Q1 2024 KB Home Earnings Call

Okay.

John: Good afternoon, My name is John and I'll be your conference operator today.

John: Good afternoon. My name is John, and I'll be your conference operator. I would like to welcome everyone to the KB Home 2024 First Quarter Earnings Conference. At this time, all participants are in a listening mode.

John: I would like to welcome everyone to the Kb home 2024 first quarter earnings Conference call. At this time, all participants are in a listen only mode.

Jill Peters: Following the company's opening remarks, we will open the lines for questions. Today's conference call is being recorded and will be available for replay at the company's website, kbhome.com, through April 19th, 2021. And now, I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. Thank you, John. Good afternoon, everyone.

John: Following the Companys opening remarks, we will open the lines for questions. Today's conference call is being recorded and will be available for replay at the Companys website Kb home Dotcom through April 19 2024.

John: And now I would like to turn the call over to Jill Peters Senior Vice President Investor Relations. Thank you Jill you may begin.

Jill Peters: Thank you John Good afternoon, everyone and thank you for joining us today to review our results for the first quarter of fiscal 2024 on the call are Jeff Mezger, Chairman and Chief Executive Officer.

Jill Peters: And thank you for joining us today to review our results for the first quarter of fiscal 2024. On the call are Jeff Mezger, Chairman and Chief Executive Officer, Rob McGibney, President and Chief Operating Officer, Jeff Kaminski, Executive Vice President and Chief Financial Officer, Bill Hollinger, Senior Vice President and Chief Accounting Officer, and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them.

Jill Peters: Rob Mcgivney, President and Chief operating Officer.

Jill Peters: Jeff Kaminski Executive Vice President and Chief Financial Officer, Bill Hollinger, Senior Vice President and Chief Accounting Officer, and Thad Johnson Senior Vice President and Treasurer.

Jill Peters: During this call items will be discussed that are considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.

Jill Peters: These statements are not guarantees of future results and the company does not undertake any obligation to update them.

Jeff Mezger: Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in this forward-looking statement. In addition, a reconciliation of the non-GAAP measure of adjusted housing gross profit margin, which excludes inventory-related charges, and any other non-GAAP measure referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release or on the investor relations page of our website at kbhome.com. And with that, here is Jeff Mezger.

Jill Peters: Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission actual results could be materially different from those stated or implied in the forward looking statements.

Jill Peters: In addition, a reconciliation of the non-GAAP measure of adjusted housing gross profit margin, which excludes inventory related charges and any other non-GAAP measures referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release <unk> on the investor relation.

Jill Peters: Page of our website at <unk> Dot com and with that here is Jeff Metzger.

Jeff Mezger: Thank you, Jill, and good afternoon, everyone. We delivered solid performance in the first quarter, highlighted by our strong net orders, as well as financial results that were either at or above the high end of our guided ranges. The spring selling season is off to a very good start, which together with our considerable backlog, better build times, and planned new community openings, gives us confidence that we are well positioned to achieve our objectives this year. As for the details of our results, we produced total revenues of $1.5 billion and diluted earnings per share of $1.76.

Jeff Mezger: Thank you Jill and good afternoon, everyone.

Jeff Mezger: We delivered solid performance in the first quarter highlighted by our strong net orders as well as financial results.

We're either at or above the high end of our guided ranges.

Jeff Mezger: The spring selling season is off to a very good start which together with our considerable backlog better build times.

Planned new community openings gives us confidence that we are well positioned to achieve our objectives. This year.

Jeff Mezger: As to the details of our results. We produced total revenues of $1 5 billion and diluted earnings per share of $1 76.

Jeff Mezger: Our margins remain stable at 21.5% in gross and just under 11% in operating income. This performance, along with the cumulative benefit of sustained quarterly share repurchases, including an additional $50 million during the first quarter, drove our book value per share up 14% year over year. Market conditions have improved since the end of our last fiscal year. As we discussed on our earnings call in January, we had begun to see demand move higher in December, which accelerated as the quarter progressed. Although mortgage interest rates increased modestly in late February from their lowest levels during the quarter, the strong desire for homeownership prevailed.

Jeff Mezger: Our margins remained stable at 21, five in growth and just under 11% and operating income.

Jeff Mezger: This performance along with the cumulative benefit of sustained quarterly share repurchases.

Jeff Mezger: Including an additional $50 million during the first quarter.

Drove our book value per share up 14% year over year.

Jeff Mezger: Market conditions have improved since the end of our last fiscal year.

Jeff Mezger: As we discussed on our earnings call in January we began to see demand move higher in December which accelerated as the quarter progressed.

Jeff Mezger: Although mortgage interest rates increased modestly in late February from their lowest levels during the quarter the strong desire for homeownership prevail.

Jeff Mezger: The combination of low housing inventory levels, solid employment, and favorable demographics supports the new home market today, and we expect will continue to be the primary factors that sustain its health longer term. The momentum in our net orders resulted in sequential gains of 46% in January, followed by 53% in February. We believe these results speak to the underlying demand for homeownership and a more stable housing market. Another sign of instability is our cancellation rate, which fell significantly both sequentially and year over year.

Jeff Mezger: The combination of low housing inventory levels solid employment and favorable demographics supports a new home markets today, and we expect we will continue to be the primary factors that sustained itself longer term.

Jeff Mezger: The momentum in our net orders resulted in sequential gains of 46% in January followed by 53% in February.

Jeff Mezger: We believe these results speak to the underlying demand for homeownership and a more stable housing market.

Jeff Mezger: Another sign of this stability is our cancellation rate, which fell significantly both sequentially and year over year.

Jeff Mezger: In total, we generated 3,323 net orders in the first quarter, representing 55% year-over-year growth. This result was achieved while we conducted a mortgage concession study and implemented a modest level of price increases in most of our communities. We have continued to experience strong sales since the start of our second quarter and believe we are well positioned to respond to this buyer demand, given our products and price points, as well as to plan new community openings in the first half of this year. On a per community basis, our absorption pace accelerated as the quarter progressed, averaging 4.6 monthly net orders for the full quarter.

Jeff Mezger: In total we generated $3 323, net orders in the first quarter, representing 55% year over year growth.

Jeff Mezger: This result was achieved while we held mortgage concession study.

Jeff Mezger: And implemented a modest level of price increases in most of our communities.

Jeff Mezger: We have continued to experience strong sales since the start of our second quarter and believe we are well positioned to respond to this buyer demand given our products and price points as well as planned new community openings in the first half of this year.

Jeff Mezger: On a per community basis, our absorption pace accelerated as the quarter progressed, averaging $4 six monthly net orders for the full quarter.

Jeff Mezger: Our strategic goals continue to be optimizing each asset on a community-by-community basis, which generally results in an annualized average absorption pace of about five net orders per community per month and Generating High Inventory. In last year's second quarter, we produced very strong order results, driving an average of 5.2 net orders per community per month. This pace represented an 86% sequential increase and creates a tougher year-over-year comparable for this year

Jeff Mezger: Our strategic goals continue to be optimizing each asset on a community by community basis, which generally results in an annualized average absorption pace of about five net orders per community per month.

And generating high inventory turns.

Jeff Mezger: In last year's second quarter, we produced very strong order results driving an average of five two net orders per community per month.

This pace represented 86% sequential increase.

Jeff Mezger: And creates a tougher year over year comparable for this year.

Rob: Our expectation is to slightly exceed last year's monthly community order pace for our second quarter in light of more favorable market conditions. We continue to align our starts with sales and plan to ramp up our starts given stronger demand and to position our business for the second half of 2024. We believe our backlog, homes in production, and start space are in balance to support our projected $6.7 billion in revenues this year. With that, I'll pause for a moment and ask Rob to provide an operational update. Rob.

Jeff Mezger: Our expectation is to slightly exceed last year's monthly community order pace for our second quarter.

Jeff Mezger: A more favorable market conditions.

Jeff Mezger: We continue to align our starts with sales and plan to ramp up our starts given stronger demand and to position our business for the second half of 2024.

Jeff Mezger: We believe our backlog homes in production and starts pace are in balance to support our projected $6 7 billion.

Jeff Mezger: And revenues this year.

Jeff Mezger: With that I'll pause for a moment and ask Rob to provide an operational update Rob.

Robert V. McGibney: Thank you, Jeff I will begin by adding to Jeff's comments on our order results provide some additional color during the quarter, we pursued a higher pace to capture demand and build our backlog while also raising prices in over one half of our communities and another roughly 40% of our communities we help prices steady.

Rob: Thank you, Jeff. I will begin by adding to Jeff's comments on our order results to provide some additional color. During the quarter, we pursued a higher pace to capture demand and build our backlog, while also raising prices in over one half of our communities. In another roughly 40% of our communities, we held prices steady. At 4.6 net orders per community, our monthly absorption pace was above our historical first quarter average. As Jeff mentioned, our cancellation rate improved to 14% of our gross orders and 10% of our backlog at the start of the quarter. These are the lowest levels we have experienced in more than a year, reflecting buyers who have adjusted to the higher rates as compared to a year ago and who are motivated to close.

Robert V. McGibney: At $4 six net orders per community, our monthly absorption pace was above our historical first quarter average.

Robert V. McGibney: Jeff mentioned, our cancellation rate improved to 14% of our gross orders and 10% of our backlog at the start of the quarter.

Robert V. McGibney: This is the lowest levels, we've experienced in more than a year, reflecting buyers who will adjust it to the higher rates as compared to a year ago, and who are motivated to close.

Rob: Mortgage concessions were relatively flat as compared to our 2023 fourth quarter, with approximately 60% of our orders having some form of mortgage concession associated with them, including rate lock. Assuming market conditions and demand remain strong, we expect to be in a position to lower these types of incentives as the spring selling season progresses. We ended the quarter with almost 7,000 homes in production. Given our first quarter net order results and the elevated level of demand in the market, we expect to accelerate our starts and grow our production levels over the next six months. Operationally, our divisions are maintaining the progress they achieved last year in reducing bills. Our construction cycle is over 30% shorter than the prior year quarter, with a daily focus on additional efficiency enhancements to further reduce construction times, to even flow production incorporated into our business model, and leveraging relationships with our trade partners to increase speed, which helps improve cashflow for both sides.

