You are you are at nine eight.

And that coming on the heels of.

An unprecedented global pandemic gets created.

If I if my math is right.

That's a pretty significantly higher than what you were running at pre pandemic, but youre also intentionally doing more spec so I'm curious.

Certainly some dynamics that were being responsive to but we're not going to overreact.

Okay. Okay. That's helpful. And then just following up on your comment on trades and some of those discussions becoming more constructive.

What is the level of specs per community, but that this is total <unk> by the way that we could expect.

By the end of the year.

You quantified it.

The extent to which your cycle times increased in the quarter or decreased if at all and would you expect.

Steven Jim will give you this.

And Brexit and then I'll take the second piece of the question Underproduction, We've got $3 billion $164 million.

Shortly on cycle times, maybe in <unk> or early next year.

Anthony.

Then we have another $328 million and models for sticks and bricks.

As I highlighted and maybe my previous question, we're continuing to see some backend labor pressure with the finished trades.

And then Stephen is as to your question on our level of spec inventory.

And then at the.

Current environment, we haven't seen a bunch of progress with cycle times were still running right around six months, which is kind of unchanged from where we were in the prior quarter.

I wouldn't expect to see any improvement in Q4, there's just too much production is still on the machine.

I am very focused with our production teams.

<unk>.

Clawback cycle time in 2023.

To this very moment in terms of the inventory we have in our system, 35% of our lip.

So my hope would be by the time, we hit Q2 Q3 Q4 of next year, we're starting to see some meaningful kind of quarter over quarter improvement as we get back to.

As spec and that is right, where we want to be so we feel very comfortable with respect to that looking at the finished inventory we continue to have less than one.

More typical cycle times, so I'm confident.

Finished home per active community, which has always been our historical kind of benchmark. So.

Based on the drop in volume, but also just the healing of the supply chain, which continues to get better and better.

We also feel comfortable that were not under any pressure was finished inventory.

That that can become a reality in 2023 and beyond.

We continue to see good flow through of our sales rate of specs that are being sold that are delivering in the near term, which is a real positive for us and then maybe just the last thing Steve and you've seen this transition over the last couple of years as we've moved more of our business through the first time entry level product.

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

The next question is from Ivy Zelman with Zelman and Associates. Your line is open.

Thank you good morning, guys I appreciate it all I appreciate all the information.

Maybe Brian you can just speak to kind of broadly.

We've intentionally put more spec inventory into those first time entry level communities.

Consumer that is already put an order in and is in backlog.

Cancellations that you are seeing the function of how much of a function of.

And certainly that's where the higher percentage of our spec inventory resides.

Not being able to afford the monthly payment.

How many people are just getting cold feet and walking away from built in equity and then just more broadly I get a lot of questions from clients. If you look at where rates are today approaching 7% what has that done in general to prospective buyer pool like where do you see that now 25% of.

So.

We feel comfortable with that the last thing and I highlighted in my prepared remarks.

As it relates to do forward starts of new inventory, we've significantly slowed that and we're matching that to what our sales rate is so.

Prospective buyers can afford you more I mean, we see affordability is high.

We think we've done exactly what we said we were going to do.

The most stretched thin.

And we've made additional kind of adjustments based on how we see the market conditions at the moment.

Going back several decades. So maybe you can help us understand what needs to happen with respect to getting buyers more comfortable given such elevated pricing.

Great. Thanks, very much guys.

The next question is from Michael Rehaut with JP Morgan Your line is open.

The dynamics that led us here.

Yes.

Thanks for the questions I appreciate it.

Okay, great. Thanks.

Thanks, Good morning, everyone. Thanks for taking my questions.

In terms of the cancellations that were seeing its both.

Yes.

I wanted to start out and I apologize if I missed this earlier, but.

We're absolutely seeing buyers that can no longer afford we're also seeing buyers that still can't afford but they've gotten cold feet for whatever reasons and in many cases that are walking away from pretty sizeable earnest money deposits.

