Q1 2026 KB Home Earnings Call

March 24, 2026

Speaker #1: I think I answered it.

Operator: Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2026 Q1 Earnings Conference Call. All participant lines are in a listen-only mode. Following the company's opening remarks, we will open the lines for questions. The conference call is being recorded, and a replay will be accessible on the KB Home website until April 24, 2026. I will now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may now begin.

Speaker #2: Good afternoon. My name is John, and I'll be your conference operator today. I would like to welcome everyone to the KB Home 2026 first quarter earnings conference call.

Speaker #2: All participant lines are on listen-only mode. Following the company's opening remarks, we will open the lines for questions. The conference call is being recorded, and a replay will be accessible on the KB Home website until April 24, 2026.

Speaker #2: And I will now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may now begin.

Speaker #3: Thank you, John. Good afternoon. Today, we are here to review our results for the first quarter of fiscal 2026. On the call are Jeff Mezger, Executive Chairman; Rob McGibney, President and Chief Executive Officer; Rob Dillard, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.

Jill Peters: Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for Q1 of fiscal 2026. On the call are Jeff Mezger, Executive Chairman, Rob McGibney, President and Chief Executive Officer, Rob Dillard, Executive Vice President and Chief Financial Officer, Bill Hollinger, Senior Vice President and Chief Accounting Officer, and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements.

Speaker #3: During this call, items will be discussed that are considered forward-looking statements within the meaning of the private securities litigation reform act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them.

Speaker #3: Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements.

Speaker #3: In addition, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin as well as other non-GAAP measure referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release, and/or on the Investor Relations page of our website, at kbhome.com.

Jill Peters: In addition, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin, as well as other non-GAAP measure referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release and/or on the investor relations page of our website at kbhome.com. Finally, please note all figures are based on our quarter ended February 28, and all comparisons are on a year-over-year basis unless otherwise stated. With that, here's Jeff Mezger.

Speaker #3: And finally, please note all figures are based on our quarter-ended February 28th, and all comparisons are on a year-over-year basis unless otherwise stated. And with that, here's Jeff Mezger.

Speaker #4: Thank you, Jill. Good afternoon, everyone. We are pleased that our first quarter financial results were within our guidance ranges. Operationally, our divisions continue to execute well, and we achieved our highest community count in many years contributing to year-over-year growth in net orders.

Jeff Mezger: Thank you, Joe. Good afternoon, everyone. We are pleased that our Q1 financial results were within our guidance ranges. Operationally, our divisions continued to execute well, and we achieved our highest community count in many years, contributing to year-over-year growth in net orders. Perhaps most importantly, we have returned to a mix of sales that are predominantly built to order, which we believe will enable us to achieve 70% built-to-order deliveries in the H2 of this year. We have a renewed focus on this core strategy as a central component in strengthening our company going forward. With the lag between sale and delivery for built to order homes, we expect to continue growing our backlog.

Speaker #4: Perhaps most importantly, we have returned to a mix of sales that are predominantly built to order which we believe will enable us to achieve 70% build-to-order deliveries in the second half of this year.

Speaker #4: We have a renewed focus on this core strategy as a central component in strengthening our company going forward. With the lag between sale and delivery for build-to-order homes, we expect to continue growing our backlog.

Speaker #4: A larger backlog will provide many benefits, including greater predictability in our deliveries and higher gross margins than we achieve on inventory sales typically in the range of 300 to 500 basis points.

Jeff Mezger: A larger backlog will provide many benefits, including greater predictability in our deliveries and higher gross margins than we achieve on inventory sales, typically in the range of 300 to 500 basis points. As to the details of our Q1 results, we produced total revenues of about $1.1 billion and diluted earnings per share of $0.52. We continue to have significant financial flexibility and remain balanced in our capital allocation, investing for growth while also returning capital to our shareholders. We repurchased 843,000 shares of our common stock at an average price below our current book value per share, which we believe is an excellent use of our cash, accretive to both our earnings and book value per share, and a factor in improving our return on equity over time.

Speaker #4: As to the details of our first quarter results, we produced total revenues of about $1.1 billion and diluted earnings per share of 52 cents.

Speaker #4: We continue to have significant financial flexibility and remain balanced in our capital allocation investing for growth while also returning capital to our shareholders. We repurchased 843,000 shares of our common stock at an average price below our current book value per share which we believe is an excellent use of our cash accreted to both our earnings and book value per share and a factor in improving our return on equity over time.

Speaker #4: Inclusive of dividends, we returned almost 70 million dollars in capital to our shareholders in the first quarter. In addition, we continue to expand our book value per share compared to the year-ago period to over 61 dollars.