Robert V. McGibney: Mortgage concessions were relatively flat as compared to 2023 fourth quarter with approximately 60% of orders, having some form of mortgage concession associated with them including rate locks.

Assuming market conditions and demand remains strong we expect to be in a position to lower these types of incentives as the spring selling season progresses.

Robert V. McGibney: We ended the quarter with almost 7000 homes in production.

Given our first quarter net order results and the elevated level of demand in the market, we expect to accelerate our starts and grow our production levels over the next six months.

Robert V. McGibney: Operationally our divisions are maintaining the progress achieved last year in reducing.

Robert V. McGibney: Our construction cycle is over 30% shorter than the prior year quarter with a daily focus on additional efficiency enhancements to further reduce construction times, the even flow production incorporated into our business model and leveraging relationships with our trade partners to increase speed, which helps improve cash flow for both sides.

Robert V. McGibney: We believe we can return over time to our historical build times at between 4% and five months.

Rob: We believe we can return, over time, to our historical build times of between four and five months. This will improve our inventory turns and increase the number of homes available for delivery, as well as further enhance our built-to-order sales approach, as personalized homes with quicker delivery dates are even more compelling to homebuyers. As to direct costs on started homes, they held steady in the first quarter on both a sequential and year-over-year basis.

Robert V. McGibney: This will improve our inventory turns and increase the population of homes available for delivery as well as further enhance our built to order sales approach as personalized homes with quicker delivery dates are even more compelling to homebuyers.

Robert V. McGibney: As to direct costs on started homes. They held steady in the first quarter on both a sequential and year over year basis, we continue to pursue value engineering and simplification opportunities to drive costs down which has been effective over the past year and helping to offset overall inflation.

Rob: We continue to pursue value engineering and simplification opportunities to drive costs down, which have been effective over the past year in helping to offset overall inflation. Before I wrap up, I'll review the credit metrics of our buyers who financed their mortgages through our joint venture, KBHS Home Loan. We had a solid increase in our capture rate, with 85% of the mortgages funded during the quarter having been financed through our joint venture, as compared to 79% in the prior year quarter. Higher capture rates help us manage our backlog more effectively and provide more visibility in closing. In addition, we see higher customer satisfaction levels from buyers that use KBHS versus other lenders. The average cash down payment was 16%, consistent with last year, equating to roughly $77,000.

Robert V. McGibney: Before I wrap up I'll review, the credit metrics of our buyers to finance their mortgages through our joint venture Caveats Kb Hs home loans.

Robert V. McGibney: We had a solid increase in our capture rate was 85% of the mortgages funded during the quarter haven't been financed through our joint venture.

Robert V. McGibney: As compared to 79% in the prior year quarter.

Robert V. McGibney: Higher capture rates help us manage our backlog more effectively and provide more visibility in closings in.

Robert V. McGibney: In addition, we see higher customer satisfaction levels from buyers that use kb hs versus other lenders.

Robert V. McGibney: The average cash down payment was 16% consistent with last year equating to roughly $77000.

Rob: The household income of our KBHS customers was about $126,000, and they had an average FICO score of 743, a number that has steadily climbed over the past few years. Even with one half of our customers purchasing their first home, we are attracting buyers that can qualify at elevated mortgage rates while making a significant down payment. As we look ahead to the rest of 2024, our divisions are focused on maintaining our high customer satisfaction levels, improving build times, and value engineering our products to lower direct costs. In addition, our objectives are set on driving net orders, acquiring more lots, and opening communities on time, all of which will contribute to the future growth of the company. We recently completed several leadership promotions and created a new executive vice president of home building position to which Brian Koenig has been elevated. Many of you are familiar with Brian from his earlier role of successfully leading and growing our Las Vegas operations. Most recently, Brian was one of our regional presidents responsible for our divisions in Idaho, Nevada, Northern California, and Washington.

Robert V. McGibney: Household income of our cable <unk> customers was about $126000 and they had an average FICO score of 743.

Robert V. McGibney: Number that has steadily climbed over the past few years.

Even if one half of our customers purchasing their first home we are attracting buyers that can quantify an elevated mortgage rates, while making a significant down payment.

Robert V. McGibney: As we look ahead to the rest of 2020 for our divisions are focused on maintaining our high customer satisfaction levels, improving build times and value engineering, our products to lower direct cost and.

In addition, our objectives are set on driving net orders acquiring more lots in opening communities on time, all of which will contribute to the future growth of the company.

Robert V. McGibney: We recently completed several leadership promotions and created a new executive Vice President of homebuilding position to which Brian has been elevated.

Robert V. McGibney: Many of you are familiar with Brian from its earlier role of successfully leading and growing our Las Vegas business.

Robert V. McGibney: Recently, Brian was one of our regional presidents responsible for our divisions in Idaho, Nevada, Northern California, and Washington.

Jeff: In addition to Brian, we also promoted two division presidents to the role of regional general manager and increased the geographic scope of one of our existing regional presidents. We believe these organizational changes will help us in driving growth as well as operational performance. And with that, I'll turn the call back over to Jeff. Thanks, Ralph.

Robert V. McGibney: In addition to Brian We also promoted to division president to the role of regional General manager and increase the geographic scope of one of our existing regional presidents. We believe these organizational changes will help us in driving growth as well as operational performance.

Robert V. McGibney: With that I'll turn the call back over to Jeff.

Jeff: Thanks, Rob.

Jeff: We invested close to $590 million to acquire and develop land during the quarter of <unk>.

Jeff Mezger: We invested close to $590 million to acquire and develop land during the quarter, a 60% increase year over year and the highest quarterly level since early 2022. We have the capital available to accelerate our investment spend in 2024 and intend to do so while adhering to our underwriting criteria, product strategy, and price points, as we are committed to growth beyond this year. We had roughly 55,500 lots owned or controlled at Quarter End, of which about 40,100 were owned.

Jeff: 60% increase year over year, and the highest quarterly level since early 2022.

Jeff: We have the capital available to accelerate our investment spend in 2024 and intend to do so while adhering to our underwriting criteria product strategy and price points as we are committed to growth beyond this year.

Jeff: We had roughly 55500 lots owned or controlled at quarter end of which about 40100 were owned.

Jeff Mezger: Over 17,000 of these lots are finished, and as Rob referenced, we have about 7,000 homes in production. Additionally, approximately 60% of our own lots were tied up in 2020 or prior, which provides us with a solid runway of lots at a favorable cost base. We are focused on capital efficiency, developing lots wherever possible in smaller phases and balancing development with our start space to manage our inventory of finished lots. We currently own and control all the lots that we need to achieve our delivery growth targets for 2025.

Jeff: Over 17000 of these lots are finished and as Rob referenced we have about 7000 homes in production.

Jeff: Approximately 60% of our owned lots were tied up in 2020 or prior which provides us with a solid runway of lots at a favorable cost basis.

Jeff: We are focused on capital efficiency developing lots wherever possible in smaller phases and balancing development with our starts pace to manage our inventory of finished lots.

Jeff: We currently own or control all the lots that we need to achieve our delivery growth targets for 2025 and.

Jeff Mezger: And, as we have stated in the past, our divisions have roadmaps in place with timelines to achieve at least a top five position in each of our CERV markets. Our balance sheet is healthy, and our cash-generating capabilities are strong. We intend to allocate our capital toward reinvestment and growth and return cash to shareholders in 2024, primarily through share repurchase. This is a continuation of the capital allocation plan that we executed in fiscal 2023, during which we bought back $411 million of our common stock at an average price of about $44.50. This is substantially accretive to both our book value and diluted earnings per share. Over the balance of the year, we intend to utilize, at a minimum, the roughly $114 million that remains in our current repurchase authorization, and we will be requesting an additional authorization from our board.

Jeff: And as we have stated in the past our divisions have roadmaps in place with timelines to achieve at least a top five position in each of our served markets.

Jeff: Our balance sheet is healthy and our cash generating capabilities are strong.

Jeff: We intend to allocate our capital towards reinvestment in growth and returning cash to shareholders in 2024, primarily through share repurchases.

Jeff: This is a continuation of the capital allocation plan that we executed in fiscal 2023.

Jeff: During which we bought back $411 million of our common stock.

Jeff: At an average price of about $44 50.

Jeff: Substantially accretive to both our book value and diluted earnings per share.

Jeff: Over the balance of the year, we intend to utilize at a minimum the roughly $114 million that remains in our current repurchase authorization and we will be requesting an additional authorization from our board.

Speaker Change: In closing I want to thank the entire JV home team for solid execution in our first quarter and their dedication to our homebuyers.

Jeff Mezger: In closing, I want to thank the entire KB Home team for solid execution in our first quarter and their dedication to our home buyers. Market conditions have improved, and we are seeing dynamics returning to a more normalized state. Supply chain and trade labor availability have stabilized, and while cost pressures are still present, they have eased. Mortgage interest rates have also steadied, and we do not see any evidence of rates rising this year.

Speaker Change: Market conditions have improved and we are seeing dynamics returning to a more normalized state.

Speaker Change: Supply chain and trade labor availability has stabilized and will cost pressures are still present they have eased.

Speaker Change: Mortgage interest rates have also steady and we do not see any evidence of rates rising this year.

Jeff: Buyers have largely adjusted to the rate environment, and we are encouraged by the demand we are seeing at the onset of the spring selling season. Our backlog increased sequentially and is healthy, as reflected in the lower cancellation rate we experienced in the first quarter. We expect to compress our bill times further, which will contribute to higher inventory terms, unlock cash, and enhance our bill-to-order approach. These dynamics are all favorable for our company, and we look forward to demonstrating the potential of our business as the year unfolds. With that, I'll now turn the call over to Jeff for the financial review. Thank you, Jeff. And good afternoon, everyone.

Speaker Change: Buyers have largely adjusted to the rate environment and we are encouraged by the demand we are seeing that the onset of the spring selling season.

Speaker Change: Our backlog increased sequentially and is healthy as reflected in the lower cancellation rate we experienced in the first quarter.

Speaker Change: We expect to compress our build times further which will contribute to higher inventory turns unlock cash and enhance our built to order approach.

Speaker Change: These dynamics are all favorable for our company and we look forward to demonstrating the potential of our business as the year unfolds.

Speaker Change: With that I'll now turn the call over to Jeff for the financial review Jeff.

Speaker Change: Thank you, Jeff and good afternoon, everyone I will now cover highlights of our 2024 first quarter financial performance as well as provide our second quarter and full year outlooks. We are pleased with our execution during the first quarter with home deliveries up 9% over the prior year in line with our expectations and supported.

Jeff: I will now cover highlights of our 2024 first quarter financial, as well as provide our second quarter and full year out. We are pleased with our execution during the first quarter, with home deliveries up 9% over the prior year, in line with our expectations, and supported by our improving construction cycle times and backlog of solar. Our healthy operating margin of nearly 11% drove robust cash flow that enabled us to invest almost $600 million in liabilities, return over $65 million to our stockholders through share repurchases and dividends, and end the period with strong liquidity of $1.75 billion. In the first quarter, our housing revenues of $1.46 billion were up 6% year over year, driven by the 9% increase in the number of homes delivered, partially offset by a decline in the overall The number of homes delivered in the first quarter reflected a backlog conversion rate of 55%.

Speaker Change: Our improving construction cycle times in backlog of sold homes are.

Speaker Change: Our healthy operating margin of nearly 11% drove robust cash flow that enabled us to invest almost $600 million in land returned over $65 million to stockholders through share repurchases and dividends and end the period with strong liquidity of $1 75 billion.

Speaker Change: In the first quarter, our housing revenues of $1 $46 billion were up 6% year over year, driven by the 9% increase in the number of homes delivered.

Speaker Change: Partially offset by a decline in the overall average selling price of those homes.

Speaker Change: The number of homes delivered in the first quarter, reflecting a backlog conversion rate of 55% a significant improvement from 36% for the year earlier quarter, demonstrating both the impact of our improved build times as well as a lower cancellation rate in the current year period.

Jeff: A significant improvement from 36% for the year earlier quarter, demonstrating both the impact of our improved build times as well as a lower cancellation rate in the current year period. Housing revenues were up in three of our four regions, ranging from 3% in the West Coast to 35% in the Southwest, offsetting a 19% decline in the central region. We expect stable housing market conditions and favorable supply chain trends to support our forecasted results for the remainder of 2024. For the second quarter, we anticipate generating housing revenues in the range of $1.6 to $1.7 billion. For the full year, we expect to generate housing revenues in the range of $6.5 to $6.9 billion.

Speaker Change: Housing revenues were up in three of our four regions ranging from 3% in the west coast to 35% in the southwest offsetting a 19% decline in the central region.

Speaker Change: We expect stable housing market conditions, and favorable supply chain trends to support our forecasted results for the remainder of 2024.

Speaker Change: For the second quarter, we anticipate generating housing revenues in the range of one six to $1 7 billion.

Speaker Change: For the full year, we expect to generate housing revenues in the range of six five to $6 9 million.

Jeff: We believe we are well-positioned to achieve this top-line performance, supported by our backlog of sold homes, projected net orders per community, anticipated continued improvement in construction cycle times, and expected growth in communities. In the first quarter, our overall average selling price of homes delivered decreased 3% year over year to approximately $480,000, mainly due to mixed, For the 2024 second quarter, we're projecting an overall average selling price of approximately $483,000, up slightly both sequentially and compared to a prior year period. We still expect our overall average selling price for the full year to be in the range of $480,000 to $490,000. Homebuilding operating income for the first quarter increased slightly to $157.7 million, compared to $156.5 million for the year-earlier quarter.

We believe we are well positioned to achieve this top line performance supported by our backlog of sold homes projected net orders per community anticipated continued improvement in construction cycle times and expected growth in community count.

In the first quarter, our overall average selling price of homes delivered decreased 3% year over year to approximately $480000, mainly due to mix shifts.

Speaker Change: For the 2020 for second quarter, we are projecting an overall average selling price of approximately $483000 up slightly both sequentially and compared to the prior year period.

Speaker Change: We still expect our overall average selling price for the full year will be in the range of 480 to $490000.

Speaker Change: Homebuilding operating income for the first quarter increased slightly to $157 $7 million.

<unk> to $156 5 million for the year earlier quarter.

Jeff: The current quarter included abandonment charges of $1.3 million versus $5.3 million a year ago. Our home building operating income margin decreased to 10.8% compared to 11.4% for the 2023 first quarter, mainly due to a higher SG&A expense ratio in the current quarter. Scooting Inventory Related Charges, our operating margin of 10.9%, decreased 80 basis points year over year. We anticipate our 2024 second quarter home building operating income will be in the range of 10.1 to 10.5 percent, and the four-year metric to be approximately 10.9 to 11.3. Our 2024 first quarter housing gross profit margin of 21.5% was even with the year earlier quarter. However, excluding inventory-related charges in both periods, our gross margin decreased by 20 basis points year-over-year to 21.6%.

The current quarter included the abandonment charges of $1 3 million versus $5 3 million a year ago.

Speaker Change: Our homebuilding operating income margin decreased to 10, 8% compared to 11, 4% for the 2023 first quarter, mainly due to a higher SG&A expense ratio in the current year quarter.

Excluding inventory related charges, our operating margin of 10, 9% decreased 80 basis points year over year.

Speaker Change: We anticipate our 2024 second quarter homebuilding operating income margin will be in the range of 10, one to 10, 5% and.

In the full year metric to be approximately $10 nine to 11, 3%.

Speaker Change: Our 2024 first quarter housing gross profit margin of 21, 5% with even with the year earlier quarter exceed.

Speaker Change: Excluding inventory related charges in both periods, our gross margin decreased by 20 basis points year over year to 21, 6%.

Speaker Change: We are forecasting a 2024 second quarter housing gross profit margin in a range of $25 to 21%, reflecting homebuyer concessions offered for homes sold in the second half of last year amid the challenging conditions at that time that are expected to deliver in <unk>.

Jeff: We are forecasting a 2024 second quarter housing gross profit margin in a range of 20.5 to 21%, reflecting homebuyer concessions offered for homes sold in the second half of last year amid the challenging conditions at that time that are expected to deliver in the quarter. We project improved quarterly margins in the second half of 2024, supported by the margin profile in our backlog, improved leverage on fixed costs due to higher expected deliveries, and anticipated lower rate buy-down incentives. We expect our full year gross margin will be in the range of 21 to 21.4%, assuming stable housing market conditions. Our selling general and administrative expense ratio of 10.8% for the first quarter was up from 10.1% for the year earlier quarter, mainly reflecting higher costs, including marketing, advertising, and other expenses associated with the planned increase in our community during the year as we position our operations for growth.

Speaker Change: Quarter.

Speaker Change: We project improved quarterly margins in the second half of 2024 supported by the margin profile and our backlog improved leverage on fixed costs due to higher expected deliveries and anticipated lower rate buy down incentives.

Speaker Change: We expect our full year gross margin will be in the range of 21 to 21, 4% assuming stable housing market conditions.

Speaker Change: Our selling general and administrative expense ratio of 10, 8% for the first quarter was up from 10, 1% for the year earlier quarter, mainly reflecting higher costs, including marketing advertising and other expenses associated with the planned increase in our community count during the year as we position our operations for <unk>.

Speaker Change: Growth.

Speaker Change: We are also investing in personnel and other resources and alignment with the expected larger scale of our business.

Jeff: We are also investing in personnel and other resources in alignment with the expected larger scale of our business. We're forecasting our 2024 second quarter SG&A ratio to be approximately 10.5%, and we expect our full year 2024 ratio will be approximately 10.2%. Our income tax expense of $36 million for the first quarter represented an effective tax rate of 20.6%, an improvement from 22.6% for the year earlier quarter.

Speaker Change: We are forecasting our 2024 second quarter SG&A ratio to be approximately 10, 5% and expect our full year 2024 ratio will be approximately 10, 2%.

Speaker Change: Our income tax expense of $36 million for the first quarter, representing an effective tax rate of 26% an improvement from 22, 6% for the year earlier quarter.

Jeff: This improvement was predominantly due to an increase in tax benefits related to stock-based compensation in the current period. We expect our effective tax rate for the 2024 second quarter to be approximately 24% and for the full year to be approximately 23% due to the low rate realized in the first quarter. Overall, our first quarter net income increased 10% year over year to $138.7 million, and our diluted earnings per share improved 21% to $1.76, reflecting both the growth in net income and the favorable impact of common stock repurchases over the past year. Turning now to community count, our first quarter average of 240 was down 4% from the corresponding 2023 quarter. We added the corner with 238 communities. We expect to grow our portfolio of communities during the second quarter by about 5%, and then with approximately 250 communities. This would result in an average community count for the second quarter of 244.

Speaker Change: This improvement was predominantly due to an increase in tax benefits related to stock based compensation in the current period.

Speaker Change: We expect our effective tax rate for the 2024 second quarter to be approximately 24%.

Speaker Change: For the full year to be approximately 23% due to the low rate realized in the first quarter.

Speaker Change: Overall, our first quarter net income increased 10% year over year to $138 $7 million and our diluted earnings per share improved 21% to $1 76.

Speaker Change: Reflecting both the growth in net income and the favorable impact of common stock repurchases over the past year.

Speaker Change: Turning now to community count our first quarter average of 240 was down 4% from the corresponding 2023 quarter.

Speaker Change: We ended the quarter with 238 communities.

We expect to grow our portfolio of communities during the second quarter by about 5% and then with approximately 250 communities.

Speaker Change: This would result in an average community count for the second quarter of 244.

Speaker Change: We remain focused on growing our community count and believe our average community count into 2020 for third and fourth quarters will be higher than in the prior year periods in.

Jeff: We remain focused on growing our community count and believe our average community count in the 2024 3rd and 4th quarters will be higher than in the prior year period. In addition, our current outlook reflects approximately 260 open communities at year-end, which is about 10 fewer than we previously expected as a result of the stronger selling environment anticipated to drive more 2024 sellouts, as well as a handful of communities now expected to open during the 2025 first quarter. We invested approximately $590 million dollars in land and land development during the first quarter, and we ended the quarter with a pipeline of approximately 55,500 lots owned or under contract. During the first quarter, we repurchased nearly 830,000 shares of our common stock at an average price of $60.48.

Speaker Change: In addition, our current outlook reflects approximately 260 open communities at year end, which is about 10 fewer than we previously expected as a result of the stronger selling environment anticipated to drive more 2024, sellouts as well as a handful of communities now.

Speaker Change: Now expected to open during the 2025 first quarter.

Speaker Change: We invested approximately $590 million in land and development during the first quarter and we ended the quarter with a pipeline of approximately $55 500 lots owned or under contract.

Speaker Change: During the first quarter, we repurchased nearly 830000 shares of our common stock at an average price of $60 48.

Jeff: As Jeff mentioned, we intend to continue to repurchase shares and expect the pace, volume, and timing of share repurchases to be based on considerations of our cash flow, liquidity outlook, land investment opportunities and needs, the market price of our shares, and the housing market and general economic environment. At quarter end, our total liquidity was approximately $1.75 billion, including over $1.08 billion of available capacity under our unsecured revolving credit facility and $668 million of cash.

Speaker Change: As Jeff mentioned, we intend to continue to repurchase shares and expect to pace volume and timing of share repurchases to be based on considerations of our cash flow liquidity outlook land investment opportunities and needs the market price of our shares in the housing market in general.

Speaker Change: Click environment.

Speaker Change: At quarter end, our total liquidity was approximately $1 $75 billion.

Speaker Change: Including over 1.08 billion of available capacity under our unsecured revolving credit facility.

Speaker Change: $668 million of cash.

Speaker Change: Our quarter end stockholders' equity increased to approximately $3 9 billion.

Jeff: Our quarter and stockholders' equity increased to approximately $3.9 billion, and our book value per share was up 14% year-over-year to $51.14. In conclusion, we are pleased with our first quarter financial performance and expect to see solid housing market conditions for the remainder of 2024, driven by favorable demographic trends, the ongoing imbalance of housing supply and demand, and expected moderation in interest rates later in the year. We intend to sustain our focus on generating reductions across our operations and build times and construction costs, while also driving growth and expanding our scale through land-related investments and Duke Community Open. We plan to maintain our balanced approach to capital allocation, encompassing significant cash deployment back into land and development to produce top-line growth, while also returning cash to stockholders through common stock repurchases and dividends, with an overall focus on long-term stockholder value creation. We will now take your questions. John, please open the line.

Speaker Change: And our book value per share was up 14% year over year to $51 14.

Speaker Change: In conclusion, we are pleased with our first quarter financial performance and expect to see solid housing market conditions for the remainder of 2024, driven by favorable demographic trends the ongoing imbalance of housing supply and demand and expected moderation in interest rates.

Speaker Change: Later in the year.

Speaker Change: We intend to sustain our focus on generating reductions across our operations and build times in construction costs, while also driving growth and expanding our scale through land related investments and new community openings and we plan to maintain our balanced approach to capital allocation encompassing significant cash deployment.

Speaker Change: Back in the land and development to produce topline growth. While also returning cash to stockholders through common stock repurchases and dividends with an overall focus on long term stockholder value creation.

Speaker Change: We will now take your questions John Please open the lines.

John: Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two if you'd like to remove your question from the queue for.

John: Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone. A confirmation tone will indicate that your line is active. You may press star 2 if you'd like to remove your line.

John: For participants using speaker equipment, it may be necessary to pick up your hands. We ask that you please limit yourself to one question and one follow-up. One moment, please, while we pause. And the first question comes from the line of Matthew Bouley with Barclays. Please proceed with your question. Hi, you have Elizabeth Langan on for a mat today.

John: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

John: We ask that you please limit yourself to one question and one follow up thank you one.

One moment, please while we poll for questions.

John: And the first question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

John: Hi, you have Elizabeth weighing in on for Matt today.

Elizabeth Ann Langan: So just kind of starting off with the margin, would you mind talking a little bit about the margin cadence through the year? You're assuming that next quarter will be impacted by the higher incentive levels in the latter part of 2023. Would you mind talking a little bit about what we should expect for the second half, you know, kind of what you're seeing with incentive levels right now and how those, how you'd expect those to flow through? Sure.

Matthew Bouley: So just kind of starting off with.

Elizabeth: The margin would you mind talking a little bit about the margin cadence through the year.

Elizabeth: Assuming that next quarter will be impacted by the higher incentive levels in the latter part of 2020 Threes would you mind talking a little bit about what we should expect for the second half.

Threes: Kind of what Youre seeing with incentive levels right now and how the how you would expect those to flow through.

Threes: Sure Yeah as I mentioned in the prepared remarks, we do expect some improvement in the second half of the year to arrive at that.

Jeff: Yeah, as I mentioned in her remarks, we do expect some improvement in the second half of the year to arrive at that overall guide for the full year of 21 and 21.4%. What we are seeing, particularly this year and actually part of last year, pretty stable gross margin outlook quarter to quarter. You know, we're basically forecasting plus or minus 21% in all four quarters of this year.

Threes: Overall guide for the full year of 21 to 21, 4%.

Threes: What we are seeing particularly this year and actually part of last year were pretty stable gross margin outlook quarter to quarter.

Threes: We're basically forecasting plus or minus 21% in all four quarters of this year.

Jeff: And you'll see some improvement, obviously, in the back half, particularly in the fourth quarter, with improved leverage based on higher deliveries and more revenues. So that's really the outlook at the current time. Okay, thank you.

Threes: Youll see some improvement obviously in the back half, particularly in the fourth quarter with.

Threes: Improved leverage based on the higher deliveries and more revenues so.

Threes: Thats really the outlook at the current the current time.

Speaker Change: Okay. Thank you.

Elizabeth Ann Langan: And would you mind touching a little bit on what you're seeing around buyer affordability and maybe your expectations around pricing? You know, do you think that, you've said that you think that you can probably bring mortgage concessions down a little bit? Are buyers more responsive to something other than rate buydowns? Or are they, you know, seeing options like increasing their customization options or anything that you're seeing around that?

Speaker Change: And would you mind touching a little bit on what youre seeing around buyer affordability and maybe your expectations around pricing.

Speaker Change: Do you think that.

Speaker Change: You said that you think that you can probably bring mortgage mortgage concession is down a little bit.

Speaker Change: Our buyers more responsive.

Speaker Change: Can you just something other than rate buy downs or.

Speaker Change: Are they seeing.

Speaker Change: And increasing their customization options.

Speaker Change: Or anything that youre seeing around that.

Speaker Change: Yes.

Jeff Mezger: There are a lot of components to that question, Elizabeth, but I can make a few comments and then pass it to Rob for some of the specifics on our buyer profile. As we shared in our comments in the first quarter, we were focused on building our backlog and driving more sales. We left the incentive levels for mortgage concessions similar to the prior quarter and pushed the pace, and where we could, we took some, I called them moderate price increases in my prepared remarks. So, part of optimizing the assets, building our backlog, and setting up the scale for the year. Get a higher absorption rate and then start working a little bit on margin along the way.

Speaker Change: There were a lot of components to that question was.

Speaker Change: I can make a few comments and then pass it to Rob for some of the specifics on our buyer profile.

Speaker Change: As we shared in our comments in the first quarter.

We're focused on building, our backlog and driving more sales so we.

Robert V. McGibney: We left the incentive levels for mortgage concession similar to the prior quarter.

Robert V. McGibney: And push the pace and where we could we took some I would call. It moderate price increases in my prepared remarks, so part of optimizing the asset build our backlog setup the scale for the year.

Robert V. McGibney: You had a higher absorption pace and then start working a little bit on margin along the way.

Robert V. McGibney: As we shared in the credit metrics of our buyers we have a very strong buyer profile right now.

Jeff Mezger: As we shared in the credit metrics of our buyers, we have a very strong buyer profile right now, particularly when 50% of our buyers are first timers. Put it in that context and think of the FICO scores and the average down payment.

Robert V. McGibney: Particular, when 50% of our buyers are first time, we put it in that context and think of the FICO scores and.

Robert V. McGibney: And the average down payment. This is a very well qualified buyer.

Jeff Mezger: This is a very well-qualified buyer. We're not having an issue with qualifying, as you can see from our pull-through on the backlog and, frankly, the orders that we're generating while taking a little bit of a price. We've been poking around on what's going on with the buyer and the sensitivities to debt ratios, income, and qualifying. Rob can give you some specifics. Go ahead, Rob

Robert V. McGibney: We're not having an issue with would qualify and as you can see from our pull through on the backlog and frankly, the orders that we're generating model taken a little bit of price, but we've been poking around on.

Robert V. McGibney: What's going on with the buyer and the sensitivities to debt ratios.

Robert V. McGibney: Income and qualify and Rob can give you some specifics on that go ahead Rob.

Robert V. McGibney: Yes, as far as the credit ratios debt ratios were really not seeing any major change in fact on our closings we've seen debt to income ratios fall slightly so still a really well healed buyer they've got sufficient income got good credit seeing demand at our price points and I think that speaks to the price points that.

Rob: Yeah, as far as the credit ratios, debt ratios, we're really not seeing any major change. In fact, on our closings, we've seen that the income ratios fall slightly. So still a really well-heeled buyer, you know, they've got sufficient income, got good credit, and are seeing demand at our price points.

Rob: And I think that speaks to the price points that we're at and the quality of our product. You mentioned studio and buyer behavior and what they're picking for design choices. And I think this speaks to that as well, because we really have not seen a change in studio spend despite some of the affordability challenges that are out there in the markets. And, you know, we've seen some shifts in what they're spending that money on, more things like permanent features in the home, like room configurations or cabinets or, you know, converting it into a bedroom, things that you can't easily change down the road.

Robert V. McGibney: We are at and the quality of our product.

Robert V. McGibney: Mentioned studio in buyer behavior, and what they are picking through design choices.

Robert V. McGibney: This speaks to that as well because we really haven't seen a change in studio spin. Despite some of the affordability challenges that are out there in the markets.

Robert V. McGibney: We've seen some shifts in what they are spending that money on more things like permanent features in the home, but room configurations or cabinets or converting it into a bedroom things that you can easily change down the road.

Rob: But between everything that Jeff just mentioned and the credit and income levels that we talked about, in addition, we haven't really seen a shift in the square footage that buyers are purchasing. So, I'm pretty confident that our buyers are, you know, they've got the ability to qualify. And we're seeing that in our results today. And the next question comes from Stephen Kim with Evercore ISI. Please proceed with your question. Yeah, thanks very much, guys. I appreciate all the color, as always.

Robert V. McGibney: Between everything that Jeff just mentioned and the credit.

Robert V. McGibney: Income levels that we've talked about in addition, we haven't really seen a shift in the square footage that buyers are purchasing so pretty confident that our buyers are.

Got the ability to qualify and we're seeing that in our results today.

Robert V. McGibney: And the next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Stephen Kim: Yes, thanks, very much guys appreciate all the color as always.

Stephen Kim: And yeah, congrats on the good results. I have a couple of questions. Number one, I was wondering if you could give us a sense for what we should be thinking about for 2024, a kind of targeted level of operating cash flow as a percentage of net income, you know, that cash conversion, you know, what sort of level we should be thinking about for you? And then also, from a longer-term perspective, operating margin, and profitability have been improving. What do you think? Do you agree?

Stephen Kim: Yes, congrats on the good results.

Stephen Kim: Couple of questions number one I was wondering if you could give us a sense for what we should be thinking about for in 2024 kind of a targeted level of operating cash flow as a percentage of net income that kind of cash cash burn sorry cash.

Stephen Kim: Cash conversion, what what sort of level, we should be thinking about for you and then also from a longer term perspective.

Stephen Kim: Operating margin profitability has been improving what do you think.

Jeff: What do you think a level of longer-term sustainable operating margin can be for your company? I'm sort of thinking maybe, you know, 13%, or something like that. I was wondering if you could respond to that. Sure. Are we counting that as two questions or one, Steve? No, that's just one, Jeff.

Stephen Kim: Level of longer term sustainable operating margin can be for your company I'm sort of thinking maybe 13% or something like that I was wondering if you could respond to that.

Speaker Change: Sure I can count on that.

Speaker Change: Two questions are one Steve.

Speaker Change: No Thats just one Jeff.

Speaker Change: Well I'll give you a break well, let you ask a follow up.

Jeff: We'll give you a break. We'll let you ask for a follow-up. OK, so the first question on cash flow, as you guys are probably fairly used to with us, I mean, we don't really go out and forecast cash flow through the fiscal year because it depends on a lot of factors, most predominantly including land spend and then, over the past couple of years, the level of buybacks. If we go up top and look at operating cash flow, the big opportunity for us continues to be in the area of build time and reduction in We mined a lot of that cash last year when we had a very significant improvement in construction cycle time, and it freed up a ton of cash for us, put us in the really strong balance sheet position we're in today with a lot of liquidity and a lot of dry powder to go back and buy shares and reinvest in the land.

Speaker Change: Okay. So the first question on cash flow as you guys are probably.

Speaker Change: Only used to with US I mean, we don't really go out and forecast cash flow through through the fiscal year, because it depends on a lot of factors, including most predominantly including land spend and then.

Speaker Change: Over the past couple of years the level of buybacks to go off top and look at operating cash flow the big opportunity for US continues to be in the area of build time and reduction in build time, we mined a lot of that cash last year, where we had a very significant.

Speaker Change: Improvement in.

Speaker Change: In construction cycle time, and accrete up a ton of cash for us.

Speaker Change: Put us in a really strong balance sheet position, we're in today with a lot of liquidity.

Speaker Change: Lot of dry powder to go back and buy shares and reinvest in land. We anticipate continued success of that and continued strong and healthy cash flow.

Speaker Change: Acknowledging that a lot of the oversized or a supersized gains that we had on the <unk>.

Reduction in build times was.

Jeff: We anticipate continued success in that and continued strong and healthy cash flow, but acknowledging that a lot of the oversized or supersized gains that we had on the reduction in bill times are, You know, a little bit behind us at this point. So, sorry, your second question was... Oh, the 13% on the operating margin. Yeah, I think, you know, like, when you look at it, I saw your report and know that there was a number you had in there. You know, look, it's definitely within reach.

A little bit behind us at this point.

Speaker Change: So sorry. Your second question was 13% to 13% on the operating margin, Yes, I think when you look at I saw your report and know that there was the number you had in there.

Speaker Change: Look yes.

Speaker Change: Definitely within reach I mean, we're not going to go out and guide or or lay out a plan for the company.

During the Q&A period quarterly conference call, but.

Speaker Change: We're then.

Speaker Change: We're indifferent to that already and I would hope to see improvement actually over and above that over time.

Jeff: I mean, we're not going to go out and guide or, you know, lay out a plan for the company during the Q&A period of a quarterly conference call. But, you know, we're within the distance of that already. And I'd hope to see improvement actually over and above that over time. That just requires about a point decrease in what we're anticipating for this year's SG&A, which I think comes with scale and size and leverage and some of our SG&A costs at this point. And as the market stabilizes and improves, particularly with declining rates that we do expect to see and reinforce today by some of the Fed's comments, moving away from some of the incentives, which you know is not really part of our business model, to get into that, you know, low 20s range. I mean, we're already there, but to improve on where we're at today on the gross margin side. I think it's a reasonable assumption. I think it's, you know, I would like to think it's on the very conservative side as far as a long-range target for the company and certainly attainable, so, you know, that's basically my comments on that at a very high level. I appreciate that. Thanks very much, guys.

Speaker Change: And that just requires about a point decrease than what we're anticipating for this year is SG&A, which I think comes with with scale and size and leverage on some of them are.

SG&A costs at this point.

Speaker Change: And as the market stabilizes and improves particularly with.

Speaker Change: Declining rates that we do expect to see and reinforced today by some of the fed's comments.

Speaker Change: Moving away from some of the incentives, which you know is not really part of our business model.

Speaker Change: To get into that low twenties.

Speaker Change: Range I mean, we're already there to improve on where we're at today and the gross margin side. So I think it's a reasonable assumption I think it's.

Speaker Change: I would like to think it's on the very conservative side as far as a long range target for the company.

Speaker Change: And certainly attainable.

Speaker Change: So that's basically my comments on that at a very high level.

Speaker Change: Okay I appreciate that thanks, very much guys thats really encouraging.

Speaker Change: The second question relates to the Big news regarding the <unk> settlement.

Speaker Change: Yeah.

Speaker Change: Obviously, I think it's created a lot of turmoil what I'm intrigued about the potential for this confusion and the relatively quick.

Speaker Change: <unk> framed by which all of these changes need to be made.

Stephen Kim: That's really encouraging. The second question relates to the big news regarding the NAR's settlement, which obviously, I think has created a lot of turmoil. What I'm intrigued about is the potential for this confusion and the relatively quick time frame by which all these changes need to be made, whether that might result in a somewhat dysfunctional resale market that large builders such as yourselves could capitalize on with your Internet presences, which I know you've substantially bolstered over the last several years. My question is, can you give us a sense of how much of your leads today are generated through the Internet, and do those Internet-driven leads carry a lower SG&A burden when they ultimately come through in sales?

Speaker Change: Whether that might result in a.

Speaker Change: Somewhat dysfunctional resale market.

Speaker Change: Large builders such as yourselves could capitalize on with your Internet presence is which I know you've substantially bolstered over the last several years and so my question is can you give us a sense for what share of your leads today are generated through the internet and do those internet driven leads carry a lower SG&A.

Speaker Change: Burton.

Burton: When they ultimately come through in sales.

Rob: Rob, do you have any detail on that on the internet leads and the profile? Yeah, Steve, not so much as the percentage, but I would say, you know, the majority of buyers that are finding us are finding us through those avenues. And we've seen a big increase, and our internet leads just overall were up 30, 34% year over year. So pretty, pretty big movement there.

Burton: Do you have any detail on that on the internet leads in the profile.

Burton: Yes.

Burton: <unk> not so much as the percentage, but I would say the majority of <unk>.

Burton: Buyers that are finding us are finding us through those.

Speaker Change: Through those avenues, and we've seen a big increase in our Internet leads just overall it was up 30, 34%.

Speaker Change: Year over year, so pretty pretty big movement there.

Rob: As far as the opportunity with the NAR and the settlement, I think it's still a little cloudy to predict how that's going to go. I think, if anything, it's going to be a positive for us with, you know, potentially less that's being paid in broker co-ops and things like that. But I think there's a lot to be worked out when that goes into effect this summer. You know, one of the components of it is that the compensation can't be advertised on the MLS, but then they likely will have other ways to advertise that through Facebook or other methods or face to face.

Speaker Change: As far as the opportunity with the NAR in the settlement I think it's still a little cloudy to predict how that's going to go I think if anything it's going to be a positive for us with.

Speaker Change: Potentially less that's being paid in broker co ops and things like that but I think there's a lot to be worked out there when that goes into effect. This summer one of the.

Speaker Change: One of the components of it is that the compensation can't be advertised on the MLS, but then they likely have other ways to advertise that through Facebook or other methods or face to face. So a lot of it remains to be seen certainly don't see it as a downside to us as a result of our financials potentially an upside, but I think it's a little too early to tell.

Alan Ratner: So a lot of it remains to be seen. Certainly, I don't see it as a downside to us, our results, or our financials, potentially an upside, but I think it's a little too early to tell. And the next question comes from the line of Alan Ratner with Zellman & Associates. Please proceed with your, Hey guys, good afternoon. Nice, nice quarter. I appreciate all the colors so far.

Speaker Change: And the next question comes from the line of Alan Ratner with Zelman <unk> Associates. Please proceed with your question.

Alan Ratner: Hey, guys good afternoon.

Alan Ratner: Nice quarter and I appreciate all the color so far.

My first question and I really appreciate all the statistics you gave on the credit side I was admittedly a little surprised from one of your competitors last week kind of talked a little bit about.