Just as a percent.

Price sales price what were incentives running.

During the quarter and where did you end.

<unk>.

The <unk>.

That includes.

Economically.

Price adjustments as well.

<unk>.

Make a ton of sense, but.

Yes, so in the in the most recently.

That's where you really kind of get into the psychology of Theyre, just not confident in making a.

<unk> quarter today third quarter, our incentive load was 1%.

Our purchase I'd tell you as we look at the trends over the last couple of quarters, we haven't seen a noticeable or a significant change.

Closed enclose the closings right.

Yes that is.

A little bit better than last year at 30 basis points better than closings during the third quarter of last year what.

<unk>.

The mix of reasons, why folks are canceling and thats been pretty consistent.

What we did highlight was on the sales in this quarter, so not the closings, but the sales.

In terms of the buyer pool IV.

It's understandably less and.

That rate ran up to about two 5%.

And I'll, specifically focus on who can afford.

So running higher and also that financing incentives and we've talked about this in the second quarter.

As the industry is going through some pricing adjustments I think we are working to get more people into that pool. The pool, that's harder to quantify and I'm not even going to attempt to guess is how many people are on the sidelines because of psychological fear.

We're up over sales in the third quarter of last year.

So the total load of incentive is up on current sales.

Those folks just aren't engaging with us they're waiting.

By a couple of hundred basis points versus the closings that we had in this quarter. So then that will influence our business over the next couple of quarters as those homes close Mike. The only in addition to Bob's comments I'll just highlight that as we make price adjustments.

And as I highlighted in some of my prepared remarks, I think the only way we get that buyer back into the market is through stability.

And those are unfortunately things that we don't directly control so and we've highlighted kind of what we think they are.

Those adjustments are made to base price and so those adjustments arent going to necessarily show up in the incentives that Bob just described.

No that's helpful. Ryan and just if I could just follow up on my second question as it relates to underwriting land right now and appreciating that you've.

And we've talked about it for the last several quarters as well as we are opening new communities, which there are a fair number of those we've been very intentional in pricing to the current market.

Taken some option abandonments.

The returns that are currently forecasted with the new pricing on communities.

Such that you have what we believe is a more normal incentive load.

Not yet open but are slotted to be open or we talking gross.

Right.

Gross margins that would hit the return requirements that you have always been underwriting to a much lower gross margin than you're currently.

I appreciate that I mean, that's exactly kind of what I was trying to get at.

In terms of where you are today, you know you kind of mentioned that as the quarter progressed.

Obviously, achieving.

You took.

We expect margins to be more normalized on whatever you are moving forward with new community given the pricing environment or is there a risk it could even lead to low normal at this point, maybe you could just qualitatively give us some direction.

Perhaps a little bit more of an aggressive posture.

Trying to meet the market.

With price reductions and Im sure price adjustment, so just trying to get a sense I guess.

Yes, Ivy what I'd highlight is we underwrite to return we'd never underwritten the margin.

As we've taken those actions maybe over the last.

Yes, 30, 45 days, if you could give us any sense in terms of what.

So the screen that we're using in the current environment as we're using current prayed pop pace and price against the historical return on invested capital screen and risk grid that we've always used.

Percent of AFP, those price adjustments or reductions.

Might have amounted to at this point and I would assume that that's something that we wouldn't see in the gross margin until the first half of next year.

And we have not compromised on that.

So the deals that we've elected to walk away from simply don't meet that screen.

Yes, Mike.

There is so much details behind that where what the price points are.

The ones that we've elected to move forward with by and large continue to meet our return based screen.

You can see though our sign up average price per sign ups is down.

And that includes margins that are.

By about 6% Thats certainly reflect some of the current pricing.

Kind of.

Sure.

All over the board in terms of the historical range that we've typically operated and Bob anything you'd add in terms of kind of underwriting. So hopefully IV that helps in terms of your question.