Jeff Mezger: Inclusive of dividends, we returned almost $70 million in capital to our shareholders in Q1. In addition, we continued to expand our book value per share compared to the year-ago period to over $61. Consumers have been faced with a variety of challenges over the past two years, and the conflict in the Middle East that began at the end of February has added another layer of uncertainty. Against this backdrop, and taking into consideration that our net orders in Q1 were below the level we needed to hold our prior full-year delivery guidance, we are lowering our range for the year. Rob McGibney will provide more color on this in a moment. Before turning the call over to Rob, I want to congratulate him on his promotion.

Speaker #4: Consumers have been faced with a variety of challenges over the past two years, and the conflict in the Middle East that began at the end of February has added another layer of uncertainty.

Speaker #4: Against this backdrop, and taking into consideration that our net orders in the first quarter were below the level we needed to hold our prior-year, our prior full-year delivery guidance, we are lowering our range for the year.

Speaker #4: Rob McGibney will provide more color on this in a moment. Before turning the call over to Rob, I want to congratulate him on his promotion.

Speaker #4: As part of our long-term succession plan, Rob assumed the role of President and Chief Executive Officer on March 1, and I transitioned to Executive Chairman of the Board.

Jeff Mezger: As part of our long-term succession plan, Rob assumed the role of President and Chief Executive Officer on 1 March, and I transitioned to Executive Chairman of the Board. Rob is a proven, results-oriented leader with a deep understanding of our business gained over the past 25 years with the company. He began his career at KB Home in our Las Vegas division, historically our largest and most profitable, where he rose to division president and then continued on in roles of increasing responsibility within the company. Rob has worked side by side with me during the past 5 years while running our home building operations, and both the Board and I are confident that he is ready to lead KB Home forward. With that, I'll turn the call over to Rob.

Speaker #4: Rob is a proven, results-oriented leader with a deep understanding of our business, gained over the past 25 years with the company. He began his career at KB Home in our Las Vegas division, historically our largest and most profitable, where he rose to division president and then continued on in roles of increasing responsibility within the company.

Speaker #4: Rob has worked side by side with me during the past five years while running our home building operations, and both the Board and I are confident that he is ready to lead KB Home forward.

Speaker #4: With that, I'll turn the call over to Rob.

Speaker #5: Thank you, Jeff. I am honored to step into the role of CEO and excited about KB HOME's future. With our distinguished brand, differentiated product offerings, and industry-leading customer service, there are significant opportunities to create value for both our home buyers and our shareholders.

Rob McGibney: Thank you, Jeff. I am honored to step into the role of CEO and excited about KB Home's future. With our distinguished brand, differentiated product offerings, and industry-leading customer service, there are significant opportunities to create value for both our homebuyers and our shareholders. In addition, our strong financial position provides us with flexibility and the ability to support growth of our business over time. One of the traits that defined our operations in fiscal 2025 was consistency in our operational execution that led to meaningfully improving our build times and tightly managing our direct costs. We will continue to focus on these key areas in fiscal 2026, together with our renewed focus on our built-to-order strategy. We are confident the multiple advantages of our BTO model will ultimately result in a stronger company.

Speaker #5: In addition, our strong financial position provides us with flexibility and the ability to support growth of our business over time. One of the traits that defined our operations in fiscal 2025 was consistency in our operational execution, which led to meaningfully improving our build times and tightly managing our direct costs.

Speaker #5: We will continue to focus on these key areas in fiscal 2026 together with our renewed focus on our build-to-order strategy. We are confident the multiple advantages of our BTO model will ultimately result in a stronger company.

Speaker #5: We remain optimistic about the long-term housing market, with favorable demographics supporting higher demand over time, together with the structural undersupply of homes. Near term, buyers continue to demonstrate the desire for homeownership and the ability to qualify, although tepid consumer confidence, elevated mortgage interest rates, and affordability pressures have stifled underlying demand.

Rob McGibney: We remain optimistic about the long-term housing market, with favorable demographics supporting higher demand over time, together with the structural undersupply of homes. Near term, buyers continue to demonstrate the desire for homeownership and the ability to qualify, although tepid consumer confidence, elevated mortgage interest rates, and affordability pressures have stifled underlying demand. More recently, the conflict in the Middle East has created more uncertainty for an already cautious consumer. In Q1, healthy traffic in our communities, a steady conversion of traffic to sales, the lowest cancellation rate we've experienced in the past four years, and our higher community count drove a 3% year-over-year increase in net orders. While the growth in net orders is clearly a positive at 2,846, our sales were below what we needed to maintain our prior full-year delivery guidance, as Jeff noted.

Speaker #5: More recently, the conflict in the Middle East has created more uncertainty for an already cautious consumer. In the first quarter, healthy traffic in our communities, a steady conversion of traffic to sales, the lowest cancellation rate we've experienced in the past four years, and our higher community count drove a 3% year-over-year increase in net orders.

