Q1 2025 KB Home Earnings Call

This is kind of weird.

Yeah.

They go along with that.

Good afternoon.

John: My name is John and I will be your conference operator. I would like to welcome everyone to the KB Home 2025 first quarter earnings conference call. Currently, all participants are on a listen only Following the company's opening remarks, we will open the lines for questions.

John: My name is John and I'll be your conference operator today I would like to welcome everyone to the Kb home 2025 first quarter earnings Conference call.

Currently all participants are in a listen only mode. 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 Companys website Kb home Dot com through April 24 2025.

John: Today's conference call is being recorded and will be available for replay at the company's website kbhome.com through April 24, 2025.

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

Speaker Change: 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.

Speaker Change: Thank you John Good afternoon, everyone and thank you for joining us today to review our results for the first quarter of fiscal 2025.

Jill Peters: Good afternoon, everyone. And thank you for joining us today to review our results for the first quarter of fiscal 2025.

Jill Peters: On the call are Jeff Mezger, Chairman and Chief Executive Officer, Rob McGibney, President and Chief Operating 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. 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 statement.

Speaker Change: On the call are Jeff Mezger, Chairman and Chief Executive Officer, Rob Mcgivney, President and Chief Operating Officer, Bill Hollinger, Senior Vice President and Chief Accounting Officer, and Thad Johnson Senior Vice President and Treasurer.

Speaker Change: 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.

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

Speaker Change: 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 gap measure of adjusted housing gross profit margin, which excludes inventory related charges, and any other non gap measure referenced during today's discussion to its most directly comparable gap measure can be found in today's press release, and or on the investor relations page of our website at kb home.com.

Speaker Change: In addition, a reconciliation of the non-GAAP measure of adjusted housing gross profit margin, which excludes inventory related charges.

Speaker Change: Any other non-GAAP measure referenced during todays discussion to it.

Speaker Change: Most directly comparable GAAP measure can be found in today's press release <unk> on the Investor Relations page of our website at <unk> Dot com and with that here is Jeff Mezger.

Jeff Mezger: And with that, here's Jeff Mezger. Thank you, Jill. Good afternoon, everyone.

Speaker Change: Thank you Joe good afternoon, everyone.

Speaker Change: In addition to reporting our first quarter results today, we also announced the Rob Dillard will be joining the company.

Jeff Mezger: In addition to reporting our first quarter results today, we also announced that Rob Dillard will be joining the company as our Executive Vice President and Chief Financial Officer. Rob is a well-rounded leader with a solid financial and operational background. He's an excellent addition to our deeply talented and long-tenured finance and accounting team. We're excited for him to join us next week.

Speaker Change: As our executive Vice President and Chief Financial Officer.

Speaker Change: Rob is a well rounded leader with a solid financial and operational background.

Speaker Change: He is an excellent addition to our deeply talented and long tenured finance and accounting team. We're excited for him to join US next week.

Speaker Change: Moving on to market conditions.

Jeff Mezger: Moving on to market conditions. Consumers are continuing to cope with affordability concerns and uncertainties around macroeconomic and geopolitical events. As a result, consumer confidence has declined sequentially each month for the past several months.

Speaker Change: Consumers are continuing to cope with affordability concerns and uncertainties around macroeconomic and geopolitical events.

As a result consumer confidence has declined sequentially each month for the past several months.

Jeff Mezger: and Homebuyers are moving more slowly in making their purchase decisions. While longer term housing market conditions remain favorable, driven by demographics and an undersupply of homes. Demand at the start of the spring selling season has been more muted than we have seen over the past few years.

Speaker Change: And homebuyers are moving more slowly and making their purchase decisions.

Speaker Change: While longer term housing market conditions remain favorable driven by demographics and an under supply of homes.

Speaker Change: <unk> at the start of the spring selling season has been more muted than we have seen over the past few years.

Jeff Mezger: As a result of the softer selling environment, we are lowering our revenue guidance for fiscal 2025.

Speaker Change: As a result of the softer selling environment, we are lowering our revenue guidance for fiscal 2025.

Speaker Change: As to the details of our results. We produced total revenues of $1 4 billion.

Jeff Mezger: As for the details of our results, we produced total revenues of $1.4 billion and diluted earnings per share of $1.49 in our first quarter. We delivered fewer homes than we anticipated, due to about 150 less inventory home sales than we projected, and a timing issue that impacted roughly 75 of our deliveries in Southern California, following the wildfires early this year. Even with this lower level of deliveries, our gross margin held up well at 20.3%, excluding inventory-related charges, above the midpoint of our guided range. With their SG&A of 11%, we produce an operating income margin of 9.3%.

Speaker Change: And diluted earnings per share of $1 49.

Speaker Change: Our first quarter.

Speaker Change: We delivered fewer homes than we anticipated due to about 150 less inventory home sales than we projected and a timing issue that impacted roughly 75 of our deliveries in southern California. Following the wildfires early this year.

Speaker Change: Even with this lower level of deliveries are gross margin held up well at 23% excluding inventory related charges above the midpoint of our guided range.

Speaker Change: With our SG&A of 11%, we produced an operating income margin of nine 3%.

Jeff Mezger: We increased our book value per share to over $57, a 12% year-over-year increase. We generated 2,772 net orders in the first quarter. While our average community count was in line with our projection and our cancellation rate was fairly steady, our monthly absorption pace per community was 3.6 homes compared to 4.6 in last year's first quarter.

Speaker Change: We increased our book value per share to over $57 or 12% year over year increase.

Speaker Change: We generated 2772 net orders in the first quarter.

Speaker Change: While our average community count was in line with our projection and our cancellation rate was fairly steady our monthly absorption pace per community was three six homes.

Speaker Change: <unk> to $4 six in last year's first quarter.

Speaker Change: At the time of our last earnings call in January.

Jeff Mezger: At the time of our last earnings call in January, traffic in our communities was higher year over year, along with higher website leads, and mortgage interest rates were similar to where they were in the year-ago period. These metrics indicated to us that we were set up to experience a typical start to the spring selling season. Similar to how the 2024 spring season unfolded, with the strongest weeks of the first quarter still ahead of us. And with a meaningful number of planned new community openings, we expected to achieve a flat year-over-year net order comparison for the full quarter.

Speaker Change: <unk> in our communities was higher year over year.

Speaker Change: Longer along with higher website leads.

Speaker Change: In mortgage interest rates were similar to where they were in the year ago period.

Speaker Change: These metrics indicated to us that we were setup to experience a typical start to the spring selling season similar to how the 2020 for spring season unfolded with the strongest weeks of the first quarter is still ahead of us.

Speaker Change: And with a meaningful number of planned new community openings, we expected to achieve a flat year over year net order comparison for the full quarter.

Speaker Change: As the quarter progressed following our last call. It became apparent that demand was softer than we expected.

Jeff Mezger: As the quarter progressed following our last call, it became apparent that demand was softer than we expected. We took action in mid-February, evaluating our base pricing in every community relative to local market conditions, then repositioning our communities with a focus on offering the most compelling value. We were encouraged by Bayer's responses to these actions and saw a meaningful improvement in our net orders in the last two weeks of the quarter, which has continued into the first three weeks of our second quarter. For the trailing five weeks, our weekly net sales have averaged about 300, which equates to an absorption pace of 5.1 net orders per month per community.

Speaker Change: We took action in mid February evaluated in our base pricing in every community relative to local market conditions.

Speaker Change: <unk> been repositioning our communities with a focus on offering the most compelling value.

Speaker Change: We were encouraged by borrowers responses to these actions and saw a meaningful improvement in our net orders in the last two weeks of the quarter, which has continued into the first three weeks of our second quarter.

Speaker Change: For the trailing five weeks our weekly net sales have averaged about 300, which equates to an absorption pace of $5. One net orders per month per community.

Jeff Mezger: This is approaching a more normalized order pace for the spring. While we're pleased with this progress, we recognize that the environment is dynamic, and we are committed to taking further action if necessary, depending on how market conditions evolve.

Speaker Change: This is approaching a more normalized order pace for the spring.

Speaker Change: While we're pleased with this progress we recognize that the environment is dynamic and we are committed to taking further action if necessary depending on how market conditions evolve let.

Rob McGibney: Let me pause here for a moment and ask Rob to provide more details on our deliveries and sales, as well as an operational update. Rob.

Speaker Change: Let me pause here for a moment and ask Rob to provide more details on our deliveries and sales as well as an operational update Rob.

Rob McGibney: Thank you, Jeff. I will begin by addressing our shortfall in deliveries, which trailed our first quarter expectation by approximately 225.

Rob: Thank you Jeff.

Rob: I will begin by addressing our shortfall in deliveries, which trailed our first quarter expectation by approximately 225 homes.

Rob McGibney: Our revenue guidance is comprised of anticipated deliveries of homes from our backlog together with sales of inventory homes, which is represented about 40% of our business in each of the past two fiscal We expected about 150 more sales of inventory homes than we generated and fell short of this projection due to factors impacting our sales overall, which I will discuss in a We also had roughly 75 deliveries in Southern California shift into the second quarter, as we were unable to get meters, utility hookups, and final clearances on completed homes. with crews diverted to priorities related to wildfires in the Los Angeles area that occurred in January.

Rob: Our revenue guidance is comprised of anticipated deliveries of homes from our backlog together with sales of inventory homes, which has represented about 40% of our business in each of the past two fiscal years.

Rob: We expected about 150 more sales of inventory homes, and we generated and fell short of this projection due to factors impacting our sales overall, which I will discuss in a moment.

Rob: We also had roughly 75 deliveries in southern California shift into the second quarter as we were unable to get meters utility hookups and final clearances on completed homes with.

Rob: With cruise diverted to priorities related to wildfires in the Los Angeles area that occurred in January.

Rob: While we expect to close all of these homes in the second quarter and many have already been delivered we will continue to navigate any wildfire related issues that arise.

Rob McGibney: While we expect to close all of these homes in the second quarter, and many have already been delivered, we will continue to navigate any wildfire related issues.

Rob: Moving onto net orders at the time of our last earnings conference call six weeks into our first quarter, our net orders were down about 12% year over year.

Rob McGibney: Moving on to NetOrg. The time of our last earnings conference call, six weeks into our first quarter, our net orders were down about 12% year-over-year. Historically, we begin to see net order momentum build in late January and early February, similar to what we experienced in the year-ago first quarter, even with mortgage interest rates in the high 6% range at that time.

Rob: Historically, we begin to see net order momentum build in late January and early February similar to what we experienced in the year ago first quarter, even with mortgage interest rates in the high 6% range at that time.

Rob McGibney: However, the 2025 spring selling season started slower than in previous years, reflecting a decline in consumer confidence as consumers processed the variables relating to macroeconomic and geopolitical. This decline in confidence is leading homebuyers to take longer to make their purchase.

Rob: However, the 2025 spring selling season has started slower than in previous years, reflecting a decline in consumer confidence as consumers process to the variables relating to macroeconomic and geopolitical issues.

Rob: This decline in confidence is leading homebuyers to take longer to make their purchase decisions.

Rob: In addition, a number of our planned community openings were delayed until late in the first quarter or early in the second contributing to our first quarter net sales result.

Rob McGibney: In addition, a number of our planned community openings were delayed until late in the first quarter or early in the second, contributing to our first quarter net. With healthy traffic in our communities, we took steps in mid February to drive an increased urgency to purchase by improving affordability for our We focused on offering the most compelling value, reducing base prices, and in many cases lowering or eliminating incentives, helping to offset the margin impact of those prices. As we have shared in the past, although buyers are sensitive to rates and monthly payments, the primary motivation of most of our customers is securing a home that meets their needs at the best Thoughtfully and selectively adjusted pricing as needed on a community by community basis to stimulate demand and achieve a higher selling As Jeff shared, consumers responded to these adjustments.

Rob: With healthy traffic in our communities, we took steps in mid February to drive an increased urgency to purchase by improving affordability for our customers.

Rob: We focused on offering the most compelling value reducing base prices and in many cases, lowering or eliminating incentives, helping to offset the margin impact of those price changes.

Rob: As we have shared in the past, although buyers are sensitive to rates and monthly payments. The primary motivation of most of our customers is securing a home that meets their needs at the best price.

Rob: We thoughtfully and selectively adjusted pricing as needed on a community by community basis to stimulate demand and achieve a higher selling pace.

Rob: As Jeff shared consumers responded to these adjustments. We believe we have found the market and are encouraged with our trend over the last five weeks equating to an average absorption pace of five one net orders per month per community within our targeted range for the spring.

Rob McGibney: We believe we have found the market and are encouraged with our trend over the last five weeks equating to an average absorption pace of 5.1 net orders per month per community within our targeted range. While base price is the main motivator for our customers, we also provided mortgage related support to our buyers as needed. Mortgage concessions represented approximately 2% of our housing revenues in our first quarter, two-thirds of which were rate buy-downs, and the other one-third was the cost of loan.

Rob: While base prices the main motivator for our customers. We also provided mortgage related support to our buyers as needed.

Rob: Mortgage concessions represented approximately 2% of our housing revenues in our first quarter, two thirds of which were rate buy downs and the other one third was the cost of loan marks.

Rob: Our sales goals for this year are closely connected to our community count expectations at the end of the first quarter. We had 255 active communities up 7% year over year contributing to an average of 257, which also increased 7%.

Rob McGibney: Our sales goals for this year are closely connected to our community count expectation. At the end of the first quarter, we had 255 active communities, up 7% year-over-year, contributing to an average of 257, which also increased. We continue to expect to maintain roughly 250 to 260 active communities throughout our 2025 second and third In addition, we anticipate ending the year with approximately 250 communities before growing our count again in early 2026, just ahead of that spring selling year. Our backlog at the end of February was over 4,400 homes valued at $2.2 billion. We maintained a normalized cancellation rate during the quarter, indicating that buyers are ready and able to close on their home.

We continue to expect to maintain roughly 250 to 260 active communities throughout our 2025 second and third quarters.

Rob: In addition, we anticipate ending the year with approximately 250 communities before growing our count again in early 2026, just ahead of that spring selling season.

Rob: Our backlog at the end of February was over 4400 homes valued at $2 $2 billion.

Rob: We maintained a normalized cancellation rate during the quarter, indicating that buyers are ready enable to close on their homes.

Rob McGibney: While our backlog is lower year over year, our build times are nearly 20% faster as compared to the prior year quarter.

Rob: While our backlog is lower year over year, our build times are nearly 20% faster as compared to the prior year quarter.

Rob McGibney: This allows us to sell built to order homes later in the year while still achieving a year in close 2025 deliveries will be comprised of the homes we have in back. built to order homes sold through the early part of our third quarter and sales of We started approximately 2800 homes in the first quarter contributing to over 6500 total homes in production. We remain consistent in aligning our starts with sales with the majority of those starts are a Overall, our build times measured in calendar days improved sequentially in the first quarter to 147 days, our best level in the last four years.

Rob: This allows us to sell built to order homes later in the year, while still achieving our year end closing.

Rob: Our 2025 deliveries will be comprised of the homes, we have in backlog.

Rob: Built to order homes sold through the early part of our third quarter and sales of inventory homes.

Rob: We started approximately 2800 homes in the first quarter contributing to over 6500 total homes in production.

Rob: We remain consistent in aligning our starts with sales with the majority of those starts are already sold.

Rob: Overall, our build times measured in calendar days improved sequentially in the first quarter to 147 days, our best level in the last four years.

Rob McGibney: For built-to-order homes, our build times are currently 139 days. This progress in the first quarter moves us closer to our goal of 120 days from start to home completion, which is at the lower end of our historical record. Several of our divisions are already building homes at this target level and we are confident in our ability to achieve this goal company wide. benefits of lower build times are numerous, including a more compelling selling proposition for our customers purchasing a built order home relative to the 60 days it takes to complete an existing or speculative Better Inventory Terms. Monetizing our assets quicker and a lower cost of interest rate locks due to the shorter duration of the lock, which will help reduce our mortgage concession cost over time.

Rob: For built to order homes, our build times are currently 139 days.

Rob: This progress in the first quarter moves us closer to our goal of 120 days from start to home completion, which is at the lower end of our historical range.

Rob: Several of our divisions are already building homes at this target level and we are confident in our ability to achieve this goal companywide.

Rob: The benefits of lower build times are numerous including a more compelling selling proposition for our customers purchasing a built to order homes relative to the 60 days it takes to complete an existing or speculative home sale.

Rob: Better inventory turns monetizing our assets quicker and a lower cost of interest rate locks due to the shorter duration of block, which will help reduce our mortgage concession cost over time.

Rob: We are continuing to rely on our longstanding trade relationships with our even flow production to ensure that we have the crews necessary to get our homes built we have not seen any meaningful trade labor shortages to date.

Rob McGibney: We are continuing to rely on our long standing trade relationships with our even flow production to ensure that we have the crews necessary to get our homes We have not seen any meaningful trade labor shortages today. Our value engineering and studio simplification efforts are yielding results as we further reduce direct costs on our homes started during the first quarter. Direct costs were down both sequentially and year-over-year, helping to offset the impact of our price reductions and increases in land. Our costs, including lumber are protected for almost all of our second quarter starts under the terms of our supply Regarding lumber, we had started moving toward longer locks in expectation of tariffs being Our national purchasing team working with our divisions has effectively managed to hold off anticipated tariff related cost increases.

Rob: Our value engineering and studio simplification efforts are yielding results as we further reduce direct cost on our homes started during the first quarter.

Rob: Direct costs were down both sequentially and year over year, helping to offset the impact of our price reductions and increases in land costs.

Rob: Our costs, including lumber are protected for almost all of our second quarter starts under the terms of our supply contracts.

Rob: Regarding lumber, we had started moving towards longer locks in expectation of tariffs being implemented.

Our national purchasing team working with our divisions has effectively managed to hold off anticipated tariff related cost increases to date.

Rob: Before I wrap up I will review the credit metrics of our buyers who finance their mortgages through our joint venture <unk> Hs home loans.

Rob McGibney: Before I wrap up, I will review the credit metrics of our buyers who financed their mortgages through our joint venture, KBHS. We increased our capture rate sequentially with 90% of buyers who finance their homes using KBH. Higher capture rates help us manage our backlog more effectively and provide more visibility in closing. benefits our company as well as our buyers. In addition, we see higher customer satisfaction levels from buyers who use our joint venture versus other lenders. The average cash down payment was stable both sequentially and year over year at 16%, equating to about $80,000. On average, the household income of customers who use KBHS was about $133,000, and they had a FICO score of 747.

Rob: We increased our capture rates sequentially with 90% of buyers who financed their homes using K VHS.

Rob: Higher capture rates helped us manage our backlog more effectively and provide more visibility in closings, which benefits our company as well as our buyers.

Rob: In addition, we see higher customer satisfaction levels from buyers, who use our joint venture versus other lenders.

Rob: The average cash down payment was stable both sequentially and year over year at 16% equating to about $80000.

Rob: On average the household income of customers, who use <unk> Hs was about $133000 and they had a FICO score of 746.

Rob: Even with one half of our customers purchasing their first home, we're still attracting buyers with strong credit profiles, who can qualify for their mortgage while making a significant down payment.

Rob McGibney: Even with one half of our customers purchasing their first home, we are still attracting buyers with strong credit profiles who can qualify for their mortgage while making a significant In conclusion, while we believe we are aligned with current market conditions based on the solid net orders we have generated over the past five weeks, we will remain nimble in our approach to the spring selling. balancing pace and price at the community level. Our community count trajectory is consistent with the update we provided at the start of the year, and we have a significant number of planned grand openings in the second quarter as well as the second half of the year.

Rob: In conclusion, while we believe we are aligned with current market conditions based on the solid net orders we have generated over the past five weeks, we will remain nimble in our approach to the spring selling season balancing pace and price at the community level.

Rob: Our community count trajectory is consistent with the update we provided at the start of the year and we have a significant number of planned grand openings in the second quarter as well as the second half of this year.

Rob: We are committed to executing on the day to day fundamentals of our business, maintaining our high customer satisfaction levels further improving build times value engineering, our products to lower direct costs and balancing pace and price to optimize each asset and we are confident in our ability to navigate varying market conditions and with that I will turn.

Rob McGibney: We're committed to executing on the day-to-day fundamentals of our business, maintaining our high customer satisfaction. Further improving build times, value engineering our products to lower direct costs, and balancing pace and price to optimize each asset.

Jeff Mezger: And we are confident in our ability to navigate varying market With that, I will turn the call back over to Thanks, Raph. We continue to view the long term outlook for the housing market favorably and are investing in our future community count growth to support our objective of expanding our scale. During the quarter, we invested $920 million in land acquisition and development. of which about 40% went toward development and fees. The first quarter will likely represent the high water mark in our land spend for this year and included the purchase of two large parcels in Las Vegas, which will provide continuity as we replace our highly successful Inspirata community.

Rob: The call back over to Jeff. Thanks.

Jeff Mezger: Thanks Ralph.

Jeff Mezger: We continue to view the long term outlook for the housing market favorably.

Jeff Mezger: And are investing in our future community count growth to support our objective of expanding our scale.

Jeff Mezger: During the quarter, we invested $920 million in land acquisition and development of.

Jeff Mezger: Of which about 40% went toward development and fees.

Jeff Mezger: The first quarter will likely represent the high watermark in our land spend for this year and included the purchase of two large parcels in Las Vegas.

Jeff Mezger: Which will provide continuity as we replace our highly successful and sporadic community.

Jeff Mezger: Over the past five years, we've averaged nearly 450 deliveries each year at Inspirata across multiple product lines, and the community is approaching closeout. The two new parcels will offer similar product lines as Inspirata at affordable price points. Our Las Vegas business is one of our largest and strongest performers, having consistently generated the highest gross margins and profitability in the company. We continue to adhere to our underwriting criteria, product strategy and price points, and remain mindful of the housing market and overall economy with the intention of adjusting our investment spend as necessary to match local market conditions.

Jeff Mezger: Over the past five years, we've averaged nearly 450 deliveries each year it ends burrata across multiple product lines.

Jeff Mezger: Community is approaching closeout.

Jeff Mezger: The two new parcels will offer similar product lines as Vince product at affordable price points.

Jeff Mezger: Our Las Vegas business is one of our largest and strongest performers having consistently generated the highest gross margins and profitability in the company.

Jeff Mezger: We continue to adhere to our underwriting criteria of product strategy and price points and remain mindful of the housing market and overall economy.

Jeff Mezger: With the intention of adjusting our investment spend as necessary to match local market conditions.

Jeff Mezger: Our investments have contributed to increase our lot position by 41% year over year to over 78200 lots owned or controlled 46% of which are optioned.

Jeff Mezger: Our investments have contributed to increase our lot position by 41% year over year, to over 78,200 lots owned or controlled, 46% of which are option. We've expanded our lot position with a focus on capital efficiency, developing lots in smaller phases wherever possible. and Balancing Development with our Start Space to manage our inventory of finished lots.

Jeff Mezger: We have expanded our lot position with a focus on capital efficiency developing lots in smaller phases wherever possible.

Jeff Mezger: Balancing development with our starts pace to manage our inventory of finished lots.

Jeff Mezger: We continued our balanced approach of investing in our growth, while returning nearly $70 million in capital to shareholders in our first quarter, including $50 million and share repurchases.

Jeff Mezger: We've continued our balanced approach of investing in our growth, while returning nearly 70 million in capital to shareholders in our first quarter, including $50 million in share repurchase.

Jeff Mezger: In closing I want to recognize the entire Kb home team for their ongoing commitment to serving our homebuyers.

Jeff Mezger: In closing, I want to recognize the entire KB Home team for their ongoing commitment to serving our homebuyers. Although we have reduced our revenue guidance for fiscal 2025 to between $6.6 billion and $7 billion, primarily to reflect the lower level of net orders that we generated in our first quarter. We're encouraged that home buyers have responded to the actions we took to offer the most compelling value and we've experienced solid net orders in the past five weeks since implementing those adjustments. While we believe we have taken the appropriate steps to achieve our sales targets, we have a strong and experienced team that has successfully navigated varying market conditions.

Jeff Mezger: Although we have reduced our revenue guidance for fiscal 2025.

Jeff Mezger: So between $6 6 billion and $7 billion.

Primarily to reflect the lower level of net orders that we generated in our first quarter.

Jeff Mezger: We are encouraged that homebuyers have responded to the actions we took to offer the most compelling value and we have experienced solid net orders in the past five weeks since implementing those adjustments.

Jeff Mezger: While we believe we have taken the appropriate steps to achieve our sales targets. We have a strong and experienced team that has successfully navigated varying market conditions, while supporting our customers and operate our business effectively and we are confident in our ability to continue to do so.

Jeff Mezger: while supporting our customers and operating our business effectively. We are confident in our ability to continue to do so.

Jeff Mezger: Our company is well positioned for future growth with a lots owned or controlled to support higher revenues with a strong balance sheet and significant financial flexibility.

Jeff Mezger: Our company is well positioned for future growth, with the lots under control to support higher revenues with a strong balance sheet and significant financial flexibility. Long term, we remain committed to enhancing shareholder value through profitable scale expansion and producing higher returns, as well as continuing to return cash to shareholders.

Jeff Mezger: Long term, we remain committed to enhancing shareholder value through profitable scale expansion and producing higher returns as well as continuing to return cash to shareholders.

Bill Hollinger: Bill Hollinger will be providing the financial review today, and I'll turn the call over to Bill. Thank you, Jeff. As Jeff and Rob mentioned, the first quarter proved to be challenging for a variety of reasons. As a result, our performance fell short of our expectations primarily due to lower than anticipated deliveries, which impacted both our revenues and net income. Nevertheless, several other key metrics for the quarter were aligned with our previous guidance.

Speaker Change: Bill Hollinger will be providing the financial review today I'll turn the call over to Bill.

Bill Hollinger: Thank you Jeff.

Speaker Change: As Jeff and Rob mentioned, the first quarter proved to be challenging for a variety of reasons as a result, our performance fell short of our expectations, primarily due to lower than anticipated deliveries, which impacted both our revenues and net income never.

Speaker Change: Nevertheless, several other key metrics for the quarter were aligned with our previous guidance.

Bill Hollinger: Regarding our current outlook for the remainder of 2025, we are revising our guidance to reflect our first quarter results, including the more muted start to the spring selling season, as well as the selective price adjustments we implemented in mid February to stimulate demand and support a higher sales product pace. In the 2025 first quarter, we produced housing revenues of $1.39 billion, net income of $110 million, and diluted earnings per share of $1.49. We continued our balanced approach to capital allocation with 920 million in land related investments of 57% year over year while returning over $69 million to our stockholders through share repurchases and dividends.

Speaker Change: Regarding our current outlook for the remainder of 2025, we are revising our guidance to reflect our first quarter results, including the more muted start to the spring selling season as well as the selective price adjustments we implemented.

Speaker Change: In mid February to stimulate demand and support a higher sales pace.

And the 2025 first quarter, we produced housing revenues.

Speaker Change: One $3 9 billion net income of $110 million and diluted earnings per share of $1 49.

Speaker Change: We continued our balanced approach to capital allocation with $920 million in land related investments are up 57% year over year, while returning over $69 million to our stockholders through share repurchases and dividends. We also kept our debt to capital ratio at a healthy level.

Bill Hollinger: We also kept our debt to capital ratio at a healthy level. Our housing revenues for the first quarter were down 5% compared to $1.46 billion in the prior year period, due to a 9% decrease in the number of homes delivered, partly offset by a 4% increase in their overall average selling price. The 2,770 homes delivered in the quarter represented a backlog conversion rate of 62% compared to 55% in the year-earlier period, largely reflecting our improved build times. As Rob mentioned, the number of homes delivered was below expectations, mainly due to fewer than expected deliveries from inventory sales and utility services related to delays at some of our Southern California communities, as local resources were diverted to address wildfire-related priorities.

Speaker Change: Our housing revenues for the first quarter were down 5% compared to <unk>.

Speaker Change: <unk> four $6 billion in the prior year period due to a 9% decrease in the number of homes delivered partly offset by a 4% increase in their overall average selling price that 2000, and 770 homes delivered in the quarter represented a backlog conversion rate of 62%.

Speaker Change: Compared to 55% in a year earlier period, largely reflecting our improved build times as Rob mentioned the number of homes delivered was below expectations, mainly due to fewer than expected deliveries from inventory sales and utility services related to delays at some.

Speaker Change: Of our southern California communities.

Speaker Change: Local resources were diverted to address wildfire related priorities.

Bill Hollinger: With our revised outlook, we expect second quarter housing revenues to range from $1.45 billion to $1.55 billion. Looking at the 2025 full year, we are now forecasting housing revenues in the range of $6.6 to $7.0 billion. The upper end of this range remains within our previous guidance. In the first quarter of our overall average selling price of homes delivered was $500,700, also in line with our guidance. Reflecting our selected price adjustments and anticipated mix of deliveries, we expect our second quarter overall average selling price to be approximately $488,000. For the full year, we are revising our overall average selling price projection to be in the range of $480,000 to $495,000.

Speaker Change: With our revised outlook, we expect second quarter housing revenues to range from 145 billion to 155 billion.

Speaker Change: Looking at that 2025 full year, we are now forecasting housing revenues in the range of $6 six to seven <unk> billion.

Speaker Change: The upper end of this range remains within our previous guidance.

Speaker Change: In the first quarter of our our overall average selling price of homes delivered was 500 700 also in line with our guidance, reflecting our selective price adjustments and anticipated mix of deliveries, we expect our second quarter overall average selling price to be approximate.

Speaker Change: 488000.

Speaker Change: For the full year, we are revising our overall average selling price projection to be in the range of 480.

Speaker Change: Two $495000.

Bill Hollinger: For context, our prior guidance was $488,000 to $498,000. Homebuilding operating income was $127.3 million compared to $157.7 million for the year earlier quarter. Operating income included inventory-related charges totaling $1.5 million in the current quarter and $1.3 million in the prior quarter, consisting in both periods entirely of land auction contract abandonment. Our home building operating income for the quarter was 9.2% compared to 10.8% in the last year's first quarter, mainly due to our lower housing gross profit margin. We anticipate our 2025 second quarter home building operating income margin will be approximately 8.5%. For the 2025 full year, we are projecting this metric to be approximately 9.4%, which primarily reflects expected sequential improvement in the latter half of the year, driven by increased operating leverage on higher revenues.

Speaker Change: For context, our prior guidance was 488 to $498000.

Speaker Change: Homebuilding operating income was $127 3 million compared to $157 7 million for the year earlier quarter.

Speaker Change: Operating income included inventory related charges totaling $1 $5 million in the current quarter and $1 3 million in the prior quarter, consisting in both periods entirely of land option contract Abandonments, our homebuilding operating income for the.

Speaker Change: Order.

Speaker Change: Was nine 2% compared to 10, 8% in the last year's first quarter, mainly due to our lower.

Speaker Change: Housing gross profit margin.

Speaker Change: We anticipate our 2025 second quarter home building operating income margin will be approximately eight 5% for the 2025 full year. We are projecting this metric to be approximately nine 4%, which primarily reflects expected sequential improvement in the latter half of the year driven.

Speaker Change: By increased operating leverage on higher revenues.

Bill Hollinger: Our current projection is lower compared to both our prior guidance of approximately 10.7% and the year earlier results of 11.1%. These operating income margins assume no inventory related charges. Our 2025 first quarter housing gross profit margin was 20.2 compared to 21.5% for the year earlier quarter. The decrease mainly reflected higher relative land costs, increased home buyer concessions, and reduced operating leverage. Excluding inventory related charges, our housing gross profit margin was 20.3% above the midpoint of our guidance for the 2025 first quarter. For the year earlier quarter, it was 21.6%. We are forecasting a housing gross profit margin for the 2025 second quarter in the range of 19.1% to 19.5%, and for the full year in the range of 19.2% to 20.0%, assuming no inventory-related charges.

Speaker Change: Our current projection is lower compared to both our prior guidance of approximately 10, 7%.

Speaker Change: Percent and a year earlier results of 11, 1%. These operating income margins assume no inventory related charges.

Speaker Change: Our 2025 first quarter housing gross profit margin was 22 compared to 21, 5% for the year earlier quarter. The decrease mainly reflected higher relative land costs increase home buyer concessions and reduced operating leverage excluding inventory related charges our house.

Speaker Change: <unk> gross profit margin was 23% above the midpoint of our guidance for the 2025 first quarter for the year earlier quarter was 21, 6%.

Speaker Change: We are forecasting.

Speaker Change: Housing gross profit margin for the 2025 second quarter in the range of 19, 1% to 19, 5% and for the full year in the range of $19 two.

Speaker Change: 2% to 20.0% assuming no inventory related charges, our gross margin outlook for both periods reflects lower selling prices than we anticipated in January reduced operating leverage on lower delivery volume and the challenging operating environment.

Bill Hollinger: Our gross margin outlook for both periods reflects lower selling prices than we anticipated in January, reduced operating leverage on lower delivery volume, and a challenging operating environment. Our selling general and administrative expense ratio for the quarter of 11% was up slightly from the year earlier quarter. Considering the operating leverage effect was approximately 40 basis points, we would have achieved our guidance had we delivered or we had generated the delivery volume we were expecting. We are forecasting a 2025 second quarter SG&A ratio to be in the range of 10.6 to 11.0 percent and expect our 2025 full year SG&A ratio will be in the range of 10.0 to 10.4 percent.

Speaker Change: Our selling general and administrative expense ratio for the quarter of 11% was up slightly from the year earlier quarter.

Speaker Change: Considering the operating leverage effect was approximately 40 basis points. We would have achieved our guidance had we delivered we had generated that delivery volume we were expecting.

Speaker Change: We are forecasting a 2025 second quarter SG&A ratio to be in the range of $10, 6% to 11.0% and expect our 2025 full year SG&A ratio will be in the range of 10.0 to 10, 4% or.

Bill Hollinger: Our income tax expense of $29.8 million for the quarter represented an effective tax rate of 21.4% compared to 20.6% for the year earlier quarter. The current quarter rate compared favorably to our guidance primarily due to the impact of tax benefits related to stock based compensation. We expect our effective tax rate to be approximately 24% for the second quarter and full year. As we said on our previous earnings call, our 2025 full year tax rate is expected to be up slightly from the previous year. This is primarily due to decreases in energy tax credit. In terms of our bottom line results for the quarter, we generated net income of $109.6 million and diluted earnings per share of $1.49.

Speaker Change: Our income tax expense of $29 $8 million for the quarter, representing an effective tax rate of 21, 4% compared to 26.

Speaker Change: 6%.

Speaker Change: For the year earlier quarter.

Speaker Change: Current quarter Rea compared favorably to our guidance, primarily due to the impact of tax benefits related to stock based compensation.

Speaker Change: We expect our effective tax rate to be approximately 24% for the second quarter and full year as we said on our previous earnings call. Our 2025 full year tax rate.

Speaker Change: Expected to be up slightly from the previous year.

Speaker Change: This is primarily due to decreases in.

Speaker Change: <unk> energy tax credits and.

Speaker Change: In terms of our bottom line results for the quarter, we generated net income of $109 6 million and diluted earnings per share of $1 49.

Speaker Change: This compares to net income of $138 $7 million and diluted earnings per share of $1 76 for the same quarter of last year.

Bill Hollinger: This compares to net income of $138.7 million and diluted earnings per share of $1.76 for the same quarter of last year.

Bill Hollinger: Turning to land, we continue the positive momentum of the past few quarters in expanding our lot portfolio to position our business for future growth and larger scale. In the first quarter, we significantly increased our investment in land acquisition and development to $920 million. dollars ending the quarter with inventory balance of just under $6 billion up 13% from a year ago. In keeping with our balanced approach to capital allocation, we repurchased 754,000 shares of our common stock at a total cost of $50 million during the quarter. With $650 million remaining under our current common stock purchase authorization and our healthy balance sheet, we have both the ability and intent to repurchase additional shares.

Speaker Change: Turning to land, we continue the positive momentum of the past few quarters and expanding our portfolio.

Speaker Change: To position our business for future growth and larger scale in.

Speaker Change: In the first quarter, we significantly increased our investment in land acquisition and development to $920 million.

Speaker Change: Ending the quarter with inventory balance of just under $6 billion up 13% from a year ago and.

Speaker Change: In keeping with our balanced approach to capital allocation, we repurchased 754.

Speaker Change: Shares.

Speaker Change: Of our common stock at a total cost of $50 million during the quarter with $650 million remaining under our current common stock purchase authorization and our healthy balance sheet, we have both the ability and intent to repurchase additional shares.

Bill Hollinger: However, the pace, volume, timing will depend on factors such as our operating cash flow, liquidity forecasts, land investment prospects and needs, the market price of our shares and the conditions in the housing market and broader economic environment. We entered the quarter with total liquidity. of $1.25 billion, including $268 million of cash and $982 million available under our unsecured revolving credit facility with $100 million of cash barrings outstanding. Our first quarter is typically when we have the lowest cash inflows and highest cash outflows of our fiscal year. As such, in executing on our priority of investing in land and land development for future growth, during the 2025 first quarter, we utilize cash borrowings from our credit facility.

Speaker Change: However, the pace volume timing.

Speaker Change: <unk> depend on factors such as our operating cash flow.

Speaker Change: Liquidity forecasts land investment prospects and needs the market price of our shares and the conditions in the housing market and broader economic environment.

Speaker Change: We ended the quarter with total liquidity.

Speaker Change: Of $1 billion to $5 billion, including $268 million of cash and 982 million available under our unsecured revolving credit facility with $100 million.

Speaker Change: Cash borrowings outstanding.

Speaker Change: Our first quarter is typically win.

Speaker Change: We have the lowest cash inflows and highest cash outflows.

Of our fiscal year.

Speaker Change: As such.

Speaker Change: Executing on our priority of investing in land and land development for future growth. During the 2025 first quarter, we utilized cash borrowings from our credit facility.

Bill Hollinger: As a result, our debt to capital ratio increased to 30.5% at the end of the quarter compared to 29.4% at the end of 2024. We do not expect to have any cash borrowings outstanding under the credit facility by the end of our fiscal year. We have no debt maturities until our term loans 2026 expiration with our next senior note maturity in June of 2027.

Speaker Change: As a result, our debt to capital ratio increased to 35% at the end of the quarter compared to 29, 4% at the end of 2024.

Speaker Change: We do not expect to have any cash borrowings outstanding under the credit facility by the end of our fiscal year, we have no debt maturities until our term loans 2026 exploration.

Speaker Change: With our next senior note maturity in June of 2027.

Bill Hollinger: In closing, although conditions were more challenging than anticipated in the 2025 first quarter, we believe we are well positioned to meet our updated outlook for the remainder of the year. At the same time, we plan to remain flexible to meet the evolving market conditions as we maintain our focus on balancing pace and price at each of our communities. Overall, we believe our solid financial position, including our liquidity profile and long runway for debt maturities and row plus land portfolio will enable us to navigate the current environment, continue to be opportunistic and balanced with allocating capital in 2025 and beyond, and sustain our returns focused growth strategy centered on enhancing long term stockholder value.

Speaker Change: In closing, although conditions were more challenging than anticipated in the 2025 first quarter.

Speaker Change: We believe we are well positioned to meet our.

Speaker Change: Updated outlook for the remainder of the year.

Speaker Change: At the same time, we plan to remain flexible to meet the evolving market conditions as we maintain our focus on balancing pace and price at each of our communities overall, we believe our solid financial position, including our liquidity profile and long runway for our debt maturities and ROE.

Speaker Change: Thus land portfolio will enable us to navigate the current environment.

Speaker Change: Continue to be opportunistic and balanced with allocating capital in 2025 and beyond.

Speaker Change: And sustain our returns focused growth strategy centered on enhancing long term stockholder value.

John: We will now take your questions. John, please open the line.

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

Speaker Change: Thank you we will now be conducting 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 terms of yourself from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

John: Thank you.

John: We will now be conducting 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 to remove yourself.

John: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start We ask that you please limit yourself to one question and one follow-up. One moment, please, while we poll for questions.

Speaker Change: We ask that you please limit yourself to one question and one follow up. Thank you one moment please pull for questions.

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

Matthew Bouley: And the first question comes from the line of Matthew Bouley with Barclays. Please proceed with your question. Hey, good afternoon, everyone. Thank you for taking the questions. I wanted to start with the price adjustments, and specifically the question around kind of customer elasticity. I guess, what level or what magnitude of price adjustments would you say was enough to kind of get consumers off of the fence here? And how are you kind of able to separate, you know, what you were doing with these price adjustments, you know, relative to the kind of typical seasonal uptick that you would see in March anyway?

Speaker Change: Okay.

Speaker Change: Hey, good afternoon, everyone and thank you for taking the questions.

Speaker Change: I wanted to start with.

Speaker Change: The price adjustments.

Speaker Change: And specifically the question around kind of customer elasticity.

Speaker Change: I guess, what level or what magnitude of price adjustments would you say was enough to kind of get consumers off of the fence here.

Speaker Change: And how are you kind of able to separate what you were doing with these price adjustments.

Speaker Change: Relative to the kind of typical seasonal uptick that you would see in March anyway. So, yes, just any more detail around the magnitude and I'm thinking about sort of protecting the backlog as well.

Matthew Bouley: So, yeah, just any more detail around the magnitude and thinking about sort of protecting the backlog as well, and customer elasticity. Thank you.

Speaker Change: And customer elasticity. Thank you.

Speaker Change: Yes.

Jeff Mezger: Matt, I can make a few comments, and then I'll hand it to Rob for some specifics. There's a lot of things going on in the market, and as we always share, it really is sub-market specific and community specific. And as the divisions were working to get sales, in a lot of cases, they fell in the trap of starting to offer what I would call a pocket incentive, where you don't advertise it, the consumer doesn't know about it until they get into the sales office, and then they find out there's a $10,000 studio credit available if you buy this weekend, and things like that.

Speaker Change: It can make a few comments and then I'll hand, it to Rob for some specifics.

Speaker Change: A lot of things going on in the market and as as we always share it really is submarket specific.

Speaker Change: And community specific.

Speaker Change: As the the divisions were working to get sales and a lot of cases.

Speaker Change: They fell in that trap of starting to offers what I would call a pocket incentive where you don't advertise that the consumer doesn't know about until they get into the sales office and then they'd find out there is a 10000 dollar studio credit available if you buy this weekend and things like that.

Jeff Mezger: And as we analyzed things, we decided, let's get rid of all that, what I would call noise, and just take it to price, so we can advertise on the website what the real price is, and that we were already offering anyway. So a lot of the moves we made really were cleaning out incentives and taking it to price, so that was step one. Past that, as we analyzed each community, if there were communities not selling that were not aligned with the resale data in that sub-market, or what new home competitors were doing, we took additional steps to pull the price down further as needed.

Speaker Change: As we analyze things, we decided let's get rid of all that what I would call noise and just take it to price. So we can advertise on the website what the real prices net debt, we were already offering anyway.

Speaker Change: So a lot of the moves we made really were cleaning out incentives and taken into price. So that was step one past that.

Speaker Change: As we analyze each community. If there were community is not selling that were not aligned with the.

Speaker Change: The resale data in that Submarket or what new home competitors were doing we took additional steps to to pull the price down further as needed and it's not.

Jeff Mezger: And it's not like you can identify that price will work. You have to keep going until you get your sales momentum back. And we took some steps, and we were bold all the way around. And as I shared in my comments, it was the very first week after that, our sales picked up quite a bit.

Speaker Change: It's not like you can identify that price what work you have to keep going until you get your sales momentum back and we took some steps and we were bowled all the way around and as I shared in my comments.

Speaker Change: It was the very first week after that our sales picked up quite a bit.

Rob McGibney: But Rob can get you some of the detail between offsets by reducing incentives versus pure price adjustment.

Speaker Change: Rob can give you some of the detail between.

Offsets by reducing incentives versus pure price adjustments.

Rob McGibney: Yeah, just to add some specifics to it, it was roughly half of our communities that we lowered base price. And as Jeff said, at the same time, we were cleaning up some of the clutter with the incentive. It was a range. I mean, just depending on what the sales pace was, where resale levels are trending and tracking, you know, all of those factors kind of into the mix. You know, range from $5,000 up to $30,000. In some cases, I think the average if you put them all together of the communities that we decreased, it was 15 or $16,000.

Speaker Change: Yes, just to add some specifics to it it was roughly half of our communities that we lowered base price and as Jeff said at the same time, we were cleaning up some of the clutter with the incentives.

Speaker Change: It was a range I mean, just dependent on what the sales pace was where resale levels are trending and tracking all of those factors kind of into the mix. So.

Speaker Change: Ranged from $5000 up to $30000 in some cases I think the average if you put them altogether of the communities that we decreased it was 15 or $16. So.

Rob McGibney: So You know, call it 3% on our ASP. But at the same time, when we cleaned up the incentives and the other things that Jeff mentioned that were being offered, the net reduction or impact to margins is much lower than that. And in fact, Since we've made those moves, the margin roughly on deals that we're seeing come into backlog is only about 75 basis points lower. And we feel pretty good about where we are right now. The communities where we've made the moves are performing. We've got some that have actually started performing better than what our expectations are.

Call it 3% on our ESP, but at the same time, when we cleaned up the incentives and the other things that Jeff mentioned that were being offered the net reduction or impact to margins is much lower than that and in fact.

Speaker Change: Since we've made those moves.

Speaker Change: The margin roughly on deals that we're seeing come into backlog is only about 75 basis points lower and we feel pretty good about where we are right now the communities, where we've made the moves are performing we've got some that have actually started performing better than what our expectations are so we've got some opportunity to claw back price and margin there.

Rob McGibney: So we've got some opportunity to claw back price and margin there, a handful of others that we still need to do some work on. But generally, we feel good about how we're positioned after making those moves. And the consumer has really responded to it.

Speaker Change: Handful of others that we still need to do some work on but generally we feel good about how were positioned after making those moves and the the consumer has really responded to it well.

Speaker Change: Okay, great. Thank you for that color.

Matthew Bouley: Okay, great. No, thank you for that color.

Matthew Bouley: And I guess that leads me then to the next question around the margin. I think, you know, the way you implied the kind of gross margin cadence, I think you even said the operating margin should be improving sequentially by the second half relative to Q2. So I think I heard you say that leverage on some of your fixed costs is a driver of that. But, you know, you just mentioned there's a 75 basis point hit from the kind of net price adjustments. If I think about kind of what's going on with land basis and development costs, you know, other type of inflation, you mentioned lumber top as well.

Speaker Change: That leads me to the next question around the margin.

Speaker Change: I think the way you implied that kind of gross margin cadence I think you even said the operating margin should be improving sequentially by the second half relative to Q2.

Speaker Change: So I think I heard you say that leverage on some of your fixed cost as a driver of that but you. Just mentioned there is a 75 basis point hit from the kind of net price adjustments.

Speaker Change: Kind of what's going on with land basis and development costs.

Speaker Change: Sure.

Speaker Change: Are there other type of inflation, you mentioned lumber pop as well can you just kind of bridge all of those pieces, together and pluses and minuses and give a little confidence on what drives that step up in margins in the second half. Thank you.

Matthew Bouley: Can you just kind of bridge all those pieces together and, you know, pluses and minuses and, you know, give a little confidence on what drives that step up in margins in the second half?

Matthew Bouley: Thank you. Yeah, Matt, in general terms, the margin per house is holding pretty similarly as the year unfolds. And everything that we've done is already included in the guide that we provided today. The improvement in the operating margin is coming from leverage and whether it's SG&A improvement or a little bit of gross margin improvement, both sides, it comes from deliver more housing.

Speaker Change: Yes, Matt in general terms.

Speaker Change: Margin per house is holding pretty similarly, as the year unfolds and everything that we've done is already included in the guide that we provided today the improvement in the operating margin is.

Speaker Change: Coming from leverage and whether it's SG&A improvement or a little bit of gross margin improvement both sides. It comes from deliver more houses.

Speaker Change: Okay.

Speaker Change: Thank you and the next question comes from the line of John Lovallo with UBS. Please proceed with your question.

Matthew Bouley: Thank you.

John Lovallo: The next question comes from the line of John Lovallo with UBS. Please proceed with your question. Hey, thanks, guys.

Speaker Change: Okay. Thanks, guys, you would actually have Matt Johnson on for Jon I. Appreciate the time I guess just following up on that last question trying to do some quick math I think at the midpoint of your guidance guide the implied back half gross margin is roughly call. It 19, 5%. So it would be down about 30 basis points relative to the first half.

John Lovallo: You actually have Matt Johnson on for John. I appreciate the time. I guess just following up on that last question, I'll try and do some quick math, but I think at the midpoint of your guys' guide, the implied back half gross margin is roughly, call it 19.5%, so it would be down about 30 basis points relative to the first half, despite home sales being up, call it 36% half over half. So I guess if you just help us think through some of the puts and takes there as we go from the first half into the second half, maybe how much of that is from mix as opposed to like for like deterioration.

Speaker Change: Despite home sales call it 36% half over half. So I guess can you just help us think through some of the puts and takes there as we go from the first half into the second half and maybe how much of that is from mix as opposed to like for like deterioration.

Speaker Change: Okay.

Speaker Change: Take a shot at that.

John Lovallo: Yeah, it was a little hard to hear your question, but if I got it, I don't, we're, there's always mix involved, but we're not expecting a whole lot of mix here. We are expecting, and not to say it this way, but the midpoint of the uncertainty, let's say ranges, we did look at kind of a high-low, and sort of looking at things as they are today is kind of what our forecast reflects, and I, there's really not much more I can add to that than just say that we are expecting some, you know, smaller than in improvement in the housing gross profit margin, mostly due to leverage, not due to anything else, and that because of our second half, it is going to be what we believe is going to be a far stronger volume-wise.

Speaker Change: Yes, it was a little hard to hear your question, but if I got it.

Speaker Change: There is always mix involved.

Speaker Change: But we're not expecting a whole lot of mix here.

Speaker Change: We are expecting.

Speaker Change: And not to say it this way, but the midpoint of the uncertainty, let's say ranges. We did look at kind of a high low.

Speaker Change: And.

Speaker Change: Sort of looking at things as they are today is kind of what our forecast reflects.

Speaker Change: And theres really not much more I can add to that then.

Speaker Change: Just say that.

Speaker Change: We are expecting some.

Speaker Change: Smaller than in.

Speaker Change: Improvement in the housing gross profit margin.

Speaker Change: Mostly due to leverage not due to anything else.

Speaker Change: And that because of our second half is going to be what we believe is going to be a far stronger volume wise. We think most of the leverage that we're going to get to an operating income level will come from the SG&A side.

John Lovallo: We think most of the leverage that we're going to get to an operating income level will come from the SG&A. All right, that all makes sense. I appreciate it.

Speaker Change: That all makes sense I appreciate it and then I guess just one more for the full year you guys are expecting homebuilding operating margins of nine 4% that would be down call. It 170 basis points year over year.

John Lovallo: Now, I guess just one more. For the full year, you guys are expecting home building operating margins of 9.4%. That'd be down, call it, 170 basis points year-over-year. And so if we look back at last year, operating margins on a regional basis were actually up in both the southwest and west coast, while the pressure really came from the central and southeast.

Speaker Change: And so if we look back at last year operating margins on a regional basis were actually up in both the southwest and West coast, while the pressure really came from the central and South East. So I guess do you guys expect a similar story to play out this year.

John Lovallo: So I guess you guys expect a similar story to play out this year, or how we kind of think about that on a regional basis. Yeah, I think that's the right way to look at it. West and Southwest are performing better financially.

Speaker Change: Kind of think about that on a regional basis.

Speaker Change: Yes, I think thats, the right way to look at it.

Speaker Change: Western southwest are performing better financially right now.

Speaker Change: And the next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Stephen Kim: And the next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question. Yeah, thanks very much, guys. Appreciate all the detail.

Stephen Kim: Yes, thanks, very much guys appreciate all the detail.

Stephen Kim: I guess my first question related to the cycle times, Rob, you talked about the fact that cycle times are down and all the benefits that that provides for the company. And I think you indicated you had not seen any trade labor shortages to date. But we're curious as to, are you not seeing, have you not seen any, for lack of a better term, ICE raids in any of your communities, or your neighboring communities? Is that what you meant by no trade labor shortages? Or are you in fact, seeing some of that, but it's just not meaningfully disruptive enough to call out?

Stephen Kim: I guess my first question relates to the cycle times, Rob you talked about the fact that cycle times down and all the benefits that that.

Stephen Kim: Provides for the company.

Stephen Kim: And I think you indicated you had not seen any trade labor shortages to date, but.

Speaker Change: We are curious as to are you not seeing have you not seen any.

Stephen Kim: For lack of a better term ice raids.

Speaker Change: Any of your communities are unique.

Speaker Change: <unk> communities is that what you meant by no trade labor shortages or are you in fact seeing some of that but it's just not.

Speaker Change: Meaningfully disruptive enough to call out.

Rob McGibney: And then you had said, I think direct costs were down year over year and quarter to quarter. And so I was wondering if you could quantify that a little bit for us. Sure, I'll start with the first one last. So sequentially, our direct costs are down about 1%. And then year over year, we're looking at about So that's to quantify that piece. On the labor, I'd say outside of the normal things that we would deal with outside of any kind of regulatory change or ICE or immigration policy change. really just been the same. We've seen nothing at all related to immigration.

Speaker Change: And then you had said I think direct costs were down year over year and quarter to quarter and so I was wondering if you could quantify that a little bit for us.

Speaker Change: Sure I'll start with the first one last so sequentially our direct costs are down about 1%.

Speaker Change: And then year over year, we're looking at about 3%. So that's.

Speaker Change: Thats to quantify that piece on the labor I'd say outside of the normal things that we would deal with outside of any kind of regulatory change or immigration policy changes. It's really just been the same we've seen nothing at all related to immigration I mean any kind of.

Rob McGibney: I mean, any kind of normal type labor shortage we might see on a day to day basis in a typical year may still be there, but nothing at all Steve related to immigration. Well, that's really encouraging. I appreciate that. That's Right, of course, yeah. We always have to have to add that these days for sure. Okay, that's helpful.

Speaker Change: Normal type labor shortage, we might see on a day to day basis in a typical year may still be there, but nothing at all Steve related to immigration policy.

Steve: Well, thats really encouraging and I appreciate that.

Speaker Change: Of course, yes.

Steve: We always have to have to add that these days for sure okay.

Speaker Change: Helpful.

Jeff Mezger: And then I guess, if you could just mention, I think you gave a very nice discussion about how you've eliminated the pocket incentives, and you sort of went to sort of putting these base prices, you know, on the internet and all that. It sounds like you're talking about this as a permanent change. And I just want to make sure that I'm interpreting that correctly. Is this you've referred to as, I think, cleaning up and getting some of the noise and all that kind of thing. So I just wanted to understand, is this something that you feel no longer has value?

Speaker Change: And then I guess, if you could.

Speaker Change: Just mentioned I think you gave a very nice discussion about how you've eliminated the pocket incentives and you sort of went to sort of putting these based prices.

Speaker Change: On the Internet and all of that.

Speaker Change: It sounds like you are talking about this as a permanent change and I just wanted to make sure that I'm interpreting that correctly is this you would refer to as I think cleaning up and getting some of the noise and all that kind of thing. So I just wanted to understand is this something that.

Speaker Change: You feel no longer has value or is there something maybe more nuanced if you want a message there.

Jeff Mezger: Or is there something maybe more nuanced that you want to mess with? Steve, it's an interesting evolution in that. When you have a large backlog, you're sensitive to moving price, because then you've got to go also deal with the backlog. And so our division started doing these pocket incentives. You know, fourth quarter, we were already working hard to get sales. And a lot of them crept in. And then they were still there in the first quarter. And it wasn't reflected in our pricing, but it was reflected in the margins we were generating. So we decided, let's, get out of it and get back to our core values.

Speaker Change: Okay.

Speaker Change: It's an interesting evolution in that.

Speaker Change: When you have a large backlog you're sensitive to move on price. Because then you've got to also deal with the backlog and so our division started doing these pocket incentives.

Speaker Change: Fourth quarter, we were already working hard to get sales and a lot of them crept in and then they were still there in the first quarter.

Speaker Change: It wasn't reflected in our pricing, but it was reflected in the margins we were generating so we decided let's let's get out of it and get back to our core values.

Jeff Mezger: So I, I would say it's a permanent move, because it's the way we like to run the business. Unfortunately, we fell in the trap of doing some things to try to get sales that really weren't aligned with how we present the best value to the customer. Thank you.

Speaker Change: I would say, it's a permanent move because it's the way we like to run the business.

Speaker Change: Unfortunately, we fall in the trap of doing some things to try to get sales that that really weren't aligned with how we present the best value to the customer.

Speaker Change: Thank you.

Mike Dahl: The next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question. Thanks for taking my questions. I just I guess I want to press on gross margins a little bit more maybe just remind us kind of in the current environment with what your guidance Incorporates for the revenue ramp as the year goes on. How would you normally think about how that translates to seasonal gross margin uplift? I was trying to get a sense of really like Yeah, the flat top guy in second half at face value doesn't seem awfully conservative.

Speaker Change: Next question comes from the line of Mike Dahl with RBC capital markets. Please proceed with your question.

Mike Dahl: Thanks for taking my questions.

Mike Dahl: I was just I guess I want to press on gross margins, a little bit more and maybe just remind us kind of in the current environment with what your guidance.

Mike Dahl: Corporate <unk> for the revenue ramp as the year goes on.

Mike Dahl: Would you normally think about how that translates to.

Mike Dahl: Seasonal gross margin uplift.

Mike Dahl: Trying to get a sense of really like.

Mike Dahl: Yes, the flat to up guide in second half that face value doesn't seem awfully conservative. So maybe you can just help us think through and remind us what that seasonal component actually is from a quantitative standpoint leverage by quarters yeah.

Mike Dahl: So maybe you can just help us think through and remind us what that seasonal component actually is from a quantitative standpoint. Yeah, um, you know, I would say that it's, again, our normal, sequential cadence, in that, you know, we are going to see improving quarter to quarter with really what I'll say taking out the leverage impact with a more or less flat gross. So the improvement is, again, mostly from the leverage. And so we're not looking to get much uplift in our gross margin without the leverage. I think, again, what we're hoping, and what I maybe said earlier was that, you know, there's, again, a lot of uncertainty out there.

Mike Dahl: I would say that it.

Mike Dahl: Again, our normal.

Mike Dahl: Sequential cadence in that we are going to see improving quarter to quarter.

Mike Dahl: With.

Mike Dahl: What I'll say taking out the leverage impact.

Mike Dahl: With more or less flat.

Mike Dahl: Gross so the improvement is again, mostly from the debt leverage.

Mike Dahl: And so we're not looking to get much uplift in.

Mike Dahl: Our gross margin without the leverage.

Mike Dahl: Thank again.

Mike Dahl: What we are hoping.

Mike Dahl: Maybe said earlier was that.

Mike Dahl: There's again a lot of uncertainty out there.

Mike Dahl: We're not expecting it to get worse, we're not expecting it to get better. So this really reflects kind of what we think is in our backlog. And with the sales price reductions that we've taken to date, obviously, things change, you know, it'll impact our margins. But right now, it seems or assumes a relatively static order rate. Okay.

Mike Dahl: Not expecting it get worse, we're not expecting it to get.

Mike Dahl: Better so.

Mike Dahl: It reflects kind of what we think is in our backlog and with a.

Mike Dahl: Sales price reductions that we've taken to date.

Mike Dahl: Obviously things change.

Mike Dahl: It will impact our our margins, but right now it seems it assumes a fairly a relatively static order right now.

Mike Dahl: Okay.

Mike Dahl: And my follow-up is still on the same lines. And it's more, why is that really the base case assumption when, like you just saw in a short period of time, the need to make some changes, your competitors are making changes based on what we see in terms of price, the demand environment has been very uncertain, there's an uncertain cost environment. Your sales pace, it's great to hear that it picked up, but it's still down year on year. So, you know, why not, why is assuming that conditions will remain stable the right base case? under the current condition.

Mike Dahl: And my follow up is still on the same lines.

Mike Dahl: And it's more.

Mike Dahl: Why why is that really the base case assumption when like you just saw in a short period of time the need to make some changes your competitors are making changes.

Mike Dahl: Based on what we see in terms of price the demand environment has been very uncertain and there is an uncertain cost environment.

Mike Dahl: Your sales pace, that's great to hear that it picked up but it's still down year on year or so.

Mike Dahl: Why not.

Mike Dahl: Assuming that conditions will remain stable the rate base case.

Mike Dahl: The current conditions.

Mike Dahl: While we're pleased with our sales right now and as I.

Mike Dahl: Well, we're pleased with ourselves right now. And as I Shared in my prepared comments, we're approaching a normal Q2 sales pace with the current margins we're guiding to. You know, it's based not everybody's gonna have their own crystal ball on where the world's headed. But as we see it today, we took steps that are working. The steps we took are reflected in the margin guide we've provided, and we're hitting our sales numbers. So right now we're pretty comfortable with where things are at.

Mike Dahl: Shared in my prepared comments, we're approaching a normal Q2 sales pace with the current margins we are guiding to so.

Mike Dahl: It's based on everybody's going to have their own crystal ball on where the world's headed but as we see it today, we took steps that are working.

Mike Dahl: Steps, we took are reflected in the margin guide we've provided and we're hitting our sales numbers. So right now we're pretty comfortable with where things are at.

Speaker Change: Thank you and the next question comes from the line of Michael Rehaut with Jpmorgan. Please proceed with your question.

Michael Rehaut: Thank you and the next question comes from the line of Michael Rehaut with JP Morgan. Please proceed with your question. Thanks. Good afternoon, everyone.

Michael Rehaut: Thanks, Good afternoon, everyone.

Michael Rehaut: First, I just wanted to, and I apologize if I missed this earlier, but I'd love to get kind of any regional differentiation across your footprint, you know, when you talk about, in particular, adjustments that you needed to make, you know, with incentives or pricing. If there were certain markets or even submarkets that, you know, were kind of more prevalent or at the top of the list, and by contrast, which markets might be on the stronger end of the spectrum.

Michael Rehaut: First I just wanted to and I apologize if I missed this earlier, but it is.

Michael Rehaut: Look to get kind of any regional differentiation across your footprint.

Michael Rehaut: When you talk about in particular adjustments.

Michael Rehaut: That you needed to make.

Michael Rehaut: With incentives or pricing.

Michael Rehaut: If there were certain markets or even submarkets that we're kind of more prevalent.

Michael Rehaut: At the top of the list and by contrast, which markets might be on the stronger end of the spectrum.

Michael Rehaut: Sure Michael I'll take that drop.

Rob McGibney: Chairman, I'll take that job. So, you know, as we always say, it really is market by market or even sub market by sub market. And I'll talk about resale a little bit here, because we've always viewed resale as our biggest competitor, regardless of what the new home competition is doing. We've got to stay tethered to that pricing with a reasonable new home premium to drive volume. So as far as the regional color, I would say in broad terms that Florida was our softest state in terms of sales demand in the first quarter and Because of that, we took the most pricing action there to find the market.

Michael Rehaut: As we always say it really is market by market or even submarket by Submarket and I'll talk about resale a little bit here, because we've always viewed resale as our biggest competitor regardless of what the new home competition is doing.

Michael Rehaut: We've got to stay tethered to that pricing with a reasonable new home premium to drive volume so as far as the regional color I would say in broad terms that Florida was our softest state in terms of sales demand in the first quarter and.

Michael Rehaut: Because of that we took the most pricing action there to find the market and I'd say roughly two thirds of our communities probably the same price range between five and $30000, but we had to do more in Florida to define that market in and I'll just start with like Jacksonville for example, using that as a proxy they've got Judd.

Rob McGibney: And, you know, I'd say roughly two thirds of our communities, probably the same price range between five and $30,000. But we had to do more in Florida to find that market. And, you know, to start with like Jacksonville, for example, using that as a proxy, you know, they've got just under, right at seven months of supply. So it's a month or so above what a historical norm would be in terms of resale. Supply are where most people consider a balanced market, and resale is a really efficient market. One positive that we see in that market is it is getting absorbed.

Michael Rehaut: Under the right at seven months of supply so it's a month or so above what the historical norm would be in terms of resale.

Michael Rehaut: Supplier, where most people consider a balanced market and resale is a really efficient market. One positive that we see in that market is getting absorbed so you've got days on market are actually down year over year, despite that higher supply, but it's likely because pricing has moved so we're seeing that market react we've done.

Rob McGibney: So you've got days on market are actually down year over year, despite that higher supply, but it's likely because pricing has moved. So we're seeing that market react. We've done the same thing in that market to find where we need to be to sell, and where we can offer that new, personalized, energy-efficient product with a small premium to resell, we find that we win. If you look at the rest of Florida, Orlando was similar. They've seen their days on, or their month of supply increased to about the same level, have not seen the pricing levels adjust there like they've started to in Jacksonville, and their days on market continues to be pretty elevated, so made some more significant adjustments there.

Michael Rehaut: The same thing in that market defined find where we need to be too.

Michael Rehaut: To sell and where we can offer that new personalized energy efficient product with a small frame and Theresa we find that we win.

Michael Rehaut: When you look at the rest of Florida, Orlando with similar they have seen their days on hand are there multiple supply increased to about the same level have not seen the pricing levels adjust that or like they've started to in Jacksonville and their days on market continues to be pretty elevated so made some more significant adjustments there.

Rob McGibney: The other business we have is Tampa. It's a similar situation, but lower overall months of supply than Jacksonville, Orlando. So even within those three markets, it's sub-market by sub-market. Some perform better than others, and we've had to adjust the moves that we're making based on that.

Michael Rehaut: The other business, we have is Tampa, they've got it's a similar situation, but lower overall months of supply in Jacksonville, Orlando, So even within those three market submarket by Submarket, some perform better than others and we've had to adjust the moves that we're making based on that.

Michael Rehaut: Texas I would say the story was a little more mixed many of our communities continued to perform very well while there are others that we had to adjust in I'd say Houston and Austin held the best.

Rob McGibney: Texas I would say the story was a little more mixed you know many of our communities continued to perform very well while there were others that we had to adjust in. I'd say Houston and Austin held the best. The moves there were smaller and more surgical, where San Antonio required some more broad-based adjustments. But then when you get into the West, really, resale is still very, very low in terms of where it's been historically. I mean, most of them are in the three or four months of supply range and haven't had to make as many moves in the West and Southwest.

Michael Rehaut: The moves there were smaller and more surgical where San Antonio required some more broad based adjustments.

Michael Rehaut: But then when you get into the West really resale is still very very low in terms of where it's been historically I mean most of them are in the.

Michael Rehaut: The three or four months of supply range and haven't had to make as many moves in the west and southwest has held better.

Michael Rehaut: Thanks.

Michael Rehaut: Thanks, that's a great overview. Appreciate all the detail there.

Michael Rehaut: Great overview I appreciate all the detail there.

Mike Dahl: I guess secondly, I'd love to shift, you know, towards the balance sheet. And, you know, if you could just kind of remind us How you're thinking about leverage over the longer term and, you know, kind of the, you know, dividends and share repurchase and perhaps you know, what the potential is for that over time. But Mike, our, our strategy really hasn't changed from where we've been the last few years, our ratios will improve because we're growing the the equity, we don't see the need to go get more debt. We don't have any maturities for a while when they they do come up, we'll we'll deal with Top priority, we have to grow the business and get scaled and be more profitable.

Michael Rehaut: I guess, secondly, I would love to shift.

Michael Rehaut: Towards the balance sheet, and if you could just kind of remind us.

Michael Rehaut: How youre thinking about leverage over the longer term and.

Michael Rehaut: Kind of the.

Michael Rehaut: It ends in share repurchase and perhaps.

Michael Rehaut: What the potential is for that over time.

Michael Rehaut: Mike or our strategy are really hasnt changed from where we've been the last few years.

Our ratios will improve because we're growing.

Michael Rehaut: Equity.

Michael Rehaut: You don't see the need to go get more debt, we don't have any maturities for a while when they do come up we will we'll deal with them.

Michael Rehaut: Top priority, we have to grow the business and get scale to be more profitable along the way were taken our excess cash.

Jeff Mezger: Along the way, we're taking our excess cash. and Repurchasing Shares and we've done a lot of that over the last three to four So what, but that's more of an opportunistic play. It depends on the price and what our cash forecasts are and where we think we're headed. As Bill shared in his comments. We don't expect to have anything out on the revolver. We had a little blip in Q1 because of the two Vegas land deals. And that'll get absorbed and go away over the balance of the year. So our ratio guide would be, it's gonna keep coming down as we grow the equity.

Michael Rehaut: And.

Michael Rehaut: Repurchasing shares when we've done a lot of that over the last three years to four years.

Michael Rehaut: So.

Michael Rehaut: But thats more of an opportunistic play it depends on the price and.

Michael Rehaut: What our cash forecast are and where we think we're headed.

Bill Hollinger: As bill shared in his comments.

Bill Hollinger: We don't expect to have anything out on the revolver, we had a little little blip in Q1 because of the two Vegas land deals and that will get absorbed and go away over.

Bill Hollinger: The balance of the year, so our our ratio guide would be it's going to keep coming down as we grow.

Bill Hollinger: The equity, it's not going to be.

Jeff Mezger: It's not gonna be. Taking that out. So grow the business and be opportunistic with the other things and take your excess cash and give it back to the shareholders.

Bill Hollinger: <unk> taken that out.

Bill Hollinger: So grow the business and be opportunistic with the other things and take your excess cash we give it back to the shareholders.

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

Alan Ratner: And the next question comes from the line of Alan Ratner with Zellman & Associates. Please proceed with your question. Hey, guys, good afternoon. Thanks for all the detail so far.

Alan Ratner: Hey, guys. Good afternoon, thanks for all the detail so far.

Alan Ratner: My question on the price adjustment, I'm just curious, you know, if you can look at the last five weeks with solid order results following those adjustments, would you say that those have been driven more by kind of going back to buyers that were already in the pipeline, you know, giving yourselves forced the tools to kind of go back and say, we've made these adjustments and that kind of pulling them off the sidelines, you know, given the hesitancy, or would you say that it's actually translated to significant increases in new traffic, maybe coming from the website advertising and actually pulling through more sales from from new individuals coming into the pipeline?

Alan Ratner: My question on that the price adjustments and I'm. Just curious if you can look at the last five weeks, but solid quarter results following those adjustments.

Alan Ratner: Would you say that it's been driven more by kind of going back to buyers that were already in the pipeline yet keeping your sales force tools to kind of go back and say we've made these adjustments and that kind of pulling them off the sidelines given the hesitancy or would you say that it's actually translated to significant increases in new traffic.

Alan Ratner: Maybe coming from the website advertising.

Alan Ratner: Pulling through more sales.

Alan Ratner: From from new individuals coming into the pipeline.

Speaker Change: Yes, Alex Good question, it's both I think more so it's bringing in new buyers I mean, as Jeff said, we are putting our best foot forward advertising the best price on the Internet, that's where most people see US first so I think thats generating new traffic that we weren't seeing before I don't have a ratio or a percentage for you I would tell you that.

Rob McGibney: Yeah, that's a good question. It's both. I think more so it's bringing in new buyers. I mean, as Jeff said, we are putting our best foot forward advertising the best price on the internet. That's where most people see us first. So I think that's generating new traffic that we weren't seeing before. I don't have a ratio or a percentage for you. I tell you that some percentage of it is going back to buyers that we already had in the queue or that were former leads that didn't purchase, couldn't purchase, maybe couldn't qualify. And with some of the adjustments, we've made, we have made sales from going back to past traffic, but the majority of it is new traffic that's being generated from the web .

Speaker Change: Some percentage of it is going back to buyers that we already had in the Q that reformer leaves that didnt purchase couldnt purchase maybe couldnt qualify and with some of the adjustments. We've made we have made sales from going back to past traffic, but the majority of it is new traffic that's being generated from that.

Speaker Change: Website.

Speaker Change: Got it that's encouraging and then I think what we've heard in the past is one of the.

Rob McGibney: Got it.

Rob McGibney: That's encouraging.

Rob McGibney: And then, you know, I think what we've heard in the past is one of the I guess trickier things for build order builders making base price adjustments is the large backlog that you guys have. And I'm curious how you're dealing with your backlog. Are you proactively reaching out to them in the 50% or so of communities where you have adjusted prices? And are you offering those same adjustments? Are you taking it on a case by case basis as they get closer to the closing dates? Any color there would be helpful. Yeah, we're taking it on a case by case basis.

Speaker Change: I guess trickier things for built to order builders, making base price adjustment is the large backlog that you guys have and Im curious how youre dealing with your backlog are you proactively reaching out to them in the 50% or so communities, where you have adjusted prices and are you offering those same adjustments are you taking it on a case by case.

Speaker Change: As they get closer to.

Speaker Change: Two the closing dates.

Speaker Change: Color there would be helpful. Yes.

Speaker Change: Yes, we're taking them on a case by case basis.

Rob McGibney: And really, when you look at a lot of the deals that we have in backlog, everybody struck their own deal. I mean, Jeff mentioned some of the other incentives that were being offered and deals being made. And as we looked at that, we really don't think there's a lot of backlog exposure, we have taken some adjustments where that wasn't the case in the new deal might be better than what somebody had in backlog.

Speaker Change: And really when you look at a lot of the deals that we have in backhaul everybody struck their own deal I mean, Jeff mentioned some of the other incentives that were being offered in deals being made and as we looked at that we really don't think there is a lot of backlog exposure, we have taken some adjustments where that wasn't the case in the new deal might be better than what somebody had in backlog, but in the grand scheme of things.

Jay Mccanless: But in the grand scheme of things, it's pretty pretty And the next question comes from the line of Jay McCanless with Webush.

Speaker Change: It's pretty pretty small.

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

Jay Mccanless: Please proceed with your question. Hey, thanks for taking my questions. The first one I had just wanted to find out are you guys still having problems getting meters and other things in California as the rebuild has started there? You know, it's interesting, we kind of always have problems getting meters in California. But yeah, it is a little, it's still a little more delayed from the impact of the fires. I think we're through the worst part of that. A lot of the rebuilding hasn't started. I think that's going to be a long and ongoing process. But you know, it's a big state, a lot of volume, a lot of crews.

Jay Mccanless: Hey, Thanks for taking my questions. The first one I had just wanted to find out are you guys still having problems getting meters and other things in California as the rebuild is started there.

Speaker Change: Yeah.

Speaker Change: Interestingly, we kind of always have problems getting meters in California, but yes. It is a little it's still a little more delayed from the impact of the fires I think we're through the worst part of that.

Speaker Change: Yeah, a lot of the rebuilding Hasnt started I think that's going to be a long and ongoing process, but.

Speaker Change: It's a big state a lot of volume a lot of.

Speaker Change: Cruise and I, just I don't expect that that's going to be an ongoing a significant ongoing drag on our timing to get meters in utility hookups on houses still there a little bit getting better everyday.

Rob McGibney: And I just, I don't expect that that's going to be an ongoing, a significant ongoing drag on our timing to get meters and utilities Still there a little bit, getting better every day and That'll be back to normal very It's good to hear.

Speaker Change: I don't think that that will be back to normal fairly soon.

Speaker Change: Okay.

Speaker Change: Good to hear.

Rob McGibney: And so in the 50% of communities where you didn't adjust pricing, I guess, were you able to raise prices in some areas? And if so, maybe highlight one or two that did well during the quarter? Or highlight one or two regions that did well during the quarter? Yeah, you know, as I mentioned, the West and Southwest has performed better. I mean, on the half that we didn't move prices down, we didn't move prices down because they're selling at pace and we're happy with what they've done. And now that The spring selling season is here there are opportunities to lift.

Speaker Change: And so the 50% of communities, where you didn't adjust pricing I guess.

Speaker Change: To raise prices in some areas.

Speaker Change: If so maybe highlight one or two that that did well during the quarter.

I'll highlight one or two regions that did well during the quarter.

Speaker Change: Yes, as I am.

Speaker Change: Mentioned, the west and southwest has performed better I mean on the.

Speaker Change: The half that we didn't move prices down we didn't move prices down because they are selling at pace and we're happy with what they've done and now that.

Jeff Mezger: The spring selling season. This year there are opportunities to lift I'll just use Las Vegas is one of the examples I mean that market continues to do very well for US Jeff mentioned, the two large purchases that we've had there but we've continually raised price there and continue with really strong absorptions and we've got similar examples throughout.

Rob McGibney: I'll just use Las Vegas as one of the examples. I mean, that market continues to do very well for us. Jeff mentioned the two large purchases that we've had there, but we've continually raised price there and continue with really strong absorptions.

Sam Reed: And we've got similar examples throughout, you know, some places in California as well on the communities that were already performing well that are now doing And the next question comes from the line of Sam Reed with Wells Fargo.

Speaker Change: Some places in California, as well on the communities that were already performing well that are now doing even better.

Speaker Change: And the next question comes from the line of Sam Reid with Wells Fargo. Please proceed with your question.

Sam Reed: Please proceed with your question. Awesome, thanks so much. Just looking at your updated delivery guide, especially on the back of the Q1 orders, just on my very rough math, it looks like we're going to need to see backlog conversion accelerate in the second half. Can you just break down the balance between, you know, kind of maybe better cycle times or more spec homes? Because it would seem like you know, one of those would potentially need to change to hit the revenue guide in the second half. Just hoping to unpack that. Yeah, I mean, I think it's all the things that you just mentioned there, whether it's the improvement in cycle time or covering more of the inventory that's available.

Speaker Change: Awesome. Thanks, so much I was just looking at your updated delivery guide, especially on the back of the Q1 orders.

Speaker Change: On my very rough math, it looks like we're going to need to see backlog conversion accelerated in the second half.

Speaker Change: Could you just break down the balance between kind of maybe better cycle times or more spec homes, because it would seem like one of those would potentially you can change to hit the revenue guide in the second half just hoping to unpack that.

Speaker Change: Yes, I mean, I think it's all the things that you just mentioned there whether it's the improvement in cycle time recovering more of the inventory that's available, but while it does increase from where we were in Q1. We think it is a very achievable number I mean, you just look at where we were in Q4 similar to that.

Rob McGibney: But you know, while it does increase from where we were in q1, we think it's a very achievable number. I mean, you just look at where we were in q4, it's similar to that. And, you know, we're, as we said, we're still targeting 120 days company average on cycle time. So that As we continue to progress towards that, we're going to that helps with the backlog. Yeah, that helps. And then, you know, just just to follow up to something in the prepared remarks, you delivered, I believe, slightly fewer inventory homes during the quarter than you were expecting.

Speaker Change: And as we said, we're still targeting 120 days company average on cycle time, so that.

Speaker Change: As we continue to.

Speaker Change: Progress towards that we're going to that helps with the backlog conversion as well.

Speaker Change: Yeah that helps and then.

Speaker Change: Just a follow up to something in the prepared remarks, you delivered I believe slightly fewer inventory homes during the quarter than you were expecting.

Rob McGibney: You know, can you just talk to why that number was a little bit lower? I think it was about 150 units. Apologies if I missed. And then can you just remind us what the gross margin spread historically has been between your bill to order in your inventory homes? And was there any mixed benefit in the first quarter from that lower inventory home sale volume that we should be aware of? Thanks. At the time we made our earnings call back in January, we assumed another 150 would sell and close in the quarter. Well, we assume more than that, but we missed it by the 150.

Speaker Change: Can you just talk to why that number was a little bit lower I think it was about 150 units apologies if I missed and then can you just remind us what the gross margin surprised historically has been between your built to order and your inventory homes.

Speaker Change: Was there any mix benefit in the first quarter from that lower inventory home sale volume that we should be aware of thanks.

Speaker Change: At the time, we did our made our earnings call back in January.

Speaker Change: He assumed another 150 would sell and close in the quarter.

Speaker Change: Well, we assume more than that but we missed it by the 150 units.

Rob McGibney: And if you think through the story we shared, we didn't really take the steps to get our sales going until the second week of February. So one could argue that we were a little slow on taking those steps on the inventory sale, and we missed it. Okay, hindsight's always good, but we've taken the steps now, and we're selling, so. You know, it was a one-quarter short-term event we think we've addressed. I personally expected that we would get more same quarter sales and closings in Q1 than we did in Q4, and it didn't.

Speaker Change: Through the story, we shared we didn't really take the steps to get our sales go until the second week of February so.

Speaker Change: One could argue that we were a little slow.

Speaker Change: I am taking those steps on the inventory sale and we missed it.

Speaker Change: Okay, Hindsight's always good but we've taken the steps now.

Speaker Change: And we're selling so.

Speaker Change: Sure.

Speaker Change: It was a one quarter short term event and we think we've addressed it.

Speaker Change: Do you want to go over anything else.

Speaker Change: No I think that covers it.

Speaker Change: Parsley expected that we would get more same quarter sales and closings in Q1 than we did in Q4 and it didn't turn out that way.

Speaker Change: Thank you and next question comes from Susan Mcclary with Goldman Sachs. Please proceed with your question.

Susan Maklari: Thank you and next question comes from Susan Maklari with Goldman Sachs. Please proceed with your question. Thank you.

Susan Mcclary: Thank you and good afternoon, everyone.

Susan Maklari: Good afternoon, everyone. My first question is on the design studios, you know, given that the consumer does seem to be under a bit more pressure, and you did have to take some actions to improve affordability, have there been any changes in what you're seeing in the design studios, either in terms of what they're choosing or anything in terms of, you know, what you're offering there? Not really, Susan, it's, it's interesting, our percentage of revenue that people are spending in the studio has stayed really consistent. Our square footage of homes has stayed really As to what they're picking, I think we've seen somewhat of a shift and really we started seeing that.

Susan Mcclary: My first question is on the design Studios, you know given that the consumer does seem to be under a bit more pressure than you did have to take some actions to improve affordability.

Susan Mcclary: Any changes in what Youre seeing in the design studios either in terms of what they're accusing or anything in terms of what's your offering there.

Susan Mcclary: Not really Susan it's.

Susan Mcclary: It's interesting our percentage of revenues people are spending in the studio has stayed really consistent or square footage of homes has stayed really consistent.

Susan Mcclary: As to what Theyre picking I think we've seen somewhat of a shift and really we started seeing that.

Rob McGibney: Oh, you know, maybe a couple of years ago when rates moved up, it was less kind of fit and finish type things and spending more on things that buyers knew they couldn't change or that were difficult. like room configuration, structural cabinets. Now they continue to spend about the same amount and for the most part buyer behavior in the studio is Okay, that's helpful.

Susan Mcclary: No.

Susan Mcclary: Maybe a couple of years ago when rates moved up it was less kind of fit and finish type things and spending more on things that buyers knew they couldnt changes that were difficult to change later like room configuration structural options cabinets countertops things like that but.

Susan Mcclary: They continue to spend about the same amount and for the most part buyer behavior in the studio has been consistent.

Susan Mcclary: Okay. That's helpful. And then you mentioned that you are locking in your lumber for a bit longer just given the potential inflation or the inflation that we're already seeing in la in that product can you talk a little bit more about how long that goes out for how we should think about the potential impact if lumber continues to move.

Rob McGibney: And then you mentioned that you are locking in your lumber for a bit longer, just given the potential inflation or the inflation that we're already seeing in love in that product. Can you talk a bit more about how long that goes out for how we should think about the potential impact if lumber continues to move from here? And what you're seeing in other wood products as well? Has there also been upward movement in some of those two? I haven't seen it in the other products. That may be something that's coming down the road. We haven't seen that yet.

Speaker Change: From here and what Youre seeing in other wood products as well has there also been upward movement in some of those too.

Speaker Change: I haven't seen it in the other products that may be something that's coming down the road, we haven't seen that yet as to the lumber.

Rob McGibney: As to the lumber. You know, we try to diversify on how we we lock and we'll have, you know, 90 days, maybe 120 days on the the long term and some divisions were locking for shorter term. You know, as we look at the recent locks, most of our divisions are covered for the majority of of the quarter here, but at some point, if lumber continues to go up and depending on what happens with tariffs. So, we don't know what that's going to do to domestic lumber pricing, but when those locks expire, we will have to.

Speaker Change: We try to diversify on how we look and we will have 90 days, maybe 120 days on the long term in some divisions were locking for shorter term as we look at the recent locks most of our divisions are covered for the majority of.

Speaker Change: The quarter here.

Speaker Change: But at some point if lumber continues to go up and depending on what happens with tariffs. So we don't know what that's going to do to domestic lumber pricing, but.

Speaker Change: When those locks expire we will have to adjust.

Speaker Change: Thank you and our final question comes from the line of cover Allinson with Wolfe Research. Please proceed with your question.

Rob McGibney: Thank you.

Trevor Allenson: And our final question comes from the line of Trevor Allenson.

Trevor Allenson: Please proceed with your. Good evening. Thank you for taking my questions. First, you talked about closing out of Inspirata and Las Vegas has been a really strong margin market for you guys. Can you talk about what type of gross margins you're earning at Inspirata and maybe the margin impacts as that closes out? And then when do you expect final sales? Yeah, but Trevor, we really don't get into what the gross margin is per community. I Robin and I have both shared that our biggest margins are strong and, and well above the company average. So the two land deals that we acquired, we had tied up for a couple of years, each had to take them through the entitlement process, they have a very good basis.

Cover Allinson: Good evening. Thank you for taking my questions first you talked about closing out a inspiron and Las Vegas has been a really strong margin market for you guys can you talk about what type of gross margins, you're earning at <unk> and maybe the margin impact as that closes out and then when do you expect final sales to be.

Speaker Change: From there.

Speaker Change: Yes, Trevor we really don't get into what the gross margin as per community Rob.

Speaker Change: <unk> and I, both shared that our Vegas margins are strong and well above the company average.

Speaker Change: The two land deals that we acquired with <unk>.

Speaker Change: Had tied up for a couple of years each had to take them through the entitlement process. They have a very good basis.

Jeff Mezger: Very similar products to what we offer at Inspirata. And we have a lot of builders knocking on the door wanting to get lots from us. So we know we're in a good spot. But our expectation is Vegas will continue to at the top for us in terms of profitability and margins. So a great team and a very land constrained market. Okay. Understood. And I appreciate that color.

Speaker Change: Very similar products too.

Speaker Change: What we offer at <unk> and we have a lot of builders knocking on the door wanting to get lots from us. So we know we're in a good spot but.

Speaker Change: Our expectation is Vegas will continue to be.

Speaker Change: At the top for us in terms of profitability and margins. So a great team and a very land constrained market.

Speaker Change: Okay understood and I appreciate that color and then second questions on.

Rob McGibney: And then, second question is on spec production levels. We've heard several builders talk about pulling back on spec production, given this slower start to the year. Are you guys adjusting your spec production as well? And then, what are your expectations for spec mix as a percentage of 2025 deliveries, and how does that compare to your spec mix as a percentage of 2024 deliveries? Well, right now we're running about the same. We've been about 60% VTO, 40% SPAC. And historically, we've been closer to 80-20. And our goal right now is to drive VTO sales, we do see higher margins on VTO sales.

Speaker Change: On spec production levels, we've heard several builders talk about pulling back on spec production given the slower start to the year are you guys. Adjusting your spec production as well and then what are your expectations for spec mix as a percentage of 2025 deliveries and how does that compare to respect mix as a percentage of 2024 deliveries. Thanks.

Speaker Change: Well right now we're running about the same we've been about 60% bto, 40% back and historically, we've been closer to 80 20, and our goal right now is to drive Bto sales, we do see higher margins on bto sales. So our goal is to fill the pipeline with build to order sales that will drive our starts and get back towards over time get that closer.

Rob McGibney: So our goal is to fill the pipeline with built to order sales that'll drive our starts and get back towards over time get back closer to that mix of 80% VTO, 20%.

Speaker Change: To that.

Speaker Change: Mix of 80% bto, 20% inventory or spec.

Speaker Change: Thank you and ladies and gentlemen that does conclude the question and answer session and that also concludes today's teleconference. We thank you for your participation you may now disconnect your lines.

John: Thank you, and ladies and gentlemen, that does conclude the question and answer session.

John: And that also concludes today's teleconference. We thank you for your participation. You may now disconnect your line.

Speaker Change: Yeah.