You have to be a little bit careful because our sign ups were a little bit more skewed towards first time, and so mix matters in that.

So I wouldn't I wouldn't want to put a number on X percent down because it really varies.

Okay.

By market by community.

<unk> question is from John <unk> with UBS. Your line is open.

But again you can see you can see that ASP.

Good morning, guys. Thank you for taking my questions as well.

It is likely to come down and there will be.

Margin consequence, and you can see it in the guide that we gave we were at 28% and then Mike to your margin question. Yeah. A lot of that will certainly be next year for homes that are on a build to order model. If it was a spec home than those will potentially those will show up more likely than not in the fourth quarter.

The first one is just given the more cautious near term stance pulling back on land spend which is clearly prudent in our view I mean, where do you intend to allocate the capital I mean could you be more.

More aggressive on bond buybacks will continue to be aggressive on buybacks.

Yes. It will go through the same exact exercise we always have its interesting we highlighted in this call. We are out on our revolver, which is.

And that is incorporated into the margin guidance, Bob gave for the fourth quarter.

Depending on kind of the nature of the adjustments we've made.

We started borrowing a little bit last quarter were actually out on the line today first and foremost we'll pay that off our expectation is that we'll be able to do that in short order.

Some of those incentives also have flown into backlog.

As we work to protect our backlog and get those homes closed as well. That's also incorporated into the guide for the fourth quarter.

Then what we always do is look at look the next several years. So it's not a point in time capital generation and usages.

Great One last quick one if I could.

We will consider.

<unk> and land we've highlighted that we think spend is going to be down we will be building and monetizing our backlog. So we think we're going to be cash flow positive.

And so we will look at the capital base that we've got and what to do and we will have choices. We can we can we will obviously continue our dividend.

And as you say that.

October kind of remains a little soft.

Any sense of that type of number as well.

We can look at share repurchases, we will also be looking at our leverage.

Yes without getting into details month by month, I think you heard it in Brian's prepared comments.

Obviously, the run up in rates makes our debt a little more attractive on a pricing basis.

Not suggesting we're going to do anything but it is what can we look at these things.

Consistently through time.

And we will consider all those things, but I think you can should expect to see is in market for equity.

And we will look at any other use of cash at the same time.

The decrease in demand.

Okay. That's helpful. And then just kind of thinking about your overall land.

Next question is from Matthew Blair with Barclays. Your line is open.

Land spend strategy now and just land in general are you actually pulling back on community openings communities that were slated to open.

Good morning, everyone. Thanks for taking the questions.

Wanted to ask on this 20.

$24 million write down obviously small kind of in and of itself, but can you can you kind of speak or sort of how do you think about the risk of maybe larger write downs occurring in that particular bucket, where you saw it in the deposits bucket and then ultimately as this market evolves from here what's.

Are you holding back those given the demand environment.

Not at all.

Continuing to move forward with it.

And open those communities and in fact, some of the communities that we've recently opened or even some of our brightest and best performers, which is really encouraging.

I think there's two reasons for that John one.

The risk of write down spreading to sort of the on land portfolio. Thank you.

Good communities in good locations that have got great interest list that we've been working for a long time referencing back to the marketing comment that was asked a little bit ago.

Yeah.

Yes.

Interesting.

Market will tell us that I don't want to predict.

Got you.

We've also been very deliberate in making sure that we're pricing the current market.

Obviously.

Call. It 400 $450 million of total money at risk around option deals. So that is going to be pre acquisition spend legal et cetera, as well as deposits.

No we do that all the time, when we open up new communities, but.

Especially in light of the current environment.

When we're opening we're making sure that we are opening at a value and we've seen traction there. So.

You heard us say.

We've been doing this for a while now we're reevaluating every land transaction.

Communities that are opening today have been in our pipeline for a long time.

And it's interesting because we've made the point in the prepared remarks.

They were bought right they were arguably developed.

We have been closing on a lot of transactions and our expectation is that we will for the balance of the year. There there will be some stuff that we walk away from I wouldn't want to try and quantify it.