Speaker #5: While the growth in net orders is clearly a positive at 2,846, our sales were below what we needed to maintain our prior full-year delivery guidance, as Jeff noted.

Speaker #5: The meaningful improvement in cancellations reflects high-quality, committed buyers who are ready and able to purchase a home, and also supported net orders at an average absorption pace of 3.5 per month per community.

Rob McGibney: The meaningful improvement in cancellations reflects high-quality, committed buyers who are ready and able to purchase a home and also supported net orders at an average absorption pace of 3.5 per month per community. Although this pace was slightly lower year over year, we remain focused on our long-standing annual average target of 4 net orders per community to optimize our assets. Most importantly, our order mix demonstrates a deliberate and strategic shift in how we are positioning the business for the long term. We are returning to our core built-to-order model, a foundational element of how KB Home operates.

Speaker #5: Although this pace was slightly lower year-over-year, we remain focused on our long-standing annual average target of four net orders per community to optimize our assets.

Speaker #5: Most importantly, our order mix demonstrates a deliberate and strategic shift in how we are positioning the business for the long term. We are returning to our core build-to-order model, a foundational element of how KB Home operates.

Speaker #5: This is how our teams are trained, how we manage our communities, and how we create value. While this will result in a temporary trough in deliveries for the first half of the year, as the higher level of BTO homes we are selling now will benefit our third and fourth quarter deliveries, and we have intentionally slowed our inventory starts, it is a stronger, more predictable company in the second half of the year and beyond.

Rob McGibney: This is how our teams are trained, how we manage our communities, and how we create value. While this will result in a temporary trough in deliveries for H1 as the higher level of BTO homes we are selling now will benefit our Q3 and Q4 deliveries, and we have intentionally slowed our inventory starts, it is a purposeful reset that positions us to be a stronger, more predictable company in H2 and beyond. We are making considerable progress increasing our built-to-order sales. They represented 44% of our net orders in October, growing each month through Q1. We exited February at 68%, and in the early weeks of March, we are now above 70%.

Speaker #5: We are making considerable progress increasing our build-to-order sales. They represented 44% of our net orders in October, growing each month through the first quarter.

Speaker #5: We exited February at 68%, and in the early weeks of March, we are now above 70%. Build-to-order homes typically generate between 300 and 500 basis points of incremental gross margins compared to inventory homes and, as a result, having a greater percentage of BTO deliveries will drive higher margins.

Rob McGibney: Built-to-order homes typically generate between 300 and 500 basis points of incremental gross margins compared to inventory homes. As a result, having a greater percentage of BTO deliveries will drive higher margins. As we increase our mix of built-to-order homes, we are building a solid sold backlog that has not yet started construction. This backlog provides greater visibility into future deliveries and revenues, improves efficiency in our starts and production processes, and gives our trade partners clearer line of sight into their upcoming workloads. In turn, this predictability supports better execution and over time contributes to more favorable cost structures. We can leverage the pending starts into more favorable bids and keep our trade partners on our job sites, which is more efficient and further improves build times.

Speaker #5: Having a greater percentage of BTO deliveries will drive higher margins. As we increase our mix of build-to-order homes, we are building a solid backlog, a solid sold backlog that is not yet started construction.

Speaker #5: This backlog provides greater visibility into future deliveries and revenues, improves efficiency in our starts and production processes, and gives our trade partners a clearer line of sight into their upcoming workloads.

Speaker #5: In turn, this predictability supports better execution and, over time, contributes to more favorable cost structures. We can leverage the pending starts into more favorable bids and keep our trade partners on our job sites, which is more efficient and further improves build times.

Speaker #5: Internally, our cost structure benefits from managing to even-flow production. With the makeup of our net orders in the first quarter, together with our expectations for BTO sales in the second quarter, we anticipate reaching a turning point in the second quarter in growing our backlog relative to the prior year period.

Rob McGibney: Internally, our cost structure benefits from managing the even flow of production. With the makeup of our net orders in Q1, together with our expectations for BTO sales in Q2, we anticipate reaching a turning point in Q2 in growing our backlog relative to the prior year period. As a result, we expect to drive sequential increases in deliveries as we move through H2. More broadly, we view this as more than just a mix shift. It is a reset back to our core operating model that extends well beyond the current fiscal year results, which will allow us to operate with greater precision, less volatility, and stronger alignment among sales, starts, and deliveries. It reduces the need for speculative inventory, lowers our exposure to pricing swings, and supports more disciplined capital deployment.

Speaker #5: As a result, we expect to drive sequential increases in deliveries as we move through the back half of the year. More broadly, we view this as more than just a mix shift.

Speaker #5: It is a reset back to our core operating model that extends well beyond the current fiscal year results, which will allow us to operate with greater precision, less volatility, and stronger alignment among sales, starts, and deliveries.

Speaker #5: It reduces the need for speculative inventory, lowers our exposure to pricing swings, and supports more disciplined capital deployment. Over time, we believe this will translate into a more durable and differentiated business—one that is better positioned to generate sustainable margins and returns across cycles.

Rob McGibney: Over time, we believe this will translate into a more durable and differentiated business, one that is better positioned to generate sustainable margins and returns across cycles. We also expect our deliveries in the H2 of this year to reflect a more favorable regional mix with increased contribution from our Northern California businesses. Our communities in these markets have historically had higher ASPs and higher margins. More of these communities are selling now, and with deliveries projected in the Q3 and Q4 and beyond, we expect to see the benefits in our financial results. Finally, with greater delivery volumes at higher ASPs in the H2 of the year, we expect to regain operating leverage on the fixed cost component of our gross margin. Our ability to build homes more efficiently continues to be strong.

Speaker #5: We also expect our deliveries in the second half of this year to reflect a more favorable regional mix, with increased contribution from our Northern California businesses.

Speaker #5: Our communities in these markets have historically had higher ASPs and higher margins. More of these communities now, and with deliveries projected in the third and fourth quarters and beyond, we expect to see the benefits in our financial results.

Speaker #5: Finally, with greater delivery volumes at higher ASPs in the second half of the year, we expect to regain operating leverage on the fixed cost component of our gross margin.

Speaker #5: Our ability to build homes more efficiently continues to be strong. We had already achieved our company-wide target of 120 days from home start to completion on build-to-order homes in the fourth quarter of fiscal 2025.

Rob McGibney: We had already achieved our company-wide target of 120 days from home start to completion on built-to-order homes in Q4 of fiscal 2025. Yet we further improved in this critical area in Q1 with a sequential decrease to 108 days. This is an important factor in the value proposition of a BTO home from a customer standpoint, relative to the time it takes to purchase a resale or an inventory home. Shorter build times also allow our customers to lock their mortgage rates more easily and cost efficiently. In reducing our build times, we have now meaningfully expanded our selling window within the year. Last year, it took us about 5 months to build a home, which meant early spring was the latest we could sell BTO homes for same-year delivery.

Speaker #5: Yet we further improved in this critical area in the first quarter, with a sequential decrease to 108 days. This is an important factor in the value proposition of a BTO home from a customer standpoint, relative to the time it takes to purchase a resale or an inventory home.

Speaker #5: Shorter build times also allow our customers to lock their mortgage rates more easily and cost-efficiently. In reducing our build times, we have now meaningfully expanded our selling window within the year.

Speaker #5: Last year, it took us about five months to build a home, which meant early spring was the latest we could sell BTO homes for same-year delivery.

Speaker #5: Today, with build times closer to three and a half months, we can continue selling BTO homes for same-year delivery into the summer. The result is simple.

Rob McGibney: Today, with build times closer to 3.5 months, we can continue selling BTO homes for same-year delivery into the summer. The result is simple. More of what we sell this year turns into deliveries and revenues by year-end, which improves both our volume and cash flow. We ended Q1 with 276 active communities, the highest count we have had in many years, up 8% year over year. We achieved 37 grand openings in Q1, in line with our target, and project another 30 to 35 community openings in Q2. These new communities will contribute to a peak for community count sometime within Q2 at the height of the spring selling season.

Speaker #5: More of what we sell this year turns into deliveries and revenues by year-end, which improves both our volume and cash flow. We ended the first quarter with 276 active communities, the highest count we have had in many years, up 8% year over year.

Speaker #5: We achieved 37 grand openings in the first quarter, in line with our target, and project another 30 to 35 community openings in our second quarter.

Speaker #5: These new communities will contribute to a peak for community count sometime within our second quarter, at the height of the spring selling season. With more communities, we are positioned to drive more sales, and our new communities typically sell at a stronger initial absorption pace, benefiting from the newness and excitement of grand openings and supported by our disciplined community opening process.

Rob McGibney: With more communities, we are positioned to drive more sales, and our new communities typically sell at a stronger initial absorption pace, benefiting from the newness and excitement of grand openings and supported by our disciplined community opening process. As we look beyond Q2, depending on the pace of sellouts, we expect the community count to step down somewhat in H2. Our production is in better balance today with a total of 3,353 homes in process, split between 70% sold and 30% unsold. This balance aligns with our expectation to increase our BTO deliveries to at least 70% of our total in H2. As to direct cost, we continue to benefit from lower trade labor expense in most markets, but there is some pressure on material cost from lumber.

Speaker #5: As we look beyond the second quarter, depending on the pace of sellouts, we expect the community count to step down somewhat in the second half of the year.

Speaker #5: Our production is in better balance today, with a total of 3,353 homes in process, split between 70% sold and 30% unsold. This balance aligns with our expectation to increase our BTO deliveries to at least 70% of our total in the second half of this year.

Speaker #5: As to direct cost, we continue to benefit from lower trade labor expense in most markets, but there is some pressure on material cost from lumber.

Speaker #5: We are managing our lumber lock strategically and drawing on our deep supplier relationships to limit cost increases, while also continuing to actively rebid our value engineer our products and simplify our studio offerings to help manage our overall direct cost.

Rob McGibney: We are managing our lumber costs strategically and drawing on our deep supplier relationships to limit cost increases while also continuing to actively rebid our local and national contracts, as well as value engineer our products and simplify our studio offerings to help manage our overall direct cost. Before I wrap up, I will review the credit profile of our buyers who finance their mortgages through our joint venture, KBHS Home Loans. Our capture rate remained high, with 81% of buyers who financed their homes in Q1 using KBHS. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, which benefits our company as well as our buyers. In addition, we see higher customer satisfaction levels from buyers who use our JV versus other lenders.

Speaker #5: Before I wrap up, I will review the credit profile of our buyers who finance their mortgages through our joint venture, KBHS Home Loans. Our capture rate remained high, with 81% of buyers who financed their homes in the first quarter using KBHS.

Speaker #5: Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, which benefits our company as well as our buyers.

Speaker #5: In addition, we see higher customer satisfaction levels from buyers who use our JV versus other lenders. The average cash down payment of 16% was fairly steady as compared to prior quarters, and equated to over $72,000.

Rob McGibney: The average cash down payment of 16% was fairly steady as compared to prior quarters and equated to over $72,000. On average, the household income of customers who used KBHS was about $133,000, and they had a FICO score of 743. Even with one-half of our customers purchasing their first home, we are still attracting buyers with strong credit profiles who can qualify for their mortgage while making a significant down payment or pay in cash. 11% of our deliveries in Q1 were to all-cash buyers. In conclusion, we continue to navigate market conditions with a focus on strong operational execution and disciplined adherence to our built-to-order model to drive results. We are confident that our personalized product offerings and transparent pricing approach are compelling for our buyers.

Speaker #5: On average, the household income of customers who use KBHS was about $133,000, and they had a FICO score of 743. Even with one-half of our customers purchasing their first home, we are still attracting buyers with strong credit profiles who can qualify for their mortgage while making a significant down payment or paying in cash.

Speaker #5: 11% of our deliveries in the first quarter were to all cash buyers. In conclusion, we continue to navigate market conditions with a focus on strong operational execution and disciplined adherence to our build-to-order model to drive results.

Speaker #5: We are confident that our personalized product offerings and transparent pricing approach are compelling for our buyers. Further, with an increasing number of communities and attractive submarkets set to open in our second quarter, and expected higher percentage of BTO deliveries, as well as an anticipated regional mix weighted towards higher ASP, higher-margin, Northern California deliveries later this year, we believe we are well positioned for stronger results in the second half of fiscal 2026.

Rob McGibney: Further, with an increasing number of communities and attractive submarkets set to open in our Q2, an expected higher percentage of BTO deliveries, as well as an anticipated regional mix weighted towards higher ASP, higher margin Northern California deliveries later this year, we believe we are well-positioned for stronger results in the H2 of fiscal 2026. Finally, as we continue to align our overhead to our delivery volume, we have taken steps to reduce our cost, including an unfortunate but necessary 10% year-over-year headcount reduction. While it takes a little time to see the impact of these measures in our financial results and our SG&A ratio is also a function of our revenue level, we do expect this ratio to be lower in the H2 of 2026 as well. With that, I will turn the call back to Jeff.

Speaker #5: And finally, as we continue to align our overhead to our delivery volume, we have taken steps to reduce our cost, including an unfortunate but necessary 10% year-over-year headcount reduction.

Speaker #5: While it takes a little time to see the impact of these measures in our financial results and our SG&A ratio is also a function of our revenue level, we do expect this ratio to be lower in the second half of 2026 as well.

Speaker #5: And with that, I will turn the call back to Jeff.

Speaker #1: Thanks, Rob. We have a favorable lot position, owning or controlling over 63,000 lots at the end of our first quarter, 41% of which were controlled.

Jeff Mezger: Thanks, Rob. We have a favorable lot position, owning or controlling over 63,000 lots at the end of our Q1, 41% of which were controlled. Our growth strategy remains primarily centered on expanding our share within our existing markets with a geographic footprint that we believe is positioned for long-term economic and demographic growth. Our approach toward allocating our cash flow remains consistent and balanced. We are achieving our priorities of positioning our business for future growth, managing our leverage within our targeted range, and rewarding our shareholders through share repurchases and our quarterly cash dividend. We are maintaining our land investments at a level that will support our current growth projections and invested about $560 million in land acquisition and development in Q1, with roughly 60% of our investment going toward developing land we already own.

Speaker #1: Our growth strategy remains primarily centered on expanding our share within our existing markets, with the geographic footprint that we believe is positioned for long-term economic and demographic growth.

Speaker #1: Our approach toward allocating our cash flow remains consistent and balanced. We are achieving our priorities of positioning our business for future growth, managing our leverage within our targeted range, and rewarding our shareholders through share repurchases and our quarterly cash dividend.

Speaker #1: We are maintaining our land investments at a level that will support our current growth projections, and invested about $560 million in land acquisition and development in the first quarter, with roughly 60% of our investment going toward developing land we already own.

Speaker #1: In closing, I want to thank our entire KB HOME team for their commitment to serving our home buyers, and the discipline with which they've been executing our build-to-order model, which we believe will result in a stronger company going forward.

Jeff Mezger: In closing, I want to thank our entire KB Home team for their commitment to serving our home buyers and the discipline with which they've been executing our built-to-order model, which we believe will result in a stronger company going forward. Although market conditions remain challenging, we are focused on the appropriate levers to drive improved results, renewing our focus on built-to-order, reducing our build times, lowering our costs, opening new communities, and staying balanced in our capital allocation. We plan to continue our share repurchase program in fiscal 2026, with between $50 million and $100 million of repurchases planned for our Q2. Following the end of the spring selling season, we expect to have more clarity on our year. As a result, we anticipate providing margin guidance with our 2026 Q2 earnings announcement in June.

Speaker #1: Although market conditions remain challenging, we are focused on the appropriate levers to drive improved results, renewing our focus on build-to-order, reducing our build times, lowering our costs, opening new communities, and staying balanced in our capital allocation.

Speaker #1: We plan to continue our share repurchase program in fiscal 2026, with between $50 million and $100 million of repurchases planned for our second quarter.

Speaker #1: Following the end of the spring selling season, we expect to have more clarity on our year. As a result, we anticipate providing margin guidance with our 2026 second quarter earnings announcement in June.

Speaker #1: We are committed to delivering long-term shareholder value, and we look forward to updating you as the year continues to unfold. Now, I'll turn the call over to Rob Dillard for the financial review.

Jeff Mezger: We are committed to delivering long-term shareholder value, and we look forward to updating you as the year continues to unfold. Now, I'll turn the call over to Robert Dillard for the financial review.

Speaker #2: Thanks, Jeff. I'm pleased to report on the first quarter fiscal 2026 results. As Jeff and Rob said, we continue to manage the business with discipline, with a focus on optimizing every asset by pricing to the market, maintaining a healthy pace, and delivering our build-to-order advantage.

Robert Dillard: Thanks, Jeff. I'm pleased to report on the Q1 fiscal 2026 results. As Jeff and Rob said, we continue to manage the business with discipline, with a focus on optimizing every asset by pricing to the market, maintaining a healthy pace, and delivering our built-to-order advantage. We expected this strategy of providing a personalized home that the customer prefers will also benefit our financial performance as we shift the delivery mix towards higher margin built-to-order homes in 2026 and beyond. In the Q1 of fiscal 2026, we were within our guidance range with total revenues of $1.08 billion and housing revenues of $1.07 billion, a 23% decrease on a year-over-year basis. We delivered 2,370 homes in the quarter.

Rob Dillard: Thanks, Jeff. I'm pleased to report on the Q1 fiscal 2026 results. As Jeff and Rob said, we continue to manage the business with discipline, with a focus on optimizing every asset by pricing to the market, maintaining a healthy pace, and delivering our built-to-order advantage. We expected this strategy of providing a personalized home that the customer prefers will also benefit our financial performance as we shift the delivery mix towards higher margin built-to-order homes in 2026 and beyond. In the Q1 of fiscal 2026, we were within our guidance range with total revenues of $1.08 billion and housing revenues of $1.07 billion, a 23% decrease on a year-over-year basis. We delivered 2,370 homes in the quarter.

Speaker #2: We expect that this strategy of providing a personalized home that the customer prefers will also benefit our financial performance, as we shift the delivery mix towards higher-margin, build-to-order homes in 2026 and beyond.

Speaker #2: In the first quarter of fiscal 2026, we were within our guidance range, with total revenues of $1.08 billion and housing revenues of $1.07 billion, a 23% decrease on a year-over-year basis.

Speaker #2: We delivered 2,370 homes in the quarter. This result was near the midpoint of our guidance range, as we continue to experience moderate demand from a cautious consumer.

Robert Dillard: This result was near the midpoint of our guidance range as we continue to experience moderate demand from a cautious consumer. Deliveries benefited from a 22% reduction in build times for built-to-order homes to 108 days, a 9% sequential reduction. Lower build times increased capital efficiency and benefited volume, as Rob discussed. Average selling price declined 10% to $452,000 due to regional and product mix, and general market conditions. Average selling price declined 3% sequentially, due primarily to regional mix. Housing gross profit margin was 15.3%, and adjusted housing gross profit margin, which excludes $2.2 million of inventory-related charges, was 15.5%. Adjusted housing gross profit margin was 480 basis points lower, primarily due to pricing pressure, higher relative land costs, regional mix, and lower operating leverage.

Rob Dillard: This result was near the midpoint of our guidance range as we continue to experience moderate demand from a cautious consumer. Deliveries benefited from a 22% reduction in build times for built-to-order homes to 108 days, a 9% sequential reduction. Lower build times increased capital efficiency and benefited volume, as Rob discussed. Average selling price declined 10% to $452,000 due to regional and product mix, and general market conditions. Average selling price declined 3% sequentially, due primarily to regional mix. Housing gross profit margin was 15.3%, and adjusted housing gross profit margin, which excludes $2.2 million of inventory-related charges, was 15.5%. Adjusted housing gross profit margin was 480 basis points lower, primarily due to pricing pressure, higher relative land costs, regional mix, and lower operating leverage.

Speaker #2: Deliveries benefited from a 22% reduction in build times for build-to-order homes to $108 days, a 9% sequential reduction. Lower build times increased capital efficiency and benefit volume as Rob discussed.

Speaker #2: Average selling price declined 10% to $452,000 due to regional and product mix and general market conditions. Average selling price declined 3% sequentially due primarily to regional mix.

Speaker #2: Housing gross profit margin was 15.3%, and adjusted housing gross profit margin, which excludes $2.2 million of inventory-related charges, was 15.5%. Adjusted housing gross profit margin was 480 basis points lower primarily due to pricing pressure, higher relative land costs, regional mix, and lower operating leverage.

Speaker #2: We continue to manage cost-effectively and achieved an 8% reduction in total direct construction costs per unit. SG&A, as a percent of housing revenue, increased to 12.2%, as lower costs were offset by a decrease in operating leverage.

Robert Dillard: We continue to manage costs effectively and achieved an 8% reduction in total direct construction costs per unit. SG&A as a percent of housing revenue increased to 12.2% as lower costs were offset by a decrease in operating leverage. SG&A expense decreased 14% due to reduced selling expenses associated with lower unit volume and fixed cost controls. SG&A benefited from a favorable impact of an $8 million insurance recovery. While such recoveries occur from time to time, the absolute size and relative impact of this quarter's recovery was greater than usual. Homebuilding operating income for Q1 decreased to $33 million, or 3.1% of homebuilding revenues. Net income was $33 million, or $0.52 per diluted share, benefiting from a 13% reduction in our weighted average diluted shares outstanding. Turning now to our guidance.

Rob Dillard: We continue to manage costs effectively and achieved an 8% reduction in total direct construction costs per unit. SG&A as a percent of housing revenue increased to 12.2% as lower costs were offset by a decrease in operating leverage. SG&A expense decreased 14% due to reduced selling expenses associated with lower unit volume and fixed cost controls. SG&A benefited from a favorable impact of an $8 million insurance recovery. While such recoveries occur from time to time, the absolute size and relative impact of this quarter's recovery was greater than usual. Homebuilding operating income for Q1 decreased to $33 million, or 3.1% of homebuilding revenues. Net income was $33 million, or $0.52 per diluted share, benefiting from a 13% reduction in our weighted average diluted shares outstanding. Turning now to our guidance.

Speaker #2: SG&A expense decreased 14% due to reduced selling expenses associated with lower unit volume and fixed cost controls. SG&A benefited from a favorable impact of an $8 million insurance recovery, while such recoveries occur from time to time.

Speaker #2: The absolute size and relative impact of this quarter's recovery was greater than usual. Home-building operating income for the first quarter decreased to $33 million, or 3.1% of home-building revenues. Net income was $33 million, or $0.52 per diluted share, benefiting from a 13% reduction in our weighted average diluted shares outstanding.

Speaker #2: Turning now to our guidance. Our guidance for the second quarter and full year 2026 reflects the current uncertainty of the new home market, which we believe has been impacted by affordability concerns and recent geopolitical tensions.

Robert Dillard: Our guidance for Q2 and full year 2026 reflects the current uncertainty of the new home market, which we believe has been impacted by affordability concerns, and recent geopolitical tensions. We continue to focus on controlling the controllables and have improved our operations with lower build times and lower costs. We believe that this operational improvement, combined with our strategy to shift to a higher mix of built-to-order homes, will further benefit our financial results in H2 2026 and beyond, as Rob detailed in his comments. In Q2 2026, we expect to generate housing revenues between $1.05 and $1.15 billion based on expected deliveries of between 2,250 and 2,450 homes.

Rob Dillard: Our guidance for Q2 and full year 2026 reflects the current uncertainty of the new home market, which we believe has been impacted by affordability concerns, and recent geopolitical tensions. We continue to focus on controlling the controllables and have improved our operations with lower build times and lower costs. We believe that this operational improvement, combined with our strategy to shift to a higher mix of built-to-order homes, will further benefit our financial results in H2 2026 and beyond, as Rob detailed in his comments. In Q2 2026, we expect to generate housing revenues between $1.05 and $1.15 billion based on expected deliveries of between 2,250 and 2,450 homes.

Speaker #2: We continue to focus on controlling the controllables and have improved our operations with lower build times and lower costs. We believe that this operational improvement, combined with our strategy to shift to a higher mix of build-to-order homes, will further benefit our financial results in the second half of 2026 and beyond, as Rob detailed in his comments.

Speaker #2: In the second quarter of 2026, we expect to generate housing revenues between $1.05 and $1.15 billion, based on expected deliveries of between 2,250 and 2,450 homes.

Speaker #2: Housing gross profit margin, assuming no inventory-related charges, is expected to be between 15% and 15.6% for the second quarter of 2026. Price will continue to be the primary driver for margin pressure as we balance price and pace for the remainder of the year.

Robert Dillard: Housing gross profit margin, assuming no inventory-related charges, is expected to be between 15% and 15.6% for Q2 of 2026. Price will continue to be the primary driver for margin pressure as we balance price and pace for the remainder of the year. Margins are expected to be impacted by higher relative land costs, regional mix, and reduced operating leverage as deliveries are expected to remain below prior year levels. We expect to continue to partially offset this margin pressure with lower direct construction costs per unit. We continue to expect margins to improve in H2 of 2026, driven largely by positive operating leverage from typical seasonality and a more favorable regional mix with a shift to higher price, higher margin West Coast communities, as well as our strategy to increase the mix of built-to-order homes delivered.

Rob Dillard: Housing gross profit margin, assuming no inventory-related charges, is expected to be between 15% and 15.6% for Q2 of 2026. Price will continue to be the primary driver for margin pressure as we balance price and pace for the remainder of the year. Margins are expected to be impacted by higher relative land costs, regional mix, and reduced operating leverage as deliveries are expected to remain below prior year levels. We expect to continue to partially offset this margin pressure with lower direct construction costs per unit. We continue to expect margins to improve in H2 of 2026, driven largely by positive operating leverage from typical seasonality and a more favorable regional mix with a shift to higher price, higher margin West Coast communities, as well as our strategy to increase the mix of built-to-order homes delivered.

Speaker #2: Margins are expected to be impacted by higher relative land costs, regional mix, and reduced operating leverage, as deliveries are expected to remain below prior-year levels.

Speaker #2: We expect to continue to partially offset this margin pressure with lower direct construction costs per unit. We continue to expect margins to improve in the second half of 2026, driven largely by positive operating leverage from typical seasonality and a more favorable regional mix, with a shift to higher-price, higher-margin West Coast communities.

Speaker #2: As well as our strategy to increase the mix of build-to-order homes delivered. The second quarter 2026 SG&A ratio is expected to be between 12.4% and 13% due to expected reduced operating leverage, despite cost controls.

Robert Dillard: The Q2 2026 SG&A ratio is expected to be between 12.4% and 13% due to expected reduced operating leverage despite cost controls. We had solid results reducing both fixed costs and direct construction costs in Q1, and we expect this to continue in the remainder periods of 2026. We expect our SG&A ratio to decline in H2 2026 due to lower fixed costs and increased volume. Our effective tax rate for Q2 is expected to be approximately 19%. The tax rate is expected to trend higher in H2 2026 due to reduced impact of energy credits. For the full year 2026, we expect housing revenues of between $4.8 and $5.5 billion based on between 10,000 and 11,500 deliveries.

Rob Dillard: The Q2 2026 SG&A ratio is expected to be between 12.4% and 13% due to expected reduced operating leverage despite cost controls. We had solid results reducing both fixed costs and direct construction costs in Q1, and we expect this to continue in the remainder periods of 2026. We expect our SG&A ratio to decline in H2 2026 due to lower fixed costs and increased volume. Our effective tax rate for Q2 is expected to be approximately 19%. The tax rate is expected to trend higher in H2 2026 due to reduced impact of energy credits. For the full year 2026, we expect housