Q2 2025 Meritage Homes Corp Earnings Call
Operator: Second Quarter 2025 Analyst Call. At this time, all participants are in a listen-only The question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone key. Please note, this conference is being recorded.
Greetings and welcome to the Meritage Homes, second quarter 2025 analyst call.
This time all participants are in a listen-only mode.
A question and answer session will follow the formal presentation.
Emily Tadano: I will now turn the conference over to our host, Emily Tadano, Vice President of Investor Relations and External Communications. Thank you. You may...
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
Speaker Change: I will now turn the conference over to our host. Emily tadano, vice president of investor relations and external Communications. Thank you. You may begin.
Emily Tadano: Good morning and welcome to our analyst call to discuss our second quarter 2025 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the investor relations link at the bottom of our homepage.
Emily Tadano: Please refer to slide two, cautioning you that our statements during this call as well as in the earnings release and accompanying slide. contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time and we assume no obligation to update them. Any forward-looking statements are inherently uncertain.
Emily Tadano: Thank you operator. Good morning and Welcome to our analysts. Call to discuss our second quarter 2025 results. We issued the press release yesterday after the market closed, you can find it along with the slides. We'll refer to during this call on our website at investors that meritagehomes.com or by selecting the investor relations Link at the bottom of our homepage.
Emily Tadano: Please refer to slide 2. Cautioning you that our statements during this call, as well as in the earnings release and the accompanying slide.
Emily Tadano: Contain forward-looking statements.
Emily Tadano: Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide, as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2024 annual report on Form 10-K and Form 10-Q for subsequent quarters. We've also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures.
Emily Tadano: Those and any other projections represent the current opinions of management which are subject to change at any time and we assume no obligation to update them. Any forward-looking statements are inherently uncertain, our actual results may be materially different than our expectations due to a wide variety of risk factors which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission. Specifically
Emily Tadano: Our 2024 annual report on form 10K and form 10q for subsequent quarters.
Emily Tadano: Share and per share amounts have been retroactively restated to reflect our January 2, 2025 stock split for all prior periods.
Emily Tadano: We've also provided a Reconciliation of certain non-gaap Financial measures referred to in our earnings release as compared to their closest related Gap measures.
Emily Tadano: With us today to discuss our results are Steve Hilton, Executive Chairman, Phillippe Lord, CEO, and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour.
Share and per share amounts have been retroactively restated to reflect our January 2nd 2025 stock split for all prior periods.
Operator: A replay will be available on our website later today.
Steven Hilton: I'll now turn it over to Mr. Hilton. Thank you, Emily. Welcome to everyone listening in on our call.
Emily Tadano: With us today to discuss our results, our seat Hilton executive chairman Felipe, Lord CEO and Hillis feruza Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour, a replay will be available on our website later today. I'll now turn it over to Mr. Hilton, Steve.
Steven Hilton: Today, I'll start by touching on our second quarter results and current market trends.
Speaker Change: Thank you, Emily. Welcome to everyone listening in on our call.
Phillippe Lord: Phillippe will cover our strategy, how our strategy helps us navigate the changing market conditions and the highlights of our quarterly performance.
Speaker Change: Today, I'll start by touching on our second quarter results and current market trends.
Steven Hilton: Hilla will provide a financial overview of the quarter and forward-looking guidance. We are proud of our team's efforts to navigate the tougher selling conditions and we secured orders of 3,914 homes in the second quarter of 2025. Our strategy's focus on move-in ready inventory and the continued use of financing incentives allowed us to better compete in a challenging market because we provide our customers with certainty to help overcome strained consumer confidence. This performance generated a strong average absorption pace of 4.3 net sales per month this quarter. In the second quarter of 2025, we delivered 4,170 homes.
Speaker Change: Bleep will cover our strategy, how our strategy helps us navigate to changing market conditions, and the highlights of our quarterly performance ELO will provide a financial overview of the quarter and forward-looking guidance.
Speaker Change: We are proud of our team's efforts to navigate the tougher selling conditions.
Speaker Change: And, and we secured orders of 3,914 homes in the second quarter of 2025.
Speaker Change: Our strategies focus on moving ready, inventory? And the continued use of financing incentives. Allowed us to better compete in a challenging Market because we provide our customers with certainty to help overcome strained consumer confidence.
Speaker Change: This performance generated. A strong are absorption pace of 4.3, net sales per month, this quarter.
Steven Hilton: Our improved cycle times and move-in ready spec strategy drove another quarter of backlog conversion above 200%. We generated a home closing revenue of $1.6 billion this quarter and achieved adjusted home closing gross margin of 21.4%. excluding terminated land yield charges, which contributed to EPS, diluted EPS, of $2.04. We also increased our book value per share 10% year over year.
Speaker Change: In the second quarter of 2025 we delivered 4,170 homes.
Speaker Change: our improved cycle times and move in ready, spec strategy, drove another quarter of backlog, conversion above 200%,
Steven Hilton: It is well documented that home buying demand has softened over the last several quarters, and even more so this past quarter. Mortgage rates increased and remained volatile while consumer hesitancy went up. causing potential buyers to take an extended time frame to commit to a home purchase. And at the entry-level segment, affordability remains the primary barrier to home ownership.
Speaker Change: We also increased our book value per share, 10% year-over-year.
Speaker Change: Is well, documented that home buying demand has softened over the last several quarters and even more. So this past quarter
Speaker Change: Mortgage rates increased and remain volatile while consumer, hesitancy went up.
Speaker Change: Causing potential buyers to take an extended time frame to commit to a home purchase.
Steven Hilton: We believe our strategy was designed to provide certainty in the weather of these challenges head-on, and we remain positive on the long-term outlook of our industry, given favorable demographic trends.
Speaker Change: And at the entry-level segment, affordability Remains the primary barrier to home ownership.
Phillippe Lord: And with that, I'll now turn it over to Phillippe. Thank you, Steve. As Steve noted, we believe that Meritage is well-positioned. Despite today's macro headwinds, we remain competitive and gain market share because we are choosing to focus on what we can control by having an agile business model with a go-to market strategy which delivers certainty for customers during challenging times. First, we want to commend everyone at Meritage for their dedication and hard work to focus on these controllables.
Speaker Change: we believe our strategy was designed to provide certainty and whether these challenges had on and we remain positive on the long-term Outlook of our industry, giving them a favorable demographic trends
Speaker Change: and with that I'll now turn it over to Felipe.
Felipe Hilton: Thank you, Steve.
Felipe Hilton: As Steve noted, we believe that Meritage is well positioned. Despite today's macro headwinds, we remain competitive and gain market share because we are choosing to focus on what we can control by having an agile, business model with a go to market strategy, which delivers certainty for customers during challenging times.
Phillippe Lord: We're happy to share that our second quarter of 2025 ending community count was 312 active stores, the highest community count in company history, with more planned growth to come in the second half of the year. Further, our teams once again challenged themselves and were able to reduce our construction time from approximately 120 calendar days in the first quarter of 2025 to about 110 this quarter, which allows us to reduce our starts per community. These two achievements are laying the groundwork for continued growth, even during a time when there are macro factors that are challenging the entire industry.
Felipe Hilton: First we want to commend everyone at Meritage for their dedication and hard work to focus on these controllables. We're happy to share that our second quarter of 2025 Ending Community count was 312, active stores. The highest Community count in company history with more planned growth to come in the second half of the Year. Further, our teams, once again challenge themselves, and we're able to reduce our construction time from approximately 120, calendar days in the first.
Felipe Hilton: Quarter 2025 to about 110 this quarter, which allows us to reduce our starts per community.
Phillippe Lord: Next, I want to underscore the agility of our affordable spec building strategy. We can pull various levers at the local level to ensure we optimize every asset. Our operations and cost structure are more efficient when we are building, selling, and closing at a consistent pace of four net sales per month. We know that these savings and efficiencies can be used to offset the impact of increased incentives that are currently being offered to achieve the target. However, home building is a local business, and we look to balance pace and price on a community-by-community basis to ensure we are maximizing our financial performance.
Felipe Hilton: These 2 achievements are laying the groundwork for continued growth. Even during a time when there are macro factors that are challenging the entire industry,
Felipe Hilton: Next, I want to underscore the agility of our affordable SPEC Building strategy. We can both various levels various levers at the local level to ensure. We optimize every asset our operations and cost structure are more efficient when we are building selling and closing at a consistent pace of 4 net sales per month.
Phillippe Lord: As you have seen us do in the past, as sales pace starts to slow, we moderate our starts in order to maintain our targeted level specs, which is four to six months supply on the ground. We also change the pace of our starts based on our cycle times to ensure we have an optimal amount of ready inventory.
Felipe Hilton: We know that these savings and efficiencies can be used to offset the impact of increasing incentives that are currently being offered to achieve the target. However, home building is a local business and we look to balance pace and price on a community by Community basis to ensure, we are maximizing our financial performance.
Felipe Hilton: As USC is doing in the past is sales page, starts to slow. We moderate our starts in order to maintain our targeted level of specs which is 4 to 6 months Supply on the ground.
Phillippe Lord: As part of our agile business model, we exercise a disciplined yet flexible approach around our land strategy that helps us optimize our land positions on a market by market basis. We routinely review all of our land under control and determine if it still aligns with the changing market conditions. As a result of this analysis, we regularly terminate land deals that no longer fit our criteria, which in Q2 was approximately 1,800 lots.
Felipe Hilton: We also changed the pace of our start of our startups. Based on our cycle, times to ensure, we have an optimal amount of ready inventory.
Felipe Hilton: As part of our agile business model, we exercise a discipline yet flexible approach around our land strategy. That helps us optimize our land positions on a market-by-market basis. We routinely review, all of our land at a control and determine if it's still lines with the changing market conditions, as a result of this analysis, we regularly terminate land deals.
Felipe Hilton: No longer fit our criteria, which in Q2 was approximately 1800, Lots.
Phillippe Lord: Lastly, our go-to market strategy provides the certainty that buyers are looking for today. Our 60-day closing commitment and move-in ready offerings compete directly with resale inventory, but with all the benefits of a new home. And our focus on including our customers' brokers in the buying process make us a partner of choice for both future homeowners and the broker community. We believe our strategy and agility have allowed us to maximize our earnings while continuing to have a strong balance sheet with a focus on liquidity. We are making all of these decisions with the bigger framework of our capital allocation decision.
Lastly, our go to market strategy. Provides a certainty that buyers are looking for today our 60-day closing commitment, and moving ready offerings complete compete, directly with resale inventory, but with all the benefits of a new home and our focus on including our customers brokers in the buying process, make us a partner of choice for both future homeowners and the broker community.
Phillippe Lord: To align with prevailing macro dynamics, we have intentionally toggled between our spend on land and a focus on shareholder returns, which Hilla will cover later.
Felipe Hilton: We believe our strategy and Agility have allowed us to maximize their earnings while continuing to have a strong balance sheet with a focus on liquidity. We are making all these decisions with the bigger framework of our Capital allocation decisions.
Phillippe Lord: Now turning to slide four. Demand remained healthy during the spring selling season as we worked through affordability concerns on a customer by customer basis. Second quarter 2025 orders were 3% higher year over year due to a 7% increase in average community count that was partially offset by a 4% decrease in average absorption pace. The cancellation rate of 10% this quarter remained lower than historical average given the limited time between sale to close with our 60-day closing ready commitment. Average absorption pace decreased to 4.3 in the second quarter of 2025 from 4.5 per month in the prior year, but was in line with our target of spring selling sales pace greater than 4 per month.
Speaker Change: To align with prevailing macro Dynamics, we have intentionally toggled between our spend on land and a focus on shareholder returns, which heila will cover later.
Felipe Hilton: Now, start turning to slide 4.
Felipe Hilton: Demand remained healthy during the Spring selling season as we work through affordability concerns on a customer Buy customer basis.
Felipe Hilton: Second quarter, 2025 orders for 3%, higher year-over-year due to a 7% increase in average Community count that was partially offset by a 4% decrease in average absorption pace.
Felipe Hilton: The cancellation rate of 10% this quarter remain lower than historical average given the limited time between sale to close with our 60-day closing ready commitment.
Phillippe Lord: Under normal market conditions, we expect a sales pace that is higher in the first half of the year and a little lower in the second half of the year, balancing to around 4 net sales per store annually. ASP on orders this quarter of $395,000 was down 5% from prior year due to a greater utilization of rate-buy-down financing incentives. We offer a wide range of incentives to our customers, and rate buy-downs continue to be the most attractive offering in the majority of our markets as they drive affordability and help our customers solve for a monthly payment.
Felipe Hilton: Average absorption Pace decreased to 4.3 in the second quarter of 2025 from 4.5 per month in the prior year. But was in line with our Target of spring selling sales, Pace greater than 4 per month. Under normal market conditions. We expect a sales Pace that's is higher in the first half of the year and a little lower in the second half of the Year balancing to around 4, net sales per store annually.
Phillippe Lord: Our second quarter 2025 ending community count was 312. This was up 9% year-over-year compared to 287 at June 30, 2024, and also up 8% compared to 290 at March 31, 2025. During the quarter, we brought over 50 new communities online. With additional community count growth in the second half of the year, we reiterate our outlook of double-digit year-over-year growth for our 2025 year-end community count. As for early July indications, the first few weeks exhibited normal seasonality at a slower pace. July is traditionally one of the slowest sales months, and the timing of the 4th of July holiday caused the month to start slower than anticipated, but demand has improved to normal seasonality since then.
We offer a wide range of descendants to our customers and rape fight Downs. Continue to be the most attractive offering in the majority of our markets, as they drive, affordability, and help our customers solve for a monthly payment.
Our second quarter, 2025 Ending Community, count was 312. This was up 9% year-over-year compared to 287 at June 3020 2024 and also up 8% compared to 290 at March. 35 31st 2025
Felipe Hilton: During the quarter, we brought over 50 new communities online with additional Community count growth in the second half of the year, we reiterate our Outlook of double digit year-over-year, growth for our 2025 year-end Community count.
Phillippe Lord: We believe we can continue to solve affordability concerns and achieve our internal sales targets through our incentive offerings and broker relationships.
Felipe Hilton: As for early July indications, the first few weeks, exhibited normal, seasonality and a slower Pace to July is traditionally 1 of the slowest sales months and the timing of the Fourth of July holiday, caused the month to start slower than anticipated. But demand has approved to normal seasonality, since then,
Phillippe Lord: Moving to the regional trend levels on slide 5, the central region had our highest average absorption pace of 5.2 in the second quarter, followed by the east with 4.1 net sales per month. The west region had an average absorption pace of 3.9. During the quarter, we continue to see diversity in performance across the country, with some of our markets experiencing healthy demand, while others were more impacted by the elevated mortgage rates and growing retail supply. Although no market is immune to the current economic conditions, we saw relatively strong demand and sales performance in Arizona, Dallas, Houston, and Southern California.
Felipe Hilton: We believe we can continue to solve affordability concerns and Achieve our internal sales targets through our incentives offerings and broker relationships.
Felipe Hilton: Moving to the regional Trend levels. On slide 5. The central region have a our highest average absorption pace of 5.2 in the second quarter followed by the East with 4.1 net, sales per month. The west region had an average absorption pace of 3.9.
Phillippe Lord: Florida, Colorado, Austin, and San Antonio continue to face more challenging conditions, with increasing existing inventory and stretched affordability, while the balance of our markets were performing as expected. Now turning to slide six, we started approximately 4,000 homes in the second quarter 2025, 5% less than last year's Q2, given our faster cycle times while aligning with the current sales volume. We will continue to review seasonal sales patterns and our approved cycle times when planning for our start to pace per community in Q3 and beyond. With over 200% backlog conversion, our ending backlog declined from 2,700 units as of June 30, 2024 to 1,700 homes as of June 30, 2025.
Felipe Hilton: During the quarter, we continue to see diversity and performance across the country. With some of our markets experiencing healthy demand, While others were more impacted by the elevated mortgage rates. And growing retail supply, although no Market is immune to the current economic conditions. We saw relatively strong demand and sales performance in Arizona, Dallas, Houston, and Southern California.
Felipe Hilton: Florida, Colorado, Austin and San Antonio continue to face more challenging conditions with increasing existing inventory and stretch to portability. While the balance of our markets were performing as expected.
Phillippe Lord: The lower ending backlog balance is an intentional output of our strategy as we are able to convert sales to closings quicker. The higher backlog conversions and shorter cycle times are also generating improved WIP asset turns, helping us to achieve home inventory turns of around three times per year.
Felipe Hilton: Now, turning to slide 6, we started approximately 4,000 homes in the second quarter of 2025 5% less than last year's Q2 given our faster cycle times, while aligning with the current sales volume, we will continue to review seasonal sales patterns and our approved cycle times when planning for our starts Pace per community in Q3 and Beyond with over 200% backlog conversion, our ending backlog declined from 2,700 units. As of June 30th, 2024 to 1700 homes as of June 30th, 2025 the lower ending. Backlog balance is an intentional output of our strategy as we are able to convert sales to closings quicker.
Phillippe Lord: As we gain additional experience and consistency under our new strategy, we will be reevaluating our target for backlog conversion rate this year. Since about half of our deliveries have been generated from inter-quarter sales for several quarters now, we consider the aggregate of total specs and backlog to determine the right inventory levels of each of our communities. We have had approximately 8,700 specs and backlog units as of June 30, 2025, as compared to over 9,200 units at June 30, 2024. We had approximately 6,900 spec homes in inventory as of June 30, 2025, up 400 units from over 6,500 specs as of June 30, 2024, and up 2% sequentially from Q1.
The higher backlog, conversions and shorter cycle times are also generating improved whip asset turns helping us to achieve home Inventory turns of around 3 times per year.
Felipe Hilton: As we gain additional experience and consistency on your new strategy, we will be re-evaluating our Target for backlog conversion rate this year.
Felipe Hilton: Since about half of our deliveries have been generated from inner quarter sales for several quarters. Now, we consider the aggregate of total specs and backlog to determine the right inventory levels of each of our communities.
Felipe Hilton: We had had a proximately 8,700 specs and backlog units. As of June, 3020, 2025 as compared to over 9,200 units at June 3020 2024.
Phillippe Lord: While the total number of specs slightly increased, our specs per store held steady at approximately 22 specs per community square, which corresponds to about five months supply in the middle of our four to six-month target. As a reminder, to have the appropriate amount of inventory to meet our 60-day closing ready commitment, we intentionally release our homes for sale when they're nearly move-in ready. So similar to Q1, we maintain our percentage of complete specs at 38% as of June 30, 2025. We continue to balance our inventory levels to ensure success in our go-to market strategy and offer customers peace of mind.
Felipe Hilton: We had approximately 6,900 spec homes in inventory as of June 30th. 2025 up, 400 units from over 6,500, specs. As of June 30th 2024 and up to 2% sequentially from q1. While the total number of respects slightly increased our specs per store held steady at approximately 22, specs per Community this quarter which corresponds to about 5 months Supply in the middle of our 4 to 6 month. Target
As a reminder to have the appropriate amount of inventory to meet our 60-day closing ready, commitment. We intentionally release our homes for sale when they're near nearly moving. Ready. So similar to q1, we maintain our percentage of completed specs at 38% as of June 30th 2025.
Phillippe Lord: Our strategic focus and community count growth create an opportunity for near-term growth during time of economic transition.
Hilla Sferruzza: With that, I will now turn it over to Hilla to walk through our financial results.
Felipe Hilton: We continue to balance our inventory levels to ensure success in our go-to Market strategy and offer customers. Peace of Mind, our strategic, focus, and Community count growth create an opportunity for near-term growth during time of economic transition.
Hilla Sferruzza: Thank you, Phillippe. Let's turn to slide 7 and cover our Q2 results in more detail. Second quarter 2025 home closing revenue of $1.6 billion was 5% lower compared to prior year, despite a 1% increase in closing volume, primarily as a result of increased utilization of financing incentives, which drove our ASP on closings lower to $387,000 per home. Home closing gross margin of 21.1% in the second quarter of 2025 was down 480 BPS from 25.9% in the second quarter of 2024, reflecting the increased use of financing incentives and higher lot costs, partially offset by improved direct costs and cycle times.
Felipe Hilton: With that, I will now turn it over to hila to walk through our financial results.
Hilla Sferruzza: Our Q2 2025 margins also included terminated land deal walkaway charges of $4.2 million compared to $1.4 million in the prior year. Excluding these charges, adjusted margins were 21.4% and 26% in the second quarters of 2025 and 2024, respectively. As we look at the components of margin, we note that despite some green shoots in the current pricing of land, the land basis that is reflected in our closings was acquired and developed several years ago and remains elevated due to the higher than normal land development cost experienced since 2022. While we've not yet seen these costs start to notably decline, we have seen them stabilize, and we are in the midst of ongoing efforts to actively rebid land development spend.