Jeff Mezger: So my first question, and I really appreciate all the statistics you gave on the credit side, you know, I was admittedly a little surprised when one of your competitors last week kind of talked a little bit about some rising early stage red, you know, yellow flags or red flags and some of their customer credit metrics like credit card delinquencies and things like that. And, you know, I just want to make sure I'm thinking about your commentary in the same vein because I think a lot of the statistics you gave are maybe on closings and kind of more representative of what might have been going on six months or so ago. So can you just, you know, be clear that you are not seeing any signs of stress, you know, in kind of real time in terms of the consumers that are coming through your model homes today? Yeah, I'll take that one.

Alan Ratner: Some rising early stage red yellow flags red flags in some of their customer credit metrics like credit card delinquencies and things like that and I just want to make sure I'm thinking about your commentary in the same vein because I think a lot of the statistics you gave are maybe on closings and kind of more.

Alan Ratner: Representatives might what might have been going on six months or so ago. So.

Alan Ratner: Can you just be clear that you are not seeing any signs of stress in kind of real time in terms of the consumers that are coming through your your model homes today.

Speaker Change: Yes ill take that one I mean really when I was speaking about the debt to income ratios earlier that actually was based on sales not closing than we have seen okay. Both ratios improved slightly over the last few quarters now our leads are up I talked a little bit about the internet leads so we're seeing a lot more people.

Rob: I mean, really, when I was speaking about the debt to income ratios earlier, that was actually based on sales, not closing. And we've seen those ratios improve slightly over the last few quarters. Now, you know, our leads are up. I talked a little bit about the internet leads. So we're seeing a lot more people. So the raw number of people that don't qualify is increased. But as far as the percentage, I don't really see that that's changed much. And we're not, we're not seeing those pressures at this. Great.

Speaker Change: The raw number of people that don't qualify as increase but as far as the percentage I don't really see that thats changed much and we're not we're not seeing those pressures at this point.

Speaker Change: Great Okay.

Speaker Change: 0.2, I point to our can rate the cap rate is now below normal for us and I think thats the right buyers ability to perform.

Speaker Change: Yes that makes sense.

Speaker Change: Appreciate the clarification on that so my second question is on kind of the land portfolio and nice nice pickup in that in land acquisition activity in the quarter.

Rob: Okay. I point to our, I point to our can rate on the can rates now below normal for us, and I think that speaks to a lot of people. Buildings.

Speaker Change: Your lot count.

Speaker Change: Looking at this correctly, it's down about 10% year over year down almost 40% from two years ago and your year supply of land.

Rob: Yeah, that makes sense. I appreciate the clarification on that. So my second question is on kind of the land portfolio and, you know, nice to pick up in land acquisition activity in the quarter. But your lot count, if I'm looking at this correctly, is down about 10% year over year and down almost 40% from two years ago. And your year's supply of land, you know, is kind of hovering in that four-ish year metric, which is among the lowest in the industry. And I'm just curious, is that, would you say, by design, you know, as an effort to kind of improve your capital efficiency or turnover? Or is that land supply? I know you mentioned you've got all the land you need for 25.

Speaker Change: Hovering in that four ish year.

Metric, which is among the lower in the industry and I'm. Just curious is that would you say that's by design as an effort to kind of improve your capital efficiency or turnover or is that land supply I know you mentioned you've got all the land do you need for 'twenty five but would you like to see that that land pipeline, a little bit higher than it is currently.

Okay.

Speaker Change: Oh actually theres, a lot of moving parts to it.

Speaker Change: To reflect back on the.

Speaker Change: The push and pull we've been through there was a couple of times over the past few years, where we pulled out of the land market.

Speaker Change: It was cloudy, what's really happened in post COVID-19 and that took off that interest rates, Ron and things solved pullback again.

Alan Ratner: But would you like to see that land pipeline a little bit higher than it is? Actually, there's a lot of moving parts to it, and you reflect back on the... Push and Pull we've been through. There were a couple of times over the past few years where we pulled out of the landmark because it was cloudy. What's really happening post COVID and then that took off, interest rates ran, and things stalled. So you pull back again and reset, and we extend a lot of deals, renegotiated others, we did a lot of things, kept control of the assets that we like. So it's kind of deceptive to look at two years ago because that was one of the periods where we walked out of a lot of options at that time because they weren't making the sense that they did when they were. But we don't have to do anything outside of our underwriting in order to fill the pipeline. So we have a healthy discipline that we're adhering to. And yet, at the same time, we're encouraging the divisions to grow. So at a four-year supply, actually, of owned, that's probably a little high. I'd rather have it more controlled, less owned, if we can get there.

Speaker Change: A reset and we we extended a lot of deals.

Speaker Change: Renegotiated others, we did a lot of things kept the control of the assets that we like it.

Speaker Change: It's kind of a deceptive to look at two years ago, because that was one of the periods, where we walked out of a lot of options at that time.

Speaker Change: They werent, making the sense that they did when they were first tied up so we're comfortable with where we're at where that healthy tension we need lots for 26 and beyond.

Speaker Change: We don't have to do something.

Speaker Change: Outside of our underwriting in order to fulfill the pipeline. So we're we have a healthy discipline that we're adhering to.

Speaker Change: Yet at the same time, we're encouraging the divisions to grow so.

Speaker Change: Four year supply.

Speaker Change: Actually the one that's probably a little high I would rather have it more control less owned if we can get there, but we're pretty.

Comfortable with our position heading into 2006 right now its a focus on 26 and beyond.

Speaker Change: And our next question comes from the line of John Lovallo with UBS. Please proceed with your question.

John Lovallo: Hey, guys. Thank you for taking my questions. The first one is can you just help us with the drivers of the 60 basis point gross margin beat versus your expectations in the first quarter and then help us with sort of the walk from the first quarter to the second quarter in terms of factors like the leverage impact mix net price et cetera.

Jeff Mezger: But we're pretty comfortable with how we're positioned heading into 26. Right now, it's a focus on 26. And our next question comes from the line of John Lovallo with UBS. Please proceed with your question. Hi guys, thank you for taking my questions.

John Lovallo: Right.

John Lovallo: So yes, there were a few things that came into that one was we had a little bit of mix shifts. So we pulled and interestingly we've put a lot of the higher margin deliveries out of Q2 into Q1.

John Lovallo: The first one is, can you just help us with the drivers of the 60 basis point gross margin beat versus your expectations in the first quarter? And then help us with sort of the walk from the first quarter to the second quarter, in terms of factors like, you know, the leverage impact, mix, net price, etc. [inaudible] So, yeah, there were a few things that came into that.

John Lovallo: On an incremental basis towards the end of the quarter, which were always driving to close as many homes as we can and try to get those behind us and this time the mix worked out in our favor.

John Lovallo: We had some pickup on that side. The can rate was a pretty important factor for us as well, where we didn't have to resell homes that had already.

Jeff: One was we had a little bit of mixed shifts, so we pulled, and interestingly, we pulled a lot of the higher-margin deliveries out of Q2 into Q1 on an incremental basis towards the end of the quarter, which, you know, we're always driving to close as many homes as we can and try to get those behind us. And this time, the mix worked out in our favor where, you know, we had some pickup on that side.

John Lovallo: Our backlog at healthy margins and we didn't have to quickly discount those homes to get them sold in the quarter.

John Lovallo: So that helped us incrementally and we've been.

John Lovallo: Really it's part of the forecast that's always a difficult one to forecast out. So we did I will say is.

John Lovallo: We are forecasting the 21% for the first quarter anticipated can rates similar to what we've seen in the prior two quarters in.

Jeff: The can rate was a pretty important factor for us as well, where we didn't have to resell homes that had already been in our backlog at healthy margins, and we didn't have to, you know, quickly discount those homes to get them sold in a quarter. So, you know, that helped us incrementally. And we've been, Really, you know, as far as the forecast goes, that's always a difficult one to forecast out.

John Lovallo: And have a little bit tucked away on that debt increments.

John Lovallo: So those were the main drivers.

John Lovallo: We like to be we'd like being up when you look at it sequentially.

John Lovallo: Were really based in the second quarter predominantly off what's in our backlog.

John Lovallo: <unk>.

John Lovallo: We really saw sort of a tick up in some of those incentives and whatnot back in those times when those sales were booked and theyre coming through in the final thing and it's always the same.

Jeff: So we did, I will say, you know, as we were forecasting the 21% for the first quarter, anticipated a CAN rate similar to what we'd seen in the prior two quarters and had a little bit tucked away on that increment. So those were the main drivers, you know, we like to be, we like being up, you know, when you look at it sequentially we're really based in the second quarter predominantly off what's in our backlog and you know, we really saw sort of a tick off in some of those incentives and whatnot back in those times when those sales were blocked and they're coming through and you know, the final thing and it's always the same and I know everyone hates hearing it including me oftentimes but mix plays a big part of this, you know, between communities, high margin, low margin communities, between regions and between divisions.

John Lovallo: I mean hate sharing and including me oftentimes, but mixed plays a big part of this between communities.

John Lovallo: Arjun low margin communities.

John Lovallo: <unk> regions and between divisions. So all of those factors sort of come together and that in.

John Lovallo: If you are plus or minus a percent.

John Lovallo: Over quarter over quarter.

John Lovallo: For the most part.

John Lovallo: Kind of reflects an operation that is running pretty smoothly your poem.

John Lovallo: Pulling your deliveries from your backlog youre, not seeing any cancellations youre not having money.

John Lovallo: Much pressure on you to resell homes and closing in the current quarter.

Due to cancellations and we really like the steady environment that we saw in the first quarter.

Jeff: So all of those factors sort of come together in that, and you know, if you're plus or minus a percent quarter over quarter over quarter, for the most part, it kind of reflects an operation that's running pretty smoothly. You're pulling your deliveries from your backlog, you're not seeing many cancellations, you're not having... much pressure on you to resell homes and close them in the current quarter due to cancellations. And we really like the steady environment that we saw in the first quarter. It was a really nice start to the year for us, and we're looking forward to the rest of the year as a result of that, particularly selling. I got it.

John Lovallo: It was a really nice start to the year for us and we're looking for the rest of the year as a result of that particularly.

Selling through the spring.

Speaker Change: Got it that's helpful. Jeff and then if we think about the slight uptick in the outlook for SG&A as a percentage of sales to 10, 2% I mean, thats coming with slightly fewer communities than you were previously expecting a little bit of an uptick in sales, but I guess the question is does that reflect the need for higher broker Commission.

Speaker Change: A higher marketing spend things of that nature, but what exactly is driving that slight uptick.

John Lovallo: That's helpful, Jeff. And then if we think about the slight uptick in the outlook for SG&A as a percentage of sales to 10.2%, I mean, that comes with, you know, slightly fewer communities than you were previously expecting a little bit of an uptick in sales. But I guess the question is, you know, does that reflect, you know, the need for higher broker commissions or higher marketing spend, things of that nature? Or what exactly is driving that slight uptick? It really has nothing to do with the commission side of it.

Jeff: It really has nothing to do with the commission side of it we are putting a little bit more money in the marketing and advertising as we talked about on the community count.

Jeff: As you pointed out declining.

Jeff: Half of that decline was really due to earlier sellouts and the community. The other half is just a few communities that pushed out into the first half of 'twenty five so we're still planning on spending money marketing advertising et cetera for those communities.

Jeff: Yet in the fourth quarters, we're approaching openings on those so it really didnt impact that.

Jeff: In a way where allowed us to reduce expenses on that side, but I think overall if you didn't go right up top on the SG&A side. We're just we're just preparing the company to operate at a larger scale, we're putting in some personnel resources, where we need it Rob.

Jeff: We are putting a little bit more money into marketing and advertising, as we talked about. On the community count, you know, as you pointed out, declining. I mean, half that decline was really due to earlier sellouts.

Jeff: <unk> talked a bit about some of the operational.

Jeff: And the community, the other half is just a few communities that pushed out in the first half of 25. So we're still planning on spending money on marketing, advertising, etc. for those communities, you know, yet in the fourth quarters, we're approaching openings on those. So it really didn't impact it in a way where there was a lot of reduced expense on that side.

Jeff: Assignments and promotions and positions that we have in the business as we're expanding.

Jeff: The size of our of our divisions and our focus on growth.

Jeff: And returns and we just feel that scaling up this company.

Jeff: We'll do some really good things for <unk>.

Profitability.

Jeff: Efficiency and returns and we're really well positioned at that point in time, having.

Jeff: But I think overall, if you just go right up top on the SG&A side, we're just preparing the company to operate at a larger scale. We're putting in some personnel resources where we need them. Rob talked a bit about some of the operational assignments and promotions and positions that we have in the business as we're expanding the size of our divisions and the focus on growth and returns, and we just feel that, you know, scaling up this company will do some really good things for profitability, capital efficiency, and returns. And we're really well positioned at that point in time to have a rock-solid balance sheet to fix a lot of the issues that we And the next question comes from the line of Michael Rehaut with JPMorgan. Thank you for receiving your questions. Hi everyone, this is Andrew Hazayon from Mike.

Jeff: Just a rock solid balance sheet and fixing a lot of the issues that were nagging for many many years and we're well beyond those at this point so we're.

We're just.

Jeff: Looking forward to growing this company go into returns as we move forward.

Jeff: And the next question comes from the line of Michael Rehaut with Jpmorgan. Please proceed with your question.

Jeff: However, this is Andrew <unk> on for Mike I. Appreciate you taking my question.

Andrew: I guess just more on the longer term side.

Andrew: Should we be expecting any kind of change to your mix going forward.

Andrew: You grow I believe in <unk> your closings your mix was roughly 50% entry level, 25% move up and.

And the rest being active adult and second time move up.

Andrew: Yes.

Speaker Change: I think the market will dictate that more than we will.

Speaker Change: Say that because when you're a built to order.

Speaker Change: Company and Youre focused on the median incomes in the Submarkets that you're operating and you cater to everybody and you have a product out there where it may shift to more move up and be the lesser footages lower price points or it can shift to the first move up in the <unk>.

Andrew Hazayon: I appreciate you taking my question. I guess it's just more on the longer term side. Should we be expecting any kind of change to your mix going forward as you grow? I believe in 4Q, your closings, your mix was roughly 50% entry level, 25% move up, and the rest being active adult and second time move up. Yeah, I think the market will dictate that more than we will. And I say that because when you're a bill to order, "The Larger Home in the Bigger Room." Higher Income, and if I can move up. The market will dictate that to a degree. Our strategy and our positioning are not going to change.

A larger home and the bigger.

Speaker Change: Higher income in the second move up.

Speaker Change: The market will dig that dictate that to a degree our strategy and our positioning is not going to change so I would say.

Speaker Change: As realistic I guess to whom will be 45% to 60% first time and the other the other buyer components may move around a little bit.

Speaker Change: We've been around 15% active adult for years and years of.

Speaker Change: Natural attraction visible.

Speaker Change: Climate zones that we operate in.

Speaker Change: Lot of retirees come in and like our products as well. So we don't we don't target a specific buyer profile, we targeted an income and.

Jeff Mezger: So I would say it's realistic, I guess, to assume we'll be 45 to 60% first time buyers, and the other buyer components may move around a little bit. We've been around 15% active adult for years. It's a natural attraction to me.

Speaker Change: The price point and then let the buyers come in when Youre at the meat of the market it will move around a little bit like it does.

Speaker Change: But that should say in the same range we are seeing.

Speaker Change: Thanks for the El Paso.

Speaker Change: And the next question comes from the line of Susan Mcclary from Goldman Sachs. Please proceed with your question.

Susan Maklari: Thank you and good afternoon, everyone.

Jeff Mezger: Well, we don't target a specific buyer profile; we target an income. Comment When you're at the meat of the market, it'll move around a little bit like it does, that should say in the same way. Thanks for the help, everyone. And the next question comes from Susan Maklari from Goldman Sachs. Please proceed with your question. Thank you. Good afternoon, everyone.

Susan Maklari: My first question is thinking about the potential for lower rates and maybe an increase in.

And activity on the ground in general.

Susan Maklari: Is that as we move through the year.

Susan Maklari: The ability to retain the improvements that you've seen in build times in the cycle times and to retain the labor force and to keep things moving.

Susan Maklari: At the rate that they have been more recently.

Susan Maklari: My first question is thinking about, you know, the potential for lower rates and maybe an increase in inactivity on the ground in general. If we do see that as we move through the year, how do you think about the ability to retain the improvements that you've seen in the build times and the cycle times and, you know, to retain the labor force and keep things moving at the rate that they have been more recently? I think the opportunity there, Susan, is to continue to capture. [inaudible] more people or fixing some of the glitches in the supply chain, whether national or international. And those are all healing, if not healed already.

Susan Maklari: Okay.

Susan Maklari: I think the opportunity there too.

Susan Maklari: To continue to capture.

Susan Maklari: Some build time.

As you look back over the labor.

Susan Maklari: Brokerages and the supply chain disruptions.

Susan Maklari: Dealt with I must say that on either side.

Susan Maklari: Yes.

Susan Maklari: Those companies learned a lot and address it and fix it whether it's hiring.

Susan Maklari: More people or.

Susan Maklari: Fixing some of the glitches in the supply chain, whether national or international leaders and those were off.

Susan Maklari: Equally if not healed.

Jeff Mezger: And I think we can still pick up some, some build time compression, and I think we can control costs. And in part, because we're going to even greater scale in the markets we operate in, where we have relationships, in some cases 40 years old, with our contractor base. We see if interest rates do come down and the markets warm up a little bit, it will be a tailwind for us. But we don't think it will create bill time issues and cost pressure. Okay, okay. That's helpful.

Susan Maklari: I think we can still pick up some.

Susan Maklari: I am Bill time compression and I think we can control cost and in part because we're going to even greater scale in the markets. We operate in where we have relationships and some cases 40 years old.

Susan Maklari: Contractor base.

Susan Maklari: We see the.

Susan Maklari: Interest rates do come down and the market's warm up a little bit there will be a tailwind for us. We don't think it will create the build time issues and cost pressures.

Speaker Change: Okay. Okay. That's helpful. And then maybe just turning to capital allocation can you talk a little bit about how you're thinking of that.

Jeff Mezger: And then maybe just turning to capital allocation, you know, can you talk a little bit about how you're thinking of that? You know, you've been continuing to buy back some of the stock, which is nice to see. Is there anything there that's changed or incremental, and how should we be thinking about it? Well, I can tell you Susan, based on the prepared comments I made, we're going to keep redeeming shares, at least the next 113 million that's authorized. So that's the first time we've signaled an intent. We've been active. Share reverses for three years now, pretty consistent, and it's been a big, big boost both to our book value per share and our EPS. And it helps your ROE along the way.

Speaker Change: And then continuing to buyback some of the stock which is nice to see.

Speaker Change: Just anything there that's changed are incremental and how we should be thinking about it.

Speaker Change: Okay.

Speaker Change: I can tell you if it was based on the <unk>.

Speaker Change: <unk> comments I made were going to keep repurchasing shares at least the next $113 million. That's authorized so that's the first time, we've signaled an intent we've been active in share repurchases for three years now pretty consistently.

It's been a big big boost both to our book value per share and our EPS and it helps your ROE along the way and in part because of all the cash we've generated and we're still sitting on a large.

Jeff Mezger: And in part, it's because of all the cash we've generated; we're still sitting on a large amount. We think we have the ability to invest in growth and continue to give more cash back to shareholders. So we think we can do both through 24. Now, I think that summarizes it, you know, the focus, but years ago, we had a focus on the balance sheet from the point of view of paying off some debt and, you know, realigning the leverage ratio. That's certainly behind us at this point. Full Speed Ahead with Growth, Improving Returns, Increasing Scale, and Returning Cash to Shareholders is a key component of the Capital Outlook. And the next question comes from the line of Rafe Jadrosich from Bank of America. Great, thank you.

Speaker Change: Cash balance with nothing out on our revolver and we think we have the ability to invest in growth and continue to toggle and get more cash back to shareholders. So we think we can do both through 'twenty four.

Speaker Change: Anything else you want to no I think that summarize.

Speaker Change: The focus.

Speaker Change: But years ago, we had a focus on the balance sheet from the point of view.

Paint us in that and realigning the leverage ratio, that's certainly behind us at this point.

Speaker Change: It's full speed ahead with growth improving returns increasing scale and returning cash to shareholders as key components of the capital allocation strategy.

Speaker Change: And the next question comes from the line of Ralph <unk> from Bank of America. Please proceed with your question.

Ralph: Great. Thank you thanks for taking my question.

Rafe Jason Jadrosich: Thanks for taking my question. Can you talk about the level of inflation you're seeing today, maybe on a cash basis in terms of land and development costs as well as materials? Rob, do you want to take that?

Ralph: Can you talk about the level of inflation youre seeing today.

Ralph: Maybe on a cash basis in terms of land and development costs as well as our materials.

Rob you want to take that.

Rob: Sure, yeah, it's, um, it's really been kind of spotty on what's moving up and down in regards to materials. I mean, there are some materials that we were able to lower our costs last year, and it's stuck, and others where it's continued to go up. You know, concrete is one that comes to mind. There are a lot of infrastructure projects going on in most of the cities that we operate in. So concrete is one that deflated pretty quickly and seems almost programmatic with some of the numbers that we're seeing.

Robert V. McGibney: Sure Yes.

Robert V. McGibney: It's really.

Robert V. McGibney: Then kind of spotty on what's moving up and down as in regards to materials. I mean, there are some some that we've been able to.

Robert V. McGibney: Lower cost last year, and its stock and others, where it's continuing to go up in a concrete one that comes to mind. There are a lot of infrastructure projects going on and most of the cities that we operate in so concrete one that's played it pretty quickly it seems almost programmatic with some of the numbers that we're seeing.

Rob: As far as the development goes, you know, we're working from a really favorable cost basis in our land, and we're well positioned to sustain solid gross margins, given we've got that land cost basis favorability, but the cost to develop those lots, those assets, has gone up, and I think the most significant are the contract of labor costs. I mentioned the infrastructure work that's driving part of that, and then just growth in overall construction for home building, too. But with respect to development, kind of a little bit easier to measure because we don't have as many parts and pieces going into it, uh, a little bit higher than actually, um, sorry, low to mid single digits to low double digits is what we're seeing, and you know as we're looking These are lots that we're developing today. They aren't; they're not going to be delivered in 2024. That's really helpful.

Robert V. McGibney: As far as the development goes.

Robert V. McGibney: We're working from a really favorable cost basis in our land and we are well positioned to sustain solid gross margins given when we got that land cost basis favorability, but the cost to develop those lots those assets has gone up and I think the.

Robert V. McGibney: Most significant are the contract labor costs I mentioned the infrastructure work, that's driving part of that and then just growth.

Robert V. McGibney: Overall construction for homebuilding too.

Robert V. McGibney: With respect to development.

Robert V. McGibney: A little bit easier to measure because we didn't have as many parts and pieces going into it depending on the division, we're seeing anywhere from la.

Robert V. McGibney: Low to mid double digit range to in some cases.

Robert V. McGibney: Sure.

Robert V. McGibney: A little bit higher actually I'm, sorry, low to mid single digits to low double digits is what we're seeing.

Robert V. McGibney: <unk>.

Robert V. McGibney: As we're looking at these lots and communities that we're developing and it's really inflation that we're going to experience in our closings as we get out into 2025 lots that we're developing today. They arent they are not going to be delivered in 2024.

Speaker Change: That's really helpful. Just remind us how much of the development costs are.

Rob: And just to remind us, how much of the development cost is? Is that typically a percentage of the total land cost? Yeah, it varies tremendously by division and by land parcel. So, you know, the average, I'd have to reference it, but I don't know that it's that meaningful just because of the variances that we see. OK. And our final question comes from the line between Jay McCanless and Webush. Hey, good afternoon.

Speaker Change: Is that as a percentage of the total land cost typically.

Speaker Change: Yes it varies.

Speaker Change: It varies tremendously by division and by land parcels. So the average.

Speaker Change: Like I have to I'd have to reference it but I don't know others that meaningful just because of the variances that we see across the business.

Speaker Change: Okay.

Speaker Change: And our final question comes from the line of Jay Mccanless with Wedbush Securities. Please proceed with your question.

Jay McCanless: Hey, good afternoon. So the first question I had.

Jay McCanless: So the first question I had, maybe sticking on the Leon topic for a second. As you're looking at lots for 2026 and beyond, what are you seeing in terms of land cost inflation for those further out lots? And from a competitive standpoint, you know, we've heard from some of your competitors that the land market, especially this spring, is more fierce than it is normally. So maybe you could talk about inflation and what the competitive backdrop looks like. Well, I would describe the land market as competitive. There's no easy deal out there.

Jay McCanless: Maybe sticking on the land topic for a second.

Jay McCanless: As you are looking at lots for 2026 and beyond what are you seeing in terms of land cost inflation for those further out lots.

Jay McCanless:

Jay McCanless: And from a competitive standpoint, we've heard from some of your competitors.

Jay McCanless: The land market, especially the spring is more fierce than it is normally.

Jay McCanless: So maybe if you could talk about the inflation of what the competitive backdrop looks like.

Jay McCanless: Sure.

Speaker Change: I would I would.

Speaker Change: Describe the land market is competitive.

Speaker Change: There is no easy deal out there, it's not just who.

Jeff Mezger: It's not just. Who are you competing with for the best price for the parcel? It's what the complexity of the improvements and the development is? You really need to understand.

Speaker Change: Who are you competing with for the best price for the parcel is what's the <unk>.

Speaker Change: <unk> of the improvements in the development and you really need to understand the parcel and if you haven't been land team. It's a strength you don't have a good land team that it can be a weakness in.

Jeff Mezger: [inaudible] to be a week. Overall, while it's competitive, we are finding deals. We found 60% more in Q1 on land development than we did a year ago. So it tells you that we're finding deals and investing in input. I also said in my prepared remarks that we're sticking to our disciplines on underwriting, the location, the product, and the returns that we need. Rob, I don't know if you have any other color you want to give on what you're seeing there at the landmark. Well, I just echo your comments. I mean, it is competitive.

Speaker Change: The overall wallet is competitive we are finding deals we've spent.

Speaker Change: 60% more in Q1.

Speaker Change: Land and development than we did a year ago. So it tells you that we're finding deals.

We're investing in it but I also said in my.

Speaker Change: Prepared remarks that we're sticking to our disciplines on the underwriting.

Location of product type and the returns that we need to get so Rob I don't know if you have any other color you want to give on what you're seeing.

Robert V. McGibney: Out there on the land market.

Robert V. McGibney: Well I'd just echo your comments I mean, it is competitive and we are seeing land prices move up and it depends just based on the sub market based on the city, it's hard to give a specific number as far as what lots of lot costs are land is inflated too as the development is a factor in that too I mean, it all goes to the residual that you can pay for.

Rob: And we are seeing land prices move up. And it depends just on the sub market based on the city. It's hard to give a specific number as far as what lots of lot costs or land is inflated to. And the development is a factor in that too. It all goes to the residual that you can pay for under the Developed Law. Yep, definitely competitive.

Robert V. McGibney: So the developed lots.

Robert V. McGibney: But.

Robert V. McGibney: Definitely competitive.

Speaker Change: Okay. Thank you.

Jay McCanless: Okay, thank you. And then, Jeff K, last quarter, you talked about how I think roughly 30% of production in the quarter were spec homes, with the goal of being more like 25%. Could you talk about where specs are now and how we should think about that mix in terms of the gross margin guide for the second quarter and for the rest of the year? Yeah, on the spec side, it's remaining relatively stable. You know, when you see, the nice thing that we're seeing now is with the interest rate coming down. We're not having to resell a home after the start that we had at a point in time just a few years back. So that spec mix I think is going to remain, you know, fairly stable as we move through it. When we just look at what we have in production, it's roughly where we've been delivering right around 30% of the Total is production right now of Spec Homes. I think that'll remain pretty close to those levels. That is the tricky part, as you point out, about forecasting gross margin, but it's easier when it's a fairly stable number. Particularly with the lower can rate, we're not having as many... You know, steady as she goes in there.

Speaker Change: And then Jeff K last quarter, you talked about how I think roughly 30% of production in the quarter were spec homes with a goal of being more like 25% could you talk about where specs are now and how we should think about that mix in terms of the gross margin guide for the second quarter and for the rest of the year.

Jeff Mezger: Yes on the spec side.

Jeff Mezger: Remaining relatively stable.

Jeff Mezger: When would you see the nice thing that we're seeing now is that the can rate coming down.

Jeff Mezger: We're not having to re sell as many homes.

Jeff Mezger: After start that we had at a point in time just few years back.

Jeff Mezger: So that spec mix I think is going to remain fairly stable as we move through it when we just look at what we have in production.

Jeff Mezger: Roughly where we've been delivering right around 30%.

Jeff Mezger: The total is the production rate now spec homes in.

Jeff Mezger: Yes.

Speaker Change: Got it.

Speaker Change: Pretty close to those levels that is the tricky part as you pointed out about forecasting gross margin, but it's easier when it's a fairly stable number in and particularly with the lower can rate, where you're not having as many surprise that columns is versus versus planned loan. So we're.

Speaker Change: Steady as she goes in that metric as we as we move forward.

Jeff: Yeah. Oh, sorry. Yeah. Jeff just pointed out that the blend is in our margin guide.

Speaker Change: Yes, I'm sorry, yes, Geoff just pointed out that the blend is in our margin guide we always blended so as we look out in deliveries next quarter, we always have to make some estimate of.

Jeff: We always, So as we look out at deliveries next quarter, we always have to make some estimates of what will sell and close in the quarter that's not coming out of backlog. We'll put estimates on. We don't know what the bill costs out. We'll estimate the price and then move forward. But it's all in bed. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may now disconnect. [inaudible] Ladies and gentlemen, this does conclude today's program.

Speaker Change: What we will sell and close in the quarter, that's not coming out of backlog and we will put estimates on.

Speaker Change: We know what to build cost estimate.

Speaker Change: Submit the price and then move forward, but it's all embedded in the back.

Speaker Change: Margin guide that we put out there.

And ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may now disconnect your lines.

Speaker Change: [music].

Speaker Change: And ladies and gentlemen, this does conclude today's call.