At a pretty attractive cost basis, as well and so we can continue to deliver.

Nice nice margins and more importantly, good returns out of those communities.

But.

Part of the reason our land spend is projected to go down next year is because it's getting harder to make stuff work, especially in things that were negotiated more recently right. So as that stuff comes to the table.

Great. Thanks, guys.

The next question is from Mike Dahl with RBC capital markets. Your line is open.

Good morning, Thanks for taking my questions.

I think we're going to have some questions to answer internally as to whether it's still meets our return requirements.

My first question, just maybe a follow up on <unk> questions around cancellations and maybe answer.

<unk>.

The good news is that it was in Brian's prepared remarks.

It's a terminology issue in terms of talking affordability versus outright qualification challenges.

The 11600 lots that we walked away from.

Jim Ryan or Bob could you address what percentage of your cancellations.

Had a land act spend of $800 million and if we had bought all that land at a point in time.

Or as you are kind of security from the field around prospective buyers.

That might have been some tough tough markets that we would have had to work through so we feel and.

How youre seeing outright inability to qualify impact versus just a.

And Ryan said, if we don't feel good about a $24 million charge, having said that having to work through $800 million of land with Oh by the way a lot of development spend on top of that.

Hey, maybe I can.

All five but I can actually afford the X dollars a month in incremental payments.

So we feel like it's actually operating the way we are as we look at the market. We're trying to get more of that optionality into our book, we've targeted 65% to 70%.

Yes.

Looking at we're going to have to get back to you on that.

I can tell you is that it is.

We're pushing our teams to look for optionality, whether it be in time.

Again running at a consistent percentage, we haven't seen a run up in the percentage of people, who just don't outright qualifier rejections.

Or take down so I think.

I don't want to guess at what the market is going to bring to us.

So.

But what the relative percentage of that is I don't know off the top of my head.

We will work through each transaction as we go.

Okay.

Got it.

Very helpful. Thanks for that Bob and then I guess, the second one zooming into the margin guide.

And then in terms of thinking through as are obviously pretty diversified in your market exposures in past cycles, you've seen builders exiting markets during contraction periods.

I think the Q4 guide is for <unk>.

Margins down 200 basis points sequentially.

I know you mentioned everything around incentives and the change in.

When you look at your land positions when you look at some of the relative results across some of these markets obviously everything's.

Price.

That's more impactful to 2023 and I think Ryan you just said that there is certainly some spec impact there in the Q4 guide, but just given that given a lot of these changes won't flow through into 2023 Im just curious so you can kind of sort of bridge us to that 200 basis points declining in Q4 and sort of why this margin decline.

Getting hit, but some things harder than others.

Are you at the point, where you're evaluating whether or not certain markets makes sense or maybe if there is any other regional color you can provide around something like that.

No Mike we actually feel really good about our geographic footprint.

Kind of happening this quickly thank you.

Yes, Matt.

We've entered into several new markets over the last three years to four years.

It was really wrapped up and I think the prior answer that I gave.

As we looked at what will close in the in the fourth quarter.

We're as confident in those today as we were when we made the decision to go there.

It incorporates specs that.

A lot of the places that we've entered into in recent years have been places that have had it.

Have been sold some specs that still need to be sold.

It really attractive job growth and really nothing has changed along those lines. There are also places that are.

As well as some adjustments.

That flowed through to backlog.

Sure.

Based on pricing adjustments that we made an active communities.

Tractive climates.

They generally tend to be more affordable places.

Those are the big drivers that are that are influencing the Q4 guide.

And they're they're in locations that are predominantly kind of in the sunbelt. So.

The only other kind of piece that I would I would add is there is a little bit of Av.

We think we think our new market expansion strategy is still still makes ton of sense in terms of our existing markets, we're really happy with them.

Continued labor pressure with backend trades.

I Wouldnt I don't know that I have any real additional color to add in terms of the geographies that are doing well versus not other than what I highlighted in my.

Specifically the finished trades for what is still a pretty heavy load of inventory thats moving not only through our production machine, but the industry's production machine.

Her prepared remarks.

The western markets are the toughest for sure.

We're starting to see some of that subside on the front end of things as starts have started to come down.

I think thats been widely reported by <unk>.

For many sources, we're also seeing relative softness in the northeast.

And it's given us.

Better ability to have productive conversations with front end trades as we work to pull cost back that are responsive to the dynamic environment that we're seeing.

Some of the more expensive.

Locales.

The South east.

East, Florida, Texas relatively are performing.

Better for a lot of the reasons that I just touched on is with my comments on expansion markets.

Got it thanks, Brian .

The next question is from Anthony Pettinari with Citi. Your line is open.

Okay. Thank you.

Hi, good morning.

Our final question today is from Truman Patterson with Wolfe Research Your line is open.

As demand has slowed and pulled the price lever to maintain volumes is there a base level of absorptions, we should think about as being four before you start to maybe see some diseconomies of scale and is it possible to talk about what you see as maybe an ideal absorption pace understanding it's a very dynamic.

Hey, good morning, everyone and thanks for taking my questions.

First we've had a nice run of lower realtor and broker commissions throughout 'twenty one in the first part of 'twenty two.

I'm just seeing if you all started to pull that lever to help augment sales, especially with.

Market.

Yes Anthony.

It's a fair question.

I'll go back to what I think we've talked about for years, we really look to maximize return.

Quick move in homes are generally preferred by realtors, So just seeing if youre, increasing commissions, there and if so what sort of impact that could be to SG&A.

And so we're focused on both the pace and the price.

Driven.

Kind of levers.

The view that we've had on realtor commissions.

I would tell you.

We'd like to see more volume than what we're currently seeing.

Through time is to be balanced with it.

We certainly appreciate oil and reinsurers are the procuring cause or our <unk>.

But as I highlighted in our prepared remarks, we're trying to be strategic and take a long term view of.

Truly bring kind of a buyer into our sales office and help with that process.

That's really underpinned by what we still see as a very.

We paid I think a market competitive.

Broker Commission, we're still in the same position today.

Positive housing market.

Unfortunately, we've had a doubling of interest rates in 10 months, which we've never seen in this country at least not in the last 40 years.

So theres certainly.

Cases here and there where you may have above.

Average broker commission as an incentive to move a particular property. That's got a unique set of circumstances, but broadly you won't see us as a strategy employ above average broker commissions.

And that's coming on the heels of.

An unprecedented global pandemic gets created.

Certainly some dynamics that were being responsive to but we're not going to overreact.

Gotcha, Okay, but for the industry has it generally kind of ticked up across the board or.

Okay. Okay. That's helpful.

And then just following up on your comment on trades and some of those discussions becoming more constructive.

Specific bonuses et cetera.

I think I think it depends it depends on the market and it depends on the builder I think there are certain builders that part of their strategy.

Can you quantify.

The extent to which your cycle times increased in the quarter or decreased if at all and would you expect.

<unk> on cycle times, maybe in <unk> or early next year.

Their marketing strategy is largely directed toward.

Anthony we are.

Outsized or above average broker commission so.

As I highlighted in my previous question, we're continuing to see some backend labor pressure with the finished trades.

As the market gets tougher youre seeing certain competitors that use that as maybe their primary marketing tool youre starting to see those bigger numbers come into play.

And then at the current environment, we haven't seen a bunch of progress with cycle times were still running right around six months, which is kind of unchanged from where we were in the prior quarter.

Yes.

Okay. Okay got you and then.

Could you all discuss Ryan you mentioned earlier.

I wouldn't expect to see any improvement in Q4, there's just too much production is still on the machine.

About negotiations with with trades.

Building products, but could you discuss if youre getting any early traction on the price negotiations or any specific trades like framers.

I am very focused with our production teams.

Clawback cycle time in 2023.

So my hope would be by the time, we hit Q2 Q3 Q4 of next year, we're starting to see some meaningful kind of quarter over quarter improvement as we get back to.

<unk> materials building product categories.

Really outside of lumber.

Yes, sure I mean, it's really the the.

Uh huh.

<unk> been talking at all of our trades, but I would tell you the more.

More typical cycle times, so I'm confident.

Kind of reason and impactful conversations of bandwidth the front end trades.

Based on the drop in volume, but also just the healing of the supply chain, which continues to get better and better.

So underground plumbing Foundation.

That that can become a reality in 2023 and beyond.

Up through shell.

Your shell those conversations have been.

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

Frequent and helpful.

The next question is from Ivy Zelman with Zelman and Associates. Your line is open.

Those are the trades that are feeling the slowdown in the industry right now and so as.

Thank you good morning, guys I appreciate it I'll appreciate all the information.

They evaluate their kind of business situation and kind of the volume that they would like to be doing and what efficiencies look like.

Ryan you could just speak to kind of broadly.

Jim or that we've already put in order and backlog cancellations that you're seeing the function of how much of a function of not being able to afford the monthly payment versus how many people are just getting close key and walking away from built in equity and then just more broadly I get a lot of questions from clients. Thank you.

We're engaged in what I would tell you our productive conversations.

We need to pull cost out of housing generally.

That's our organization on Thats, our trades as well.

Where rates are today approaching 7%.

I think we can all appreciate that we've seen.

What has that done in general to prospective buyer pool like where do you see is it now 25% of.

Unprecedented inflation, both in materials and labor.

And those costs are real and so.

Perspective, Iris Canaccord <unk> morning.

I think we're trying to take a pragmatic, but very intent full approach.

<unk> is probably the most traction then.

Going back several decades, so maybe you could help us understand what needs to happen with respect to getting buyers more comfortable given touch elevated pricing.

How we tried to pull cost out of the system.

Okay got you. Thank you and good luck in the upcoming quarter.

The dynamics that might occur.

Thank you Truman.

Yes.

Okay.

Thanks for the questions I appreciate it.

That concludes.

Our question and answer session I will turn it over to Jim Zimmer for any closing remarks.

In terms of the cancellations that were seeing its both.

We are absolutely seeing buyers that can no longer afford we're also seeing buyers that that's still can't afford but they've gotten cold feet for whatever reasons and in many cases that are walking away from pretty sizeable earnest money deposits.

I appreciate everybody's time today, sorry, we could not get through all the questions, but we will be available over the remainder of the day, certainly feel free to call or E mail them outside of that we will look forward to speaking with you on our next call.

<unk>.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

The <unk>.

Economically.

<unk>.

Make a ton of sense, but.

[music].

That's where you really kind of get into the psychology of Theyre, just not confident in making a.

Our purchase I'd tell you as we look at the trends over the last couple of quarters, we haven't seen a noticeable or a significant change.

<unk>.

The mix of reasons, why folks are canceling and thats been pretty consistent.

In terms of the buyer pool IV.

It's understandably loss in.

And I'll, specifically focus on who can afford.

Those folks just aren't engaging with us they are waiting.

And as I highlighted in some of my prepared remarks, I think the only way we get that buyer back into the market is through stability.

And those are unfortunately things that we don't directly control so and we've highlighted kind of what we think they are.

No that's helpful. Ryan and just if I could just follow up on my second question as it relate to underwriting land right now and appreciating that is yes.

Tim option abandonment.

Given the returns that are currently forecasted with the new pricing on community.

I have not been open but are slotted to be open or we talking gross margins that would hit the return requirement <unk> have always been underwriting to a much lower gross margin than youre currently.

Obviously, achieving so should we expect margins to be more normalized on whatever you are buying forward in with new community given the pricing environment or is there a risk it could even lead to low normalized at this point, maybe you can just qualitatively give us some direction.

Yes Ivy.

I'd highlight is we underwrite to return we'd never underwritten the margin.

So the screen that we're using in the current environment as we're using current freight.

<unk> and price against the historical return on invested capital screen and risk grid that we've always used.

And we have not compromised on that.

So the deals that we've elected to walk away from simply don't meet that screen.

The ones that we've elected to move forward with by and large continue to meet our return based screen.

And that includes margins that are.

Kind of.

All over the board in terms of the historical range that we've typically operated and Bob anything you would add that in terms of kind of underwriting. So hopefully that helps in terms of your question.

Yeah.

The next question is from John Lovallo with UBS. Your line is open.

Good morning, guys. Thank you for taking my questions as well.

First one is just given the more cautious near term stance pulling back on land spend which is clearly prudent in our view I mean, where do you intend to allocate the capital I mean could you be more.

More aggressive on bond buybacks will continue to be aggressive on buybacks.

Yes. It will go through the same exact exercise we always have its interesting we.

Highlighted in this call we are out on our revolver, which is.

We started borrowing a little bit last quarter were actually out on the line today first and foremost we'll pay that off our expectation is that we'll be able to do that in short order.

Then what we always do is look at look the next several years. So it's not a point in time capital generation and usages.

And we will consider investment in land. We've highlighted that we think spend is going to be down we'll be building and monetizing our backlog. So we think we're going to be cash flow positive.

And so we will look at the capital base that we've got and what to do and we will have choices. We can we can we will obviously continue our dividend.

We can look at share repurchases, we will also be looking at our leverage.

Obviously, the run up in rates makes our debt a little more attractive on a pricing basis.

Not suggesting were going to do anything but it's what can we look at these things.

Consistently through time.

And we'll consider all those things, but I think you can should expect to see it in market for equity.

And we will look at any other use of cash at the same time.

Okay. That's helpful. And then just kind of thinking about your overall.

<unk> strategy now and just land in general are you actually pulling back on community openings communities that were slated to open.

Are you holding back those given the demand environment.

Not at all we're continuing to move forward with it.

And open those communities and in fact, some of the communities that we've recently opened have been some of our brightest and best performers, which is really encouraging.

I think there's two reasons for that John one.

These are good communities in good locations that have got great interest list that we've been working for a long time referencing back to the marketing comment that was asked a little bit ago.

We've also been very deliberate in making sure that we're pricing the current market.

We do that all the time, when we open up new communities, but.

Especially in light of the current environment.

When we're opening we're making sure that we're opening at a value and we've seen traction there so.

Communities that are opening today have been in our pipeline for a long time.

They were bought right they were arguably developed.

At a pretty attractive cost basis, as well and so we can continue to deliver.

Nice nice margins and more importantly, good returns out of those communities.

Great. Thanks, guys.

The next question is from Mike Dahl with RBC capital markets. Your line is open.

Good morning, Thanks for taking my questions.

My first question, just maybe a follow up on <unk> questions around cancellations and maybe it's a.

I don't know if its a terminology issue in terms of talking affordability versus outright qualification challenges but.

Yes, Ryan or Bob could you address what percentage of your cancellations.

Or as you are kind of security from the field.

And prospective buyers.

How youre seeing outright inability to qualify impact versus just a.

Yeah, Hey, maybe I can.

Mollified by that.

Actually afford the X dollars a month in incremental payments.

Yes.

Looking at we're going to have to get back to you on that.

What I can tell you is that it is.

Again running at a consistent percentage, we haven't seen a run up in the percentage of people, who just don't outright qualifier rejections.

So.

But what the relative percentage of that is I don't know off the top of my head.

Okay.

Got it.

And then in terms of thinking through as are obviously pretty diversified in your market exposures in past cycles, you've seen builders exiting markets during contraction periods.

When you look at your land positions when you look at some of the relative results across these markets obviously everything.

Getting hit, but some things harder than others.