2025 was down 480 bits from 25.9% in the second quarter of 2024 reflecting the increased use of financing incentives and higher lot costs, partially offset by improved. Direct costs and cycle times our Q2 2025 margins, also included terminated land deal. Walkway, charges of 4.2 million compared to 1.4 million in the prior year. Excluding these charges adjusted margins were 21.4% and 26% in the second quarter of 2025 and 2024, respectively, as we look at the components of margin, we note that despite some green shoots in the current pricing of land. The land bases, that is reflected in our closings, was acquired and developed several years ago and remains elevated due to the higher than normal Land Development Across experienced. Since 2022, while we've not yet, seen these costs start to notably decline, we have seen them stabilized and we are in the midst of
Hilla Sferruzza: During the quarter, we were successful in reducing our direct costs by more than 1% per square foot year-over-year. We also achieved direct cost savings sequentially from Q1 to Q2. In addition to lumber prices trending down, our higher volume combined with stronger national vendor partnerships and our purchasing teams' negotiations led to the incremental savings. Labor also seems to be more available in our markets, potentially stemming from slower multifamily construction and reduced starts in the industry. Our Q3 margin guidance reflects the current incentive environment, our actual land costs, the savings in the directs from lower prices, and improved cycle times.
ongoing effort to actively rebid Land Development spend
During the quarter, we were successful in reducing our direct costs by more than 1% per square foot year-over-year. We also achieved direct cost-saving sequentially from q1 to Q2, in addition to lumber prices, trending down, our higher, volume combined with stronger, National, Vendor Partnerships. And our purchasing teams negotiations led to the incremental savings. Labor also seems to be more available in our markets potentially semi.
Hilla Sferruzza: On a sequential basis, Q3 margins incorporate some lost leverage from Q2, since we have already closed most of the high volume of the spring selling season orders in Q2 and July, which now generates about one-third of our closing volume for Q3 under our new strategy. It's one of our slowest months of sales, as Phillippe already mentioned. Our pace typically picks up in August and September, but most of those closings won't occur until Q4. Our longer-term gross margin target remains at 22.5% to 23.5% under normal market conditions, which is about 300 steps higher than where we were pre-COVID due to our structural differences since that time.
Felipe Hilton: From slower multifamily construction and reduced starts in the industry, our Q3 margin guidance. Reflects the current incentive environment, our actual land costs, the Savings in the direct from lower prices and improved cycle times on the sequential basis. Q3 margins incorporate. Some lost leverage from Q2, since we have already closed, most of the high volume of the spring selling season orders in Q2 and July, which now generates about 1/3 of our closing volume for Q3 under our new strategy is 1 of our slowest months of sales asleep. Already mentioned our Pace typically picks up in August and September but most of those closings won't occur until Q4.
Hilla Sferruzza: We are a larger-scale company with a different operating model today, which we believe permanently improves our gross margin trajectory from our historical averages. We believe this target is achievable with even just a small pullback from the current normal levels of incentives being utilized by a large percentage of our customers. SG&A, as a percentage of home closing revenue in the second quarter of 2025, was 10.2% compared to 9.3% in the second quarter of 2024, primarily as a result of higher commissions, startup costs for our newer divisions, carry costs related to increased spec inventory, as well as some leverage.
Felipe Hilton: Our longer term gross margin, Target remains at 22 and 1/2 to 23 and 1/2% under normal market conditions, which is about 300 Pips higher than where we were pre-cooked differences. Since that time, we are a larger Scale company with a different operating model today, which we believe permanently improves our gross margin trajectory from our historical averages. We believe this target is achievable with even just a small pullback from the current above normal levels of incentives, being utilized by a large percentage of our customers.
Hilla Sferruzza: Given the tougher selling conditions, commission rates were higher year over year, and our marketing spend also increased respectively. Our co-broke percentage is in the low 90s and remains similar to Q1 this year. Under our new strategy, the higher volume of specs resulted in increase in utilities, cleaning, and landscaping costs, all of which are included as a component of our selling expenses. We are assessing all SG&A components to ensure we have the appropriate overhead to align with the current operating environment. There are also some AI opportunities we are pursuing that can help us further streamline operations in the future.
Sgna as a percentage of Home closing Revenue. In the second quarter of 2025 was 10.2% compared to 9.3% in the second quarter of 2024, primarily as a result of higher commissions startup costs. For our newer divisions, carry costs related to increased spec inventory, as well as some lost leverage, given the tougher selling conditions commission rates were higher year-over-year and our marketing spend also increased respectively. Our co-workers percentage is in the low 90s and remains similar to q1 this year.
Hilla Sferruzza: We are maintaining our long-term SG&A target of 9.5% once we achieve higher closing volume. The second quarter's effective income tax rate was 23.9% this year, compared to 22.1% for the second quarter of 2024. The higher tax rate in 2025 reflects fewer homes qualifying for energy tax credits under the Inflation Reduction Act, given the new higher construction thresholds required to earn the tax credit this year. Overall, lower gross margins, as well as higher SG&A and tax rates, led to a 35% year-over-year decrease in second quarter 2025 diluted EPS to $2.04 from $3.15 in 2024. We also generated a return on equity of 12.5% for the 12-month end of June 30, 2025.
Felipe Hilton: Under our new strategy, the higher volume of specs result in an increase, in utilities, cleaning, and Landscaping costs, all of which are included as a component of our selling expenses. We are assessing all sg&a components to ensure. We have the appropriate overhead to align with the current operating environment. There are also some AI opportunities. We are pursuing that can help us further. Streamline operations in the future. We are maintaining our long-term sgna Target of 9.5%. Once we achieve higher closing volumes.
The second quarter is effective income tax rate with 23.9% this year compared to 22.1% for the second quarter of 2024, the higher tax rate in 2025 reflects fewer homes, qualifying for energy tax credits under the inflation reduction act, given the new higher construction thresholds required to earn the tax credit this year.
Speaker Change: Overall lower gross margins, as well as higher sgna and tax rates led to a 35% year-over-year. Decrease in second quarter, 2025 diluted, EPS to $24 from $3.15 in 2024. We also generated a return of equity a return on Equity of 12.5% for the 12 months. Ended, June 3025.
Hilla Sferruzza: And net earnings decreased 35% to $270 million, with $3.73 in diluted EPS.
67% excluded, excluding terminated deal charges was 420 bits lower than 2024 sgna as a percentage of Home closing Revenue was 10.7% and that earnings decreased 35% to 270 million with 3.73 cents in diluted eps,
Hilla Sferruzza: Before we move on to the balance sheet, I want to discuss our customers' second quarter credit metrics. As expected, our buyer profile remained relatively consistent with our historical averages, with FICO scores in the 730s and DTIs around 41 to 42. LTVs were in the high 80s. This strong credit profile validates our belief that there is still a deep buyer pool that can purchase our homes, and that as of today, student loans are not a material headwind. The current market slowing isn't just a qualification or affordability issue, but also a function of weakened consumer sentiment. On to slide 8.
Before we move on to the balance sheet, I want to discuss our customers second quarter credit metrics as expected. Our buyer profile remained relatively consistent with our history historical averages. With FICO scores in the 730s and DTI around 41 to 42. Ltvs were in the high 80s, this strong credit profile validates our beliefs that there is still a deep buyer pool that can purchase our homes. And that as of today, student loans are not a material headwind. The current market selling isn't just a qualification or affordability issue, but also a function of weakened consumer sentiment.
Hilla Sferruzza: Our balance sheet remained healthy at June 30, 2025, with cash of $930 million, nothing drawn on our credit facility, and net debt-to-cap of 14.6%. Additionally, earlier this month, we refinanced our revolving credit facility to extend the maturity from 2029 to 2030. We are committed to our long-term growth trajectory while managing to a strong balance sheet and maintaining our investment-grade credit rating. As such, our net debt-to-cap ceiling remains in the mid-20% range. We aligned our capital spend with current market conditions. We reduced land acquisition and development spend net of land development reimbursements to $509 million for the second quarter of 2025.
Speaker Change: On to slide 8.
Speaker Change: Our balance sheet remains healthy at June 30th, 2022 2025 with cash of 930 million. Nothing drawn on our credit facility and that debt to cap of 14.6%. Additionally, earlier this month, we refinanced our revolving credit facility to extend the maturity from 2029 to 2030. We are committed to our long-term growth trajectory while managing to a strong balance sheet and maintaining our investment grade credit rating as such our net debt to Capital,
Speaker Change: Ceiling remains in the mid 20% range.
Hilla Sferruzza: This was a 12% decrease from $576 million in the prior year. Accordingly, we are lowering our full year land spend target from $2.5 billion to $2 billion, given today's economic uncertainty. We also shifted our capital dollars to return more cash to shareholders this quarter, exceeding our programmatic threshold. We again tripled our $15 million quarterly commitment in the second quarter of 2025, demonstrating that we can and will repurchase shares opportunistically based on market conditions. We spent $45 million to buy back over 674,000 shares in Q2, recognizing the current undervaluation of our stock. To date, in 2025, we have spent $90 million on share buybacks, reducing our December 31, 2024 outstanding share counts by almost 2%.
Speaker Change: We aligned our Capital spend with current market conditions, we reduce land acquisition and development, spend net of Land Development reimbursements to 509 million. For the second quarter of 2025. This was a 12%, decrease from 576 million in the prior year, accordingly, we are lowering our full year land. Spend Target from 2.5 billion to 2 billion. Given today's economic uncertainty. We also shifted our Capital dollars to return more cash to shareholders this quarter exceeding, our programmatic thresholds, we again, tripled our 15 million quarterly commitment in the second quarter of 2025 demonstrating that we can and will repurchase shares opportunistically based on market conditions. We spent 45 million to buy back over 674,000 shares in Q2 recognizing, the current undervaluation of our stock to date in 2025. We have spent 90 million on share BuyBacks reducing our December 31st 2024,
Hilla Sferruzza: As of June 30, 2025, $219 million remain available to repurchase under our share authorization program. We increased our quarterly cash dividend 15% year-over-year to $0.43 per share in 2025, from $0.375 per share in 2024. Our cash dividends totaled $31 million in the second quarter of 2025 and $61 million year-to-date. We returned a total of $76 million of cash to shareholders in the second quarter of 2025 and $151 million for the first half of this year as we intentionally slowed our land spend and recalibrated our capital allocation to maximize returns in prevailing market environment. Slide 9.
Speaker Change: Or outstanding share accounts by almost 2%. As of June 3020 2025 29 million remain available to repurchase under our share authorization program. We increase our quarterly cash dividend. 15% year-over-year to 43 cents per share in 2025 from 37.5 cents per share in 2024 our cash dividends totaled. 31 million in the second quarter of 2025 and 61
Hilla Sferruzza: In the second quarter of 2025, we put approximately 1,800 net new lots under control. This balance is net of the 1,800 lots that we terminated as part of our routine quarterly review of land deals that no longer met our underwriting standards. In the second quarter of 2024, we put nearly 8,700 net new lots under control. As of June 30, 2025, we owned or controlled a total of about 81,900 lots, equating to 5.3 years supply of the last 12 months closing. We also had nearly 26,200 lots that were still undergoing diligence as of the end of the second quarter.
Million year to date. We returned a total of 76 million of cash to shareholders in the second quarter of 2025 and 151 million, for the first half of this year. As we intentionally slowed, our land spend and recalibrated our Capital allocation, to maximize returns. In prevailing Market, environment, slide 9
Hilla Sferruzza: Giving our strong land portfolio as of June 30, we owned or controlled all of the land we need for the next several quarters. About 66% of our total lot inventory at June 30, 2025 and 2024 was owned and 34% optioned. Our maximum ceiling for option land remains in the 40% range.
Speaker Change: The second quarter of 2025, we put approximately 1800, net New, Lots under control. This balance is net of the 1800, lots that we terminated as part of our routine quarterly review of land deals that no longer met our underwriting standards in the second quarter of 2024, we put nearly 8,700, net New, Lots under control as of June, 30 202nd. A total of about 81,900, lots equating to 5.3 years supply of the last 12 months closings. We also had nearly 26,200 lots, that were still undergoing diligence. As of the end of the second quarter, giving our strong land Pro portfolio, as of June 30th, we owned or controlled all of the land, we need for the next several quarters.
Hilla Sferruzza: Finally, I'll direct you to slide 10 for our guidance. Due to volatility in the market at this time and our high backlog conversions, we have little visibility beyond the next quarter. Therefore, we are only providing Q3 guidance.
I bought 66% of our total lot inventory at June 30th, 2025, and 2024 was owned and 34%. Optioned our maximum ceiling for option. Land remains in the 40% range. Finally, I'll direct you to slide 10 for our guidance due to volatility in the Market at this time and our high backlog conversions, we have little visibility beyond the next
Phillippe Lord: For Q3 2025, we are projecting total home closings between 36 and 3,900 units, home closing revenue of $1.4 to $1.56 billion, home closing gross margin of around 20%, an effective tax rate of about 24.5%, and diluted EPS in the range of $1.51 to $1.86. With that, I'll turn it back over to Philippe. Thank you, Hila.
Phillippe Lord: In closing, I want to highlight on slide 11 that we have worked hard to create a business model that maximizes return and is flexible enough to allow us to navigate successfully through periods of economic transition. Our spec strategy provides a flexibility and an efficient cost structure to maintain the right level WIP and lot inventories. We are offering consumers affordability and certainty in their home ownership journey, and believe our go-to-market strategies make us resilient as we compete with resale and grow our market share. In Q2, we achieved community count expansion and shorter cycle times to prepare us for future growth opportunities, and also demonstrated our commitment to discipline, land spend, and growth in the business while increasing our return of cash to shareholders.
To 186 with that. I'll turn it back over to Felipe. Thank you hila in closing. I want to highlight on slide 11. That we we have worked hard to create a business model that maximize the return and is flexible enough to allow us to navigate successfully through periods of economic transition.
Phillippe Lord: Through our operations and capital allocation strategy, we are focused on maximizing returns.
Operator: With that, I will now turn the call over to the operator for instructions on the Q&A. Operator? Thank you.
Speaker Change: Our spec strategy provides a flexibility and an efficient cost structure to maintain the right level Whip. And lot of inventories we are offering consumers affordability and certainty in their home ownership journey and believe our go-to Market strategies. Make us resilient as we compete with resale and grow, our market share in Q2. We achieved Community count expansion and shorter cycle times to prepare us for future growth opportunities. And also demonstrated our commitment to discipline land. Spend and growth in the business while increasing our return of Caster shareholders, through our operations and cap, allocation strategy. We are focused on maximizing returns with that. I will now turn the call over to the operator for instructions on the Q&A operator.
Operator: And at this time, we will conduct our question and answer If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question area. You may press star 2 if you would like to remove your question from and other participants using speaker. It may be necessary to pick up your handset before pressing.
Speaker Change: Thank you.
Speaker Change: And at this time, we will conduct our question and answer session.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Trevor Allinson: Our first question comes from Trevor Allinson with Wolfe Research.
Trevor Allinson: Please sit. Hi, good morning. Thank you for taking my questions. Appreciate your high backlog conversion rate and the volatile environment really limits your visibility in the full year volume. So I guess a question on what you're seeing regarding absorption rates on new communities. I think previously you'd expected that as you bring on a significant number of new communities, you would expect to see pretty good absorption rates relative to flea average on those. Can you just comment on how that is trended versus what you expected? Yeah, thank you for the question. It's trended pretty well. As you can see from the Q2 results, we opened up 50 stores and achieved 4.3 net sales per month in that quarter.
Trevor Alanson: Our first question comes from Trevor alanson with wolf research, please State your question,
Trevor Alanson: Hi, good morning. Thank you for taking my questions. Uh, appreciate your high backlog, conversion rate, and the volatile environment really limits your visibility into fully your volume. So, I, I guess the question on what you're seeing regarding absorption rates on new communities? I think previously, you'd expected that as you bring on a significant number of new communities. Uh, you would expect to see pretty good absorption rates uh, relative to flea average on those. Can you just come on? How that is trended versus what you expected?
Phillippe Lord: So they opened up and met our expectations as it relates to what we were thinking we were going to get from those communities.
Trevor Alanson: Yeah. Uh, thank you for the question. Uh, it's trying to pretty well as you can see from the Q2 results, we opened up 50 stores and achieved 4.3 net sales per month in that quarter. So they opened up and met our expectations.
Um,
Trevor Alanson: as it relates to what we were thinking, we were going to get from from those communities.
Trevor Allinson: Okay, definitely encouraging to hear.
Phillippe Lord: And then the second question is somewhat related on community count specifically. You've had a really nice growth there, expecting more in the second half. Can you talk about the cadence that you're expecting in the second half? You talk about up double digits by the fourth quarter, by ending community count. Any additional color on what exactly you're thinking with double digits and then with what you have in the pipeline, any early reads on where 2026 community count could grow? Yeah, thank you again. I think this was a really big quarter for us, Q2. We knew we were going to get a big pop here.
Trevor Alanson: Okay, definitely encouraging to hear. And then, uh, the second question is somewhat related on community counts, specifically, uh, you've had a really nice growth there. Expecting more in the second half. He talked about the Cadence, uh, that you're expecting, uh, in the second half. You talk about, you know, up double digits by the fourth quarter by
Trevor Alanson: Any Community account, any additional color on on? What exactly you're thinking with double digits? And then with what you have in the pipeline, any early reads on uh, where 2026 Community account, could grow. Thanks.
Phillippe Lord: I think from here, the rest of it is pretty even flowed between Q3 and Q4 to achieve the double-digit community count growth. We still feel that we're going to end the year there. As it relates to 2026, still doing a lot of planning around that, but we expect another solid year of double-digit growth between the beginning of that year and the end of 2026. Yeah, Trevor, I think we touched on this a little bit in various conversations, but the double-digit growth is not going to be 10.0, but it's also not going to be 20. So it's somewhere in between, but it's going to be north of 10.
Speaker Change: Yeah. Thank you again. Um, I think from this was a really big quarter for us. Uh, Q2 we knew we were going to get a big pop here.
Speaker Change: I think from here, the rest of it is pretty even flowed between Q3 and Q4 to achieve the double digit Community account growth. We still feel that we're going to end uh, the year there as it relates to 2026. Um, still doing a lot of planning around that
Speaker Change: But we expect another solid year of double digit growth between, uh, between the beginning of that year and the end of 2026. Yeah, Trevor, I think we touched on this a little bit, uh, um, in in various conversations but the double digit growth is not going to be 10.0, but it's also not going to be 20. So it's, it's somewhere in between, but it's going to be north of 10.
Trevor Allinson: Thanks for all the color. I appreciate it.
Trevor Allinson: Good luck moving forward. Thank you.
Speaker Change: Okay, uh thanks for all the call. I appreciate it. Good luck. Moving forward.
Speaker Change: Thank you.
Alan Ratner: Your next question comes from Alan Ratner with Zellman & Associates. Hey guys, good morning. Thanks, as always, for the detail. First question on the volume outlook, understanding not updating the full year guidance. I'm just trying to think through how you're positioned from a volume standpoint. It would still seem like if the market... Cooperate. I just want to make sure I'm thinking about that correctly and, you know, I guess in general.
Speaker Change: Your next question comes from Alan Ratner with zelman and Associates. Please State your question.
Phillippe Lord: Scaling back, spec starts at all here in the third quarter, and will that have any impact? Yeah, thanks, Alan. I think you are thinking about it the right way. Q3, based on our high backlog conversion rate, is now going to be one of our lowest volume quarters, because we basically closed out all the spring demand, and then we obviously have July to start the quarter out. So that's really what's driving the lack of visibility and some of the macro conditions that we're experiencing. But we certainly have the community count and the inventory to achieve the numbers that you're mentioning.
Alan Ratner: Hey guys, good morning. Uh, thanks as always for the detail. Um, so first question, on the, on the volume Outlook, you know, understanding, uh, not updating the full year guidance. I'm just trying to think through, you know, how your position from a volume standpoint for the remainder of the year. If I look at your homes, under construction, the specs and backlog of about 8700 and I look at the closings year to date, it, it would still seem like if the market, you know, cooperates your your position to deliver 16,000 Plus Homes. Like not too far off from where you were before I just want to make sure I'm thinking about that correctly and you know I guess in general are you
Alan Ratner: Scaling backs spec starts at all here in the third quarter and and will that have any impact on your ability to deliver homes this year? Or is that more of a 26 story?
Phillippe Lord: It's just a matter of whether the market will cooperate. To your second question, we are slowing down starts because of our cycle times. And so we can reduce the amount of starts we have based on just the timing that it's taking to build homes. And then we're ramping up starts because of our community count growth. But between those two things, I still think you'll see a slower Q3 to kind of match the seasonality of demand. But we're still starting quite a few specs in all these new communities that we're opening up between now and the end of the year.
Alan Ratner: To be 1 of our lowest volume quarters because we basically close out all the spring demand and then we obviously have July to start the quarter out. So that's really what's driving? The lack of visibility and some of the macro conditions that we're experiencing but we certainly have the community count and the inventory to achieve the numbers that you're mentioning. It's just a matter of whether the market market will cooperate to your second question. Um, we are slowing down starts because of our cycle times and so we can reduce the amount of starts we have uh, based on just a the the timing that's taken to build homes.
And then we're ramping up starts because of our community count growth, but between those 2 things, I still think you'll see a slower Q3 to kind of match the seasonality of demand, but we're still starting quite a few specs in all these new communities that we're opening up between now and the end of the year.
Alan Ratner: Got it. That's helpful.
Hilla Sferruzza: I believe. through kind of cash, capital allocation. have been buying back stock at a slightly greater rate than the... I'm just curious with you pulling back the land spend by 500. Is there an opportunity or are you thinking about accelerating that buyback number even further? Something like that should free up a pretty meaningful amount of cash. Yeah, we're definitely looking at rebalancing those two, a good catch on the fact that we're pulling back on the expected spend by half a billion dollars. So we're definitely going to be pressing on the gas on their repurchases while kind of just keeping an eye on the store.
Got it that that's helpful. Hopefully and then I just thinking through kind of cash, Capital allocation, you know, you've been buying back stock at a, at a slightly greater rate than the uh, than kind of the quarterly commitment. You've set forth. I'm just curious with you pulling back the land, spend by 500 million. Is there an opportunity? Or are you thinking about accelerating that buyback number even further? Um, because it would seem like that that should free up a pretty meaningful amount of cash in the back half of the year. Um, you know, if I'm thinking about that correctly,
Hilla Sferruzza: We do have quite a few communities opening and all those need new specs as well, which is also a cash utilization for us. So we're balancing all those pieces, but definitely an intentional rebalancing from the volume of land spend that maybe we projected coming into the year based on current economic conditions and redeploying that cash back into return of capital to shareholders.
Hilla Sferruzza: Yeah, and I would just say that. with our stock trading where it is. It's just for us, you can expect us to continue to buy more than our programmatic commitment because of the value that we see in our stock. based on my conversation. Thank you. Perfect. Thanks, Alan.
Alan Ratner: Yeah, we're we're definitely uh, looking at rebalancing. Those 2, uh, uh, good cuts on the fact that we're pulling back on on the expected spend by half a billion dollars. So we're definitely going to be pressing on the gas. Um, on the repurchases, what kind of just keeping you know, an eye on the store, we do have quite a few communities opening and uh all those need new specs as well, which is also a a cache, a cache utilization for us. So we're balancing all those pieces. But uh, definitely an intentional rebalancing uh, from, uh, the volume of land spend that maybe we projected coming into the year, uh, based on current economic conditions, and, uh, redeploying that cash back into, uh, return of capital to shareholders. Yeah. And I would just say that,
Alan Ratner: With our stock trading, where it is.
Alan Ratner: um,
it's just for us, you can expect us to continue to buy more than our programmatic commitment.
Alan Ratner: Um, because of the value that we see in our stock,
Alan Ratner: Based on my cam.
Alan Ratner: With investors, I I would imagine that that would be very well received especially considering where the stock is at today.
Speaker Change: Thank you. Perfect. Thanks Alan.
Stephen Kim: Your next question comes from Stephen Kim with Evercore ISI. Thanks a lot, guys. Appreciate the color. Following up on the comment, I think, that Trevor made regarding your new communities opening up, being a boost to sales.
Speaker Change: Your next question comes from Stephen Kim with evercore isi, please State your question.
Phillippe Lord: Am I right that communities, when they open up, they typically have a somewhat lower margin profile than when they're later in their life? Is that a dynamic that, first of all, is true for you guys, and is that something that is something we should be thinking about as to the impact of these communities on your margin? So yeah, I think traditionally, when you open up a new community, you set it up to make sure you set it up to gain momentum because momentum is really important. It gives the consumers confidence. And so we certainly evaluate and make sure we price our new community openings to really achieve that momentum.
Yeah, thanks a lot guys, appreciate the color. Um, you know, touching up, touch following up on the the comment. I think that that Trevor made regarding this. Uh um your new communities uh, opening up being a booster sales. Um, am I right? That communities? When they open up, they typically have somewhat lower margin profile than when, you know, they're sort of later in their life. Uh, is that is that a dynamic that, uh, first of all, is true for you guys. And is that something that, you know, is, is, uh, something we should be thinking about, um, as to the impact of these communities, uh, on your margin.
Phillippe Lord: I don't think it's fair to say that we open up new communities at lower margins just as a standard course of business. It's really sort of market by market. In today's environment, I think the theory of being more conservative when you open up to make sure you get those first sales is probably a reality just because of the amount of incentives out there in the market and whatnot. But I'd have to go back and look. A lot of the new communities we opened up this last quarter are really good locations and really good spots. So I feel pretty good that the margin profile was pretty good.
Speaker Change: So yeah, I I think traditionally when you open up a new community, you set it up to, um, make sure you set it up to gain momentum because momentum is really important. It gets the consumer's confidence and so we certainly evaluate and make sure we price our, our new community openings to really achieve that momentum. I don't think it's fair to say that we open up new communities at lower margins. Um, just as a standard course of business, it's really sort of Market by market. Um in today's environment, I think the theory of being more
Phillippe Lord: But yes, to your point, we always traditionally try to open up a community and gain momentum. And usually the number one lever to do that is pricing. Yeah, I appreciate that.
Conservative. When you open up to make sure you get those first sales is probably um a reality just because of the amount of uh incentives out there in the market and whatnot, but I'd have to go back and look. Um, a lot of the new communities, we opened up this uh last quarter are really good locations and really good spots. Um, so I feel pretty good. That the margin profile was pretty good, but yes, your to your point. We always traditionally try to open up a community and gain momentum. And usually, the the number 1 lever to do that is pricing.
Phillippe Lord: Another question relates to some of the change, one of the changes you made in addition to guaranteeing, you know, move in in 60 days, you've also changed the way in which your sales folk can cross sell, you know, sell homes and communities that are not the one they're sitting in. And I was curious, first of all, it seemed like it might be a really good thing for your strategy in terms of developing the relationships, not just with the realtors, but with also, you know, consumers who may be looking at more than one community. But I was wondering if you could give us some statistics on that, like roughly what percent of your sales are done in a cross sale manner?
Phillippe Lord: And secondarily, are you seeing any of your peers copying this or not? And if not, why do you think that Yeah. So, I would say, first of all, the reason we're doing this, the cross-selling is exactly what you highlighted. When we spoke to our customers and spoke to the realtors, they really create a relationship with a specific salesperson. And just because they don't want to buy a home in that community or the realtor doesn't want to sell a home in that community, they still want to work with that salesperson. So, cross-selling allows that relationship to translate across our communities, which is why we do it, to build those deeper connections with our customers and with our realtors.
Speaker Change: Is you've also changed the way in which your sales folk can cross. Sell, you know, sell, um, homes and communities that are not the 1, they're sitting in, um, and, uh, I was curious, first of all, that seemed like, it might be a really good thing, um, for your, for your strategy in terms of developing the relationships, not just with the Realtors. But with also, you know, consumers who may be looking at more than 1 Community. But I was wondering if you could give us some statistics on that, uh, like roughly what percent of your sales are done in a cross sale, uh, Manner and secondarily. Um, are you seeing any of your peers, uh, copying this, uh, or not? And if not, why do you think that is?
Speaker Change: Yeah. Um, so
Speaker Change: I would say, first of all, the reason we're doing this, the cross selling is exactly what you highlighted.
When we spoke to our customers and spoke to the Realtors.
Phillippe Lord: I'd have to get you stats on that, but I think it's pretty high because we're cross-selling across the entire company. So, I think there's a lot of salespeople in our business selling in communities that they don't, quote-unquote, are stationed to. Frankly, Steven, we don't station them anymore. They are driving around, meeting with realtors, meeting with customers, showing homes, and we really don't tether them to a community anymore. So, I think at some point, it's just going to become 100%.
Speaker Change: They really create a relationship with a specific salesperson and just because they don't want to buy a home in that Community, or the realtor doesn't want to sell a home in that Community. They still want to work with that salesperson. So cross-selling allows that relationship to translate across our communities, which is, which is why we do it to build those deeper connections with our customers. And with our Realtors, um, I have to get you stats on that, but I think it's pretty high because we're cross-selling and cross the entire company.
Phillippe Lord: The last thing you asked was whether competitors are following us. I would say yes, in some form or fashion. We see a lot of competitors starting to cross-sell. Lennar was one of the first ones to start doing it a long time ago in a couple of markets. But they probably still do it for different reasons. They're still tethering their salespeople to a particular community, but allowing them to cross sell. While in our case, we're not tethering it to that community, and all we do is cross sell. I hope that's helpful. Yeah. Appreciate it. Thanks. Thank you.
Speaker Change: So, I think there's a lot of sales people in our, in our business selling in communities that they don't quote, unquote art station to, but frankly, Stephen, we don't station them anymore. Uh, they are driving around meeting with Realtors meeting with customers showing homes and we really don't tether on to a community anymore. So I I think it's at some point. It's just going to become a 100%.
Speaker Change: The last thing you asked, was whether competitors are following us? I would say yes in some form or fashion. Um, we see a lot of competitors starting to cross. Sell lenar was 1 of the first ones to start doing it a long time ago, in a couple of markets.
Um, but they probably still do it for different reasons. Um, they're still tethering their sales people to a particular Community, but allowing them to cross South
While in our case, we're not tethering up to that community and all we do is cross sell.
Speaker Change: I hope that's helpful.
Speaker Change: Yeah, appreciate it, guys.
Speaker Change: Thanks, thank you.
John Lovallo: Your next question comes from John Lovallo with UBS.
Your next question comes from John lavallo with UBS, please. State your question.
John Lovallo: Good morning, guys. Thanks for taking my questions as well. I wanted to talk about the gross margin. So the third quarter gross margin seems like it's expected to decline about 140 basis points sequentially. I know you guys pointed to lower closings given the new strategy, higher land cost and higher incentives. So as a starting point, I was hoping maybe you could bucket those three categories as it pertains to that 140 basis points decline. And then importantly, it seems like the fourth quarter gross margin is expected to step up from sequentially from the third quarter. I wonder if you could just help us kind of put some context around the magnitude of that potential step up.
Speaker Change: Good morning guys, thanks for taking my questions as well. Um I wanted to talk about the gross margin so the third quarter of gross margin seems like it's expected to decline about 140 basis points sequentially and I know you guys pointed to lower closings, given the new strategy you know, higher land costs and higher incentives. Um so as a starting point
I was hoping maybe you could bucket those 3 categories as, you know, as it pertains to that 140 basis points Decline. And then importantly it seems like the fourth quarter. Gross margin is expected to step up from you know sequentially from the third quarter wonder if you could just help us kind of put some context around you know the magnitude of that potential Step Up.
Hilla Sferruzza: Yeah, so we actually didn't give any guidance on Q4, so I don't think we're going to have any discussion about that. However, the commentary probably still stands. We did note that there's going to be a lost leverage in Q3 in our prepared remarks, and you can see that from the volume projections that we provided in the guidance. And that's really a function of July being a little bit of a tougher month, and that pickup that you're seeing subsequent to that is really not going to materialize in closings until Q4. So I think that you're seeing that lost leverage is the primary driver of the pullback in margins.
Speaker Change: So we actually didn't give any guidance.
So, um,
Hilla Sferruzza: If you recall from discussions in prior years, it can be 75 to 100 bps in lost leverage in gross margin alone from volume. So as we're looking at our expectations for Q3, and we know that the volume is going to be less, the majority of the pullback that you're seeing is lost leverage. As I said, we didn't give any guidance into Q4, and we didn't reiterate our full year guidance, but putting logic together, if we're expecting a different volume for the last quarter of the year, any lost leverage could potentially be recovered if the units increase at that point in time.
Speaker Change: Um, uh, discussion about that. However, the the commentary probably still stands. We did not know that there's going to be, uh, a lost leverage in Q3 uh, in our prepared, remarks and that and you can see that from the, the volume projections that we provided, uh, in the guidance. And that's really a function of uh, July being a little bit of a tougher month. And that in that pickup that you're seeing, uh, subsequent to that is really not going to materialize in closings until Q4. So, um, I think that you're seeing that lost Leverage is the primary driver of the pullback in margins. If you, uh, recall from from discussions in Prior years, it can be 75 to 100 bits in Lost, leverage in gross, margin alone from, uh, from volume. So as we're looking at our, um, at our, uh, expectations for Q3, and we know that the volume is going to be less uh that the majority of the uh pullback that you're seeing is Los leverage. As I, as I said, we didn't give any um guidance into
Hilla Sferruzza: So, I think that that's the majority. I don't know that the other categories make up meaningful buckets. It's primarily the lost leverage. And just to amplify a few things that he reiterated, most fields to order builders, their lowest leverage quarter is going to be Q1 because they closed out all their backlog in Q4. For us, based on our new strategy, it's going to be Q3. And traditionally, July is the slowest month of sales across the whole year. Sometimes December can be slow too, but July is traditionally the slowest. And then we start to see volume pick back up between September, October, and November.
Their lowest leverage quarter is going to be q1 because they close out all their backlog with Q4 for US. Based on our new strategy, it's going to be Q3
and traditionally July is the slowest month of sales across the whole year. Um, sometimes December can be slow too, but July is traditionally the slowest.
Hilla Sferruzza: So, that's kind of what we're currently expecting, but right now, it's tough to see with everything that's going on. Yeah, when you think about the fact that we closed out such a material portion of our backlog, and we're coming in with a lower backlog, there's not that cushion to go into it. So, some of those closings were accelerated into Q2. The strong volume that we're going to have in the back half in sales in Q3 isn't going to close until Q4. So, it kind of creates this dip in Q3, which, as Salip said, is a different quarter for other builders.
Felipe Hilton: And then we start to see volume pick back up between September, October and November. So that's kind of what we're currently expecting. But right now it's, it's it's tough to see with everything that's going on. Yeah. When you think about the fact that we closed out such a material portion of our backlog, and we're coming in with a lower backlog, there's not that cushion to go into it. So some of those closings were accelerated into Q2 the strong volume that we're going to have in the back half in in sales in Q3 isn't going to close until Q4. So, it kind of creates, uh, this, this dip in Q3 which, as Philip said, is a different quarter for other builders.
Hilla Sferruzza: Yeah, and I think that's really helpful clarity, particularly when people see the 20% in the third quarter and start trying to run rate that. And I think reiterating the 22.5 to 23.5 also is really helpful.
Hilla Sferruzza: But the second question would be, you know, in terms of land cost inflation, curious, you know, what you're seeing today. And I know you talked about the potential for rebidding and, you know, some potential lower development costs. Curious when that may start rolling through. I mean, is that a fourth quarter or is that more in in 2026? And what would you expect that land cost inflation to look like, you know, as we move into into 2026? Yeah, so just to give you a feel for what's happening in the land market, and I'm not sure I'm going to say anything different than what you've heard from others, because we're all sort of competing for the same land.
Speaker Change: Yeah and I think that's really helpful Clarity particularly when people see the 20% in the in the third quarter and start trying to run rate that and I think reiterating the 225 to 235 also is really helpful. Um but the second question would be you know in terms of um land cost inflation curious. You know what you're seeing today and I know you talked about the potential for re-bidding and um you know some potential lower development costs curious when that may start rolling through, I mean, is that a fourth quarter or is that more?
Speaker Change: in uh in 2026 and what would you expect kind of that land cost inflation to look like um you know as we move into into 2026
Speaker Change: Yeah, so um, just to give you a feel for what's happening in the land market. And I'm not sure I'm going to say anything different than what you've heard from others, because we're all sort of competing for the same land.
Hilla Sferruzza: But generally, the land market is slowing, which creates some opportunities to restructure deals, mostly terms and timing, breaking up deals into multiple takes, potentially closing a deal closer to being shovel-ready, and things like that. We haven't really seen land prices decline anywhere except a few distressed pieces here and there in certain locations. I'm not sure we should expect that at all until next year. I think most landsellers are and we'll wait to see if this thing extends into 2026 before they start getting a little bit more religion on what their lands worth. As far as rebidding land development jobs, we have seen some green shoots recently as we've gone out and rebid new jobs that were about to start develop for future phases of existing communities.
But generally um, The Landmark it is slowing which creates some opportunities to uh restructure deals, mostly terms and timing, uh, breaking up deals into multiple takes, um, potentially closing a deal closer to being shovel ready and things like that. Um, we haven't really seen land prices, uh, decline anywhere, except a few distressed pieces here and there in certain locations.
Speaker Change: I'm not sure we should expect that at all until. Uh, next year, I think most land sellers are patient and we'll wait to see if this thing extends into 2026 before they start getting a little bit more religion on what their lands worth.
Hilla Sferruzza: We've seen more competitive bids, more people bidding, and therefore we've seen some potential cost savings there. Those obviously wouldn't impact until the back half of 2026. It usually takes about six to nine months to develop land. We're sitting here in July, almost August.
Speaker Change: Um, as far as re-bidding Land Development jobs, we have seen some green shoots recently as we've gone out and rebid. Uh, new jobs that were about to start develop or uh, future phases of existing communities. We've seen more competitive bids uh, more people bidding and therefore we've seen some potential cost savings there.
Hilla Sferruzza: At the earliest, you wouldn't really see that impact our P&L until second quarter, probably more like third quarter, fourth quarter of 2026.
Speaker Change: Those obviously wouldn't impact until the back half of 2026. It usually takes about 6, to 9 months, to develop land. Uh, we're sitting here in August. Oh sorry, July almost August. So at the earliest you wouldn't really see that impact our p&l until, you know, second quarter, probably more like third quarter to fourth quarter of 2026.
Hilla Sferruzza: Thank you, guys.
Thank you guys.
Susan Maklari: Your next question comes from Susan Maklari with Goldman Sachs. Hi everyone, this is Charles Perron from Susan's team.
Charles Perron: Just first on with the rising for sale inventory that we're seeing in the markets, are you making further changes to your approach to broker commission, support traffic and volume especially in your new communities? No. I mean, I think our enterprise-level strategy is to directly try to mirror and compete with the existing home market. So as that inventory comes back, we want to be a compelling choice to buy a new home over a used home. And as part of that strategy, we believe having a consistent and reliable commission structure for our realtors that they can count on is a key part of that.
Your next question comes from. Susan maclari, with Goldman Sachs, please stay your questions. Hi everyone. This is Charles Peron from, uh, from Susan steam, um, just first on the, uh, with the rising, uh, for selling inventory that we're seeing in the markets, are you making further changes to your approach to broker commission support traffic and volume? Especially in your, in your new communities?
Speaker Change: No. I mean, I think our our over our Enterprise level strategy is to directly try to mirror and compete with the existing Home Market. So, as that inventory comes back, we want to be a compelling Choice, uh, to buy a new home over a used home.
Phillippe Lord: We operate at a market rate, whatever the market rate is for that commission in that market and in that sub-market is where we position our external commissions.
Phillippe Lord: And that's it. I think there are, right now in the competitive market, there are a lot of people doing a lot of different incentives, including doing some different realtor bonuses and things like that. So that's kind of an industry thing, not a marriage thing. And in certain communities, we may do that as well, where realtors are really driving the customer base in that market. But generally, we don't do anything unique when we open up a new community versus an existing community. Our realtor strategy is market-based at kind of the MSA level.
And as part of that strategy, we believe, um, having a consistent and reliable, uh, commission structure for our realtors that they can count on, uh, is a key key part of that, we operate at a market rate, whatever the market rate is for that Commission in that market. And in that submarket is where we uh position our external commissions.
And, um, and and that's it. Uh, I think there are
Phillippe Lord: Yeah. And just to clarify, I think a couple of our peers have already mentioned this. There's no denying the fact that retail inventory is increasing across the US, but it's not necessarily a head-on competitor in all of our markets. The inventory that's coming online isn't necessarily entry-level. A lot of it's aging. And as we mentioned, you typically are not able to get a financing incentive when you're buying from an individual homeowner. So it hasn't created the drag that we had expected in the markets that have seen the return of the retail inventory. It's certainly there and it's certainly a competitor, but it's not a head-to-head competitor.
Speaker Change: Do that as well where Realtors are really driving uh, the customer base in that market, but generally we don't do anything unique. Uh, when we open up a new community versus, um, an existing Community, our our realtor strategy is market-based at at kind of the MSA level. Yeah. And just to clarify.
Phillippe Lord: Yeah. I think that's a really important point. The incentives we're seeing out there aren't in the existing home space. The incentives that we're competing with right now are more in the new home space.
Increasing across the us, but it's not necessarily a head-on competitor. In all of our markets, the inventory that's coming uh, online isn't necessarily entry-level, uh, a lot of its aging. And uh, as as we mentioned, do you typically are not able to get a financing incentive when you're buying from from an individual homeowner. So uh, it's not, it hasn't created the drag that we had expected in the markets, uh, that have seen the return of the resale inventory, certainly there, and it's certainly a competitor, but it's not, uh, uh, a head-to-head competitor. Yeah, I think that's in a really important point.
The incentives we're seeing out there aren't in the existing home space.
The incentives that are, we're competing with right now, are more in the new home. The new home space.
Charles Perron: That's very helpful, Culler. Thanks, guys, for that.
Hilla Sferruzza: And it's nice to see that stick and brick costs were declining over your disquarter. When you consider the recent decline in lumber and OSB against the potential for tariff slowing through your P&L, do you see opportunities for further reductions going forward in your stick and bricks? And how does this play out in your third quarter margin outlook? Yeah, so most of our third-quarter homes have already been started. Actually, all of our third-quarter homes have already been started. So the guidance that we provided includes the sticks and bricks that we're experiencing right now. There's always an opportunity to reset, so our teams never stop re-bidding, never stop competing for a lower price.
Speaker Change: That's very helpful of color. Thanks guys for that. Um, and it's nice to see that stick and brick costs were declining over your disorder. When you consider the recent decline in Lumber and OSB, uh, against the potential for carrots flowing through your p&l. Do you see opportunities for further? Reductions going forward in your stick and bricks. And how does this play out in? Your third, quarter margin Outlook,
Hilla Sferruzza: I think several of our peers have also said this tariffs have not really flown through our numbers in any material way. We've been able to successfully push back on any tariff asks, and there haven't been nearly as many as we had anticipated. Kind of trying to read the TV is difficult, but at this point in time, we're not modeling any expectation for increases in our direct. We actually think that there's potential savings. We haven't modeled incremental savings, although we're going to continue to push internally to find those.
Yeah, so, most of our third quarter homes have already been started. Actually all of our third quarter homes have already been started. So the, the guidance that we provided includes, uh, the Sticks and Bricks that we're experiencing right now. There's always an opportunity, uh, to reset. So our teams never stop re-bidding, never never stopped competing uh, for a lower, for a lower price. Um, I think several of our of our peers have also said, this tariffs have not really flown through our numbers in any material way. We've been able to successfully push back on any tariff asks. Um, and there haven't been, uh, nearly as many as we had. Anticipated. Kind of trying to read the TVs as difficult, but at this point in time, we're not modeling. Uh, any expectation for, um, increases in our uh, uh, direct. We actually think that there's potential savings. We haven't modeled incremental savings, although we're going to continue to push internally to find those.
Operator: Thank you.
Michael Rehaut: Next question, operator.
Speaker Change: Thank you.
Michael Rehaut: Your next question comes from Michael Rehaut with J.P. Morgan. Please state your question. Hi, thanks. Good morning, everyone. Thanks for taking my questions. I wanted to start off with... You know, some of the comments around how to think about closings for the full year, I think, you know, Alan brought that up. And, you know, obviously, you have a decent amount, perhaps, of a thought around volume, I would assume, already. Gross margins, obviously, taking a little bit of a downward move in the third quarter. And, you know, extensively assuming a relatively stable backdrop. I know that might be a big assumption, but I'd assume that there's some way to think about 4Q even at this point.
Speaker Change: Thank you. Next question operator. Your next question comes from Michael rehaut with JP Morgan. Please say your question.
Michael Rehaut: All right. Thanks, uh, good morning everyone. Thanks for taking my questions.
Speaker Change: Um,
Speaker Change: Wanted to start off with, um, you know, some of the, the comments around, um, had a thing about closing for the full year. I think, you know, Alan brought that up and, you know, obviously, um, you have it, a decent amount, perhaps of, of a thought around volume, I would assume already, um, gross margins obviously, taking a little bit of a, of a downward move in the third quarter. And and, and, you know, ostensibly assuming a relatively stable backdrop, I know that might be a big assumption but
you know, I would assume that there's some way to think about 4 q even at this point,
Phillippe Lord: I'm wondering about, you know, the pulling of the full year guidance. you know, at this point in the year. And if there's other variables outside of just, you know, what you're seeing today in terms of maybe being a little less certain, you know, that maybe we're not fully appreciating in terms of, you know, pulling the guidance rather than perhaps just adding a little bit of a wider range or maybe lowering the high end of the range, you know, versus what you had three months ago. Yeah, I mean, it's great question. I think it's all just really built on the lack of visibility we have right now with With our current backlog, and you start to model out our current community count and our guidance for Q3, you can back into what our absorptions per store is.
Um, I I I'm wondering about, you know, the pulling of the full year guidance, um, you know, at this point in the year and if there's other variables outside of just, you know, what you're seeing today. In terms of maybe being a little less certain, you know, that that maybe we're not fully appreciating in terms of, you know, pulling the guidance, rather than perhaps just adding a, a little bit of a wider range, or maybe lowering the high end of the range. Um,
You know, versus what you had, uh, 3 months ago.
Yeah, I mean it's a great question. I think it's all just really built on the lack of visibility. We have right now with
Speaker Change: With our current backlog. And you start to model out our current Community count
and,
Phillippe Lord: So, I think that's pretty indicative of what we think the market's going to give to us. And then we're optimistic that demand will trend the way it normally does seasonally. The example I gave earlier was that usually August and September and October pick up meaningfully from July. But based on the macro backdrop, I think we're not really ready to commit to that until we see it. July will close this quarter. August will close this quarter. If September is strong and October followed course, and our community count that's going to happen in the back half of the year, we can get to a pretty good number full year.
Speaker Change: Our guidance for Q3, uh, you can back into what our absorption is for storage. So I think that's pretty indicative of what we think the Market's going to give give to us. And then we're optimistic. That demand will Trend the way it normally does seasonally. Uh, the example I gave earlier was that usually August and September and October pick up meaningfully from.
Speaker Change: Until we see it.
Phillippe Lord: But until we experience that, I just think that given our low backlog rate, it's tough to continue giving out full year guidance. That's kind of discussion we had with our board and everyone else around the company, and we thought that was in our best interest.
Phillippe Lord: Yeah, so I'll just add, this is very, very obvious, but I'm just going to say it anyway, because it needs to be said. If you look at the backlog that we have coming into the quarter at 1700 units, we got it to 36 to 3900 closings. We don't even have all of our closings yet for Q3. We have zero closings identified yet for Q4. So just because of the current market dynamics, we thought it didn't make sense to put a number out there and potentially be wrong one way or the other, up or down. We didn't think it was a responsible action to put a number out there that at this point, again, the market dynamics are moving around so quickly.
Um, July will close this quarter, August will close this quarter, if September strong and October follow follow, of course, and our community count, that's going to happen in the back, half of the year. Uh we can get to a a pretty good number for year, but until we experience that, I just think that given our low backlog rate, it's tough to continue giving out fully your guidance. Um, that's that's kind of discussion we had with our board and everyone else around the company, and we thought that was in our best interest. Yeah. So I'll just add a
Phillippe Lord: It's tough to gauge them. We have a good level of confidence about Q3, even though we're coming into the quarter with less than half of those closings. So I think that at this point, when we see market conditions stabilize and we see the community count opening trend stabilize, then we'll be able to provide better guidance on a go-forward basis. But unlike many of our peers, we don't have any units currently sold beyond the current quarter. So it's really just a very educated guess on our end, which didn't seem like the right call. Right. No, no, no.
Speaker Change: A very, very obvious, but I'm just going to say it anyway because it needs to be said. Um, if you look at the backlog that we have coming into the quarter of 1700 units, we got it to 36 to 3,900, closings. We don't even have all of our closings yet for Q3, we have zero closings identified yet for Q4. So just because of the current market dynamics, we thought it didn't make sense, uh, to put a number out there and potentially be wrong, 1 way or the other up or down. We didn't think it was. It was a a responsible action to put a number out there. That's at this point. I guess the market dynamics are moving around so quickly, it's tough. It's tough to gauge them. Uh, we have a, a good level of confidence about Q3 even though we're coming into the quarter with less than half of those closings. So I think that it at this point when we see market conditions stabilize and we see the community count opening Trend stabilized. Then we'll be
Speaker Change: Be able to provide better uh guidance on a go forward basis but unlike many of our peers we don't have any units currently sold uh beyond the current quarter. So it's really just a, you know, very educated guest on our end which didn't seem like the right call.
Michael Rehaut: I appreciate it. I just thought I'd, you know, kind of probe it a little bit more, so I appreciate you having the patience to answer that.
Michael Rehaut: You know, secondly, you know, I wanted to kind of explore a little bit on the gross margin side. You know, you said, Hilla, that, you know, the 3Q decline versus 2Q is primarily due to reduced leverage. But when I look at, you know, what you're expecting to generate from a revenue standpoint versus, you know, the back half of 24. You know, you averaged about a 24% margin in the back half of 24. Your revenue guide is for Third quarter, if you kind of, you know, it's a little bit less than the back half average, but, you know, clearly there's You know, a-a-a-a-a-a You know, change in cost structure or profitability.
Right. No, no, no, I appreciate it. I just thought I'd, you know, kind of probe it a little bit more, so I appreciate you. You you having the patience to answer that, um, you know, secondly, you know, I, I wanted to kind of explore a little bit on the on the growth margin side, you know, you, you, you said Hill that, you know, the 3Q,
Speaker Change: Um decline versus 2 view, 2q primarily due to reduced leverage. But when I look at you know what you're expecting to generate from a revenue standpoint versus you know the back half of
Speaker Change: 24. You know you averaged about a 24% margin in the back half of 24 you know your your Revenue guidance for um
Third quarter, if you kind of, you know, it's a little bit less than the the back half average. But, you know, clearly there's, you know, a, a a
Hilla Sferruzza: And I'm just kind of wondering in terms of, you know, year over year, over the last several quarters, actually maybe perhaps just more year to date, what have you seen? in terms of headwinds from hires, specifically just incentives, either financing incentives or just a more challenging pricing backdrop that's impacted the gross margin year-to-date. And if you've seen that trend, presumably a headwind, continue throughout 2Q and you expect that to continue into 3Q in terms of incremental headwinds. Yeah, so I think this is a good point that the dynamics are fairly different than they were in 2024, right?
Speaker Change: You know, change in cost structure or profitability and I'm just kind of wondering in terms of, you know, year-over-year over the last several quarters. You know, actually maybe perhaps just more year-to-date what have you seen in terms of headwinds from higher specifically just incentives? You know, I did financing incentives or just a more challenging pricing backdrop. Um, that's impacted the gross margin year to date. And if you've seen that Trend, uh presumably a headwind continue throughout 2q and and you expect that to continue into 3 Q uh, in terms of incremental headwinds,
Hilla Sferruzza: It's primarily the incentive environment. So, if you look at our ASP or year over year, it's quite a material difference, right? I think we were from 411 to 387. So, it's that ASP differential that's causing the margin pullback and the ASP differential. A little bit of it is mix and product, geographic mix and product, but a big piece of it is increased use of incentives. So, as we kind of talked about it in the prepared remarks, there's a lot of buyer hesitancy. So, even though folks may be able to qualify for a home, they want that comfort and security of that lower affordability point to get them over the fence to make that purchasing decision.
Hilla Sferruzza: So, what we're seeing is an increased use of financing incentives. The financing incentive cost hasn't moved too much, but the number of folks that are asking for that financing incentive to be included with their home purchase, has increased. So, that's really the pullback that you're seeing in margin when you're looking at 24 to 25, and then kind of sequentially from Q1 to Q2 to Q3. It's really that increased utilization that is the main driver. Our costs are actually, as we mentioned, are coming down. So, we're not really seeing anything else change in the profit equation.
Yeah, so I think this is a good point that the Dynamics are fairly different than they were in 2024, right? It's primarily the incentive environment. So, if you look at our ASP, your year-over-year, it's quite a material difference, right? I think we were from 411 to 387, so it's that ASP differential that's causing uh, the margin pullback and the ASP. Differential a little bit of it is mixing product, uh, Geographic mix and product, but a big piece of it is increased use of incentives. So as we we kind of talked about it in the prepared remarks, there's a lot of buyer hesitancy. So, even though folks may be able to qualify for a home, they want that comfort and security of that lower, affordability Point, uh, to get them over the fence to make that purchasing decision. So, what we're seeing is an increase
Hilla Sferruzza: It's really just the fact that the top line number is lower because of that incentive usage. As a reminder, I know different builders record that differently for us. That comes right off the top. It reduces ASP. We don't have it in financial services. So, it's a function of a reduced revenue, which for us obviously affects margin versus maybe some other folks that have it rolling through a different line item. That's a great point, Hilla, and obviously that also kind of ties into when you're talking about reduced operating leverage. I assume it's fair to say, or maybe not, maybe you can clarify, when you talk about reduced operating leverage because of less revenue, that's really because of the increased use of incentives.
As a reminder, I know different Builders uh record that differently for us that comes right off the top. It it it reduces ASP we don't have it in uh financial services. So it's a function of um uh A reduced Revenue which for us obviously affects uh, margin versus maybe some other folks that have it rolling through a different line item.
Hilla Sferruzza: that's ultimately driving the lower gross margin and the reduced operating leverage as a byproduct of those higher incentives. Is that fair or? Exactly. So the reduced leverage, both as a component in gross margin and all the way down to SG&A, right? Again, folks that are recording that as a financial services reduction, it's not showing in their SG&A. So our SG&A control has actually been very tight, but because of the lower per home ASP, the net percentage calculation is increasing, even though the dollars are kind of doing what we thought that they could and should be doing.
Speaker Change: That that's a, that's a great Point Hill. And obviously, that also kind of ties into when you're talking about reduced operating leverage. I, I, I assume it's fair to say or or maybe not maybe you can clarify, um, when in fact reduced operating leverage because of less Revenue, be that that's really, because of the increased use of incentives,
Hilla Sferruzza: So you're a hundred percent right, Mike. Okay.
That's ultimately driving the the lower gross margin and and and the reduced operating leverage. It's a byproduct of those higher incentives is that fair? Or exactly. So, the reduced leverage both as a component in gross margin and all the way down to sgna right. Again, folks that are recording that as a financial services reduction. It's not it's not showing in their sgna. So our sgna control has actually been very tight, but because of the lower per home ASP, uh, the net percentage calculation is increasing. Uh, even though the dollars are are kind of doing what we thought, that they could and should be doing. So you're 100% right, Mike.
Hilla Sferruzza: And then one last quick clarification, Hilla. You said earlier in the call that you're talking about year-over-year community count growth. I wasn't sure if you were referring to year-end 25 year-over-year growth or year-end 26. It was an answer to a question talking about 26, and you said not 10.0%, but not 20%. I wasn't sure if you were referring to the year-end 25 or year-end 26. in terms of year-over-year growth. You know what? Both. It's going to be both. So for sure, 25. And we're expecting double digit growth in 26 as well. All right, perfect. Thanks so much.
Speaker Change: Okay, then 1 1 last Quick clarification Hill, you said earlier in the call that you're talking about year over year uh Community count growth.
Um, I wasn't sure if you were referring to.
Speaker Change: Year, end 25, uh, year-over-year growth or year, end 26. It was an answer to a question talking about 26 and you said not 10.0% but, you know, not 20%. I wasn't sure if you were referring to the year, end, 25, or year end 26, in terms of year-over-year growth.
Speaker Change: You know what, both it's going to be both. So for sure, 25. And we're expecting double digit growth in uh 26 as well.
Michael Rehaut: Thanks, Mike.
All right, perfect. Thanks so much.
Thanks Mike.
Rafe Jadrusich: And your next question comes from Rafe Jadrusich with Bank of America. Hi, good morning. Thanks for taking my question. Just following up on some of the prior questions on the fixed cost side, can you give some color on the fixed costs that are in cost of goods? It would be really helpful if we could get a dollar amount, so we sort of break out what the deleverage could be in the third quarter and what the leverage was in the second quarter. Yeah, that's too detailed. We don't we don't go into components of gross margin. But you guys can probably back into it.
Speaker Change: and your next question comes from Reef, Jag with Bank of America, please State your question,
Reef Jag: Hi. Hi, good morning and thanks for taking my my question, just following up on some of the, the prior questions on the fixed cost side, can you give some color on the fixed costs that are in cost of goods? Uh, it would be really helpful if we could get a dollar amount. So we could sort of break out what the de-lever um could be in the third quarter and what the leverage was on the second quarter.
Hilla Sferruzza: If we're giving you the lost leverage pieces, we can tell you that it's mostly people, people costs, right? So there's there's a superintendent and land act and land of team members that no matter how many homes we sell, they're still working. So it's really the leveraging of the human capital. That's the primary primary driver. So the 140 basis point step down from 2Q to 3Q, that's all de-leverage, that's not higher incentives quarter over quarter. No, so it's not all deleverage. I think we've gone on record many times in the past that deleveraging from your highest quarter to your lowest quarter is typically 75 to 100 bits.
Speaker Change: Yeah, that's too detailed. We don't we don't go into components of gross margin, um, but you guys can probably back into it if we're giving you the Lost leverage pieces, we can tell you that it's mostly people people cost.
Speaker Change: Right. So there's there's a um, superintendent and Land Act and land, Dev team members that no matter how many homes, we we sell, they're still working.
Speaker Change: So it's really the leveraging of the human capital. That's the primary primary driver.
Speaker Change: Got the, the so the 140 basis point stepped down from, um, 2q to 23 Q. That's all.
The Leverage. That's not higher incentives. Quarter of a quarter.
Hilla Sferruzza: So it's not the 140, it's just a large portion of that pullback. The rest is, you know, a million other factors going forwards and backwards. Product mix, geographic mix, you know, it's a lot of other little things here and there. Yeah, I mean, we're not currently Thinking that incentives are going to rise between Q2 and Q3, they were already pretty high. But certainly July is a tough month and we see some pretty aggressive stuff out there in July to kind of get through the summer slowdown. Okay, so the fixed costs are at 75 basis points, roughly, from 2Q to 3Q.
Speaker Change: No. So it's not all due leverage. I think we've we've uh, Gone on record many times in the past, the deleveraging, uh, from your highest quarter to your lowest quarter is typically 75 to 100 bits so it's not the 140, it's just the large portion of of that pullback. The rest is, you know, a million other factors, going going forwards and back backwards product mixed Geographic mix. Uh, you know, it's a lot of other little things here and there. Yeah, I mean, we're, we're not
Speaker Change: Currently.
Speaker Change: Thinking that incentives are going to rise between Q2 and Q3. They were already pretty high but um, certainly July is a tough month and we see some pretty aggressive stuff out there in July to kind of get through the summer Slowdown.
Hilla Sferruzza: of that. Okay. Yes. That's super helpful.
Speaker Change: Got. Okay. So so we should the the the fixed costs are at 75 basis points. Roughly from 22 to 32 of of that of of the okay? Yes.
Phillippe Lord: And then in terms of the community count, growth outlook, the double digit this year, and then also targeting that for next year, can you talk about how many of those communities are in newer markets, or expanding into additional markets versus places where they're like existing markets that you have today? Yeah, so, um... We went into, um... You know, Jacksonville and Utah recently, a couple of years ago, and then, of course, we bought Elliott Homes recently, which got us into the Gulf Coast. So other than those three, all the new community count growth we're talking about for this year and next year is in our existing footprint.
Speaker Change: That that that's super helpful. And then, um, in terms of the the uh, Community count, uh, growth Outlook that the double digit this year. And then, um, also targeting that for next year. Can you talk about how many of of those communities are in newer markets or expanding into additional markets versus places where or that are like be in existing markets that you have today.
Speaker Change: uh, we went into, um,
Speaker Change: You know, Jacksonville and Utah, recently, a couple years ago, and then, of course, we bought Elliot homes. Uh, recently, which got us into um the Gulf Coast
Phillippe Lord: But I would say we are over-investing, obviously, in Jacksonville, Utah, and the Gulf Coast, because we want to gain scale there, although the Elliott Homes transaction came with almost 5,000 watts, so we have quite a few watts through that acquisition. But there is no new community growth between now and next year in markets that we're currently not in. Thank you, it's really helpful. Okay.
Speaker Change: So, other than those 3, uh, all the new community count growth. We're talking about for this year or next year is in our existing footprint.
Speaker Change: But I would say, we are over investing on, obviously in Jacksonville Utah and the Gulf Coast because we want it gain scale there although the Elliott homes transaction came with almost 5,000. Lots. So we have quite a few Lots through that acquisition but there is no, uh, new community growth between now. And next year in markets that we're currently not in.
So thank you. It's really helpful.
Speaker Change: Okay, is that?
Operator: Thank you.
Phillippe Lord: And that ends our question and answer session. I'll hand the floor back to Phillippe Lord for a closer... Yeah, thanks. Appreciate everyone joining our call today. Thank you so much for your interest in our organization and we look forward to seeing everyone next quarter. Appreciate it very much. Thank you.
Speaker Change: Thank you. And that ends our question and answer session, I'll hand the floor back to Philipe Lord for closing remarks.
Speaker Change: Yeah. Thanks uh appreciate everyone, joining our call today. Thank you so much for your interest in our organization and we look forward to seeing everyone next quarter. Appreciate it very much.
Operator: And that concludes today's call. All parties may now disconnect.
Thank you. And that concludes today's call all parties, may not disconnect have a good day.