Are you at the point, where you're evaluating whether or not certain markets makes sense or maybe if there's any other regional color you can provide around something like that.

No Mike we actually feel really good about our geographic footprint.

We've entered into several new markets over the last three years to four years.

We're as confident in those today as we were when we made the decision to go there.

A lot of the places that we've entered into in recent years have been places that have had it.

It really attractive job growth and really nothing has changed along those lines. There are also places that are.

<unk>.

Tractive climates.

They generally tend to be more affordable places.

And they are they're in locations that are predominantly kind of in the sunbelt. So.

We think we think our new market expansion strategy is still still makes ton of sense in terms of our existing markets, we're really happy with them.

I Wouldnt I don't know that I have any real additional color to add in terms of the geographies that are doing well versus not other than what I highlighted in my prepared.

Her prepared remarks.

The western markets are the toughest for sure.

I think thats been widely reported by.

For many sources, we're also seeing relative softness in the northeast.

Some of the more expensive.

Locales.

The South East, Florida, Texas relatively are performing.

Better for a lot of the reasons that I just touched on is with my comments on expansion markets.

Okay. Thank you.

Our final question today is from Truman Patterson with Wolfe Research Your line is open.

Hey, good morning, everyone and thanks for taking my questions.

First we've had a nice run of lower realtor and broker commissions.

Throughout 'twenty one in the first part of 'twenty two.

I'm just seeing if you all started to pull that lever to help augment sales, especially with.

Quick move in homes are generally preferred by realtors, So just seeing if youre, increasing commissions, there and if so what sort of impact that could be to SG&A.

Driven.

The view that we've had on realtor commissions.

Through time is to be balanced with it.

We certainly appreciate when reinsurers are the procuring cause R. R.

Truly bring kind of a buyer into our sales office and help with that process.

We paid I think a market competitive.

Broker Commission, we're still in the same position today.

So theres certainly.

Cases here and there where you may have.

Above average broker commission as an incentive to move a particular property. That's got a unique set of circumstances, but broadly you won't see us as a strategy employ above average broker commissions.

Got you, okay, but for the industry has it generally kind of ticked up across the board or <unk>.

Specific bonuses et cetera.

I think I think it depends it depends on the market and it depends on the builder I think there are certain builders that part of their strategy.

Their marketing strategy is largely directed toward.

Outsized or above average broker commission so.

As the market gets tougher youre seeing certain competitors that use that as maybe their primary marketing tool youre starting to see those bigger numbers coming into play.

Yes.

Okay. Okay got you and then.

Could you all discuss Ryan you mentioned earlier.

Negotiations with with trades.

Building products.

Could you discuss if youre getting any early traction on the price negotiations or any specific trades like framers or.

More materials building product categories.

Outside of lumber.

Yes, sure I mean, it's really the the.

We've been talking with all of our trades, but I would tell you the more.

Kind of reason.

And impactful conversations have been with the front end trades.

So underground plumbing Foundation.

Up through shell.

Exterior shell those conversations have been.

Frequent and helpful.

Those are the trades that are feeling the slowdown in the industry right now and so as.

They evaluate their business situation and kind of the volume that they would like to be doing and what efficiencies look like.

We're engaged in what I would tell you our productive conversations.

We need to pull cost out of housing generally.

That's our organization and Thats, our trades as well.

I think we can all appreciate that we've seen.

Unprecedented inflation, both in materials and labor.

And those costs are real and so.

I think we're trying to take a pragmatic, but very intense full approach.

<unk>.

How we tried to pull cost out of the system.

Okay got you. Thank you and good luck in the upcoming quarter.

Thank you Truman.

Okay.

That concludes our question and answer session I will turn it over to Jim Zuma for any closing remarks.

I appreciate everybody's time today, so we could not get to all the questions, but we will be available over the remainder of the day, certainly feel free to call or E mail.

Outside of that we will look forward to speaking with you on our next call. Thank.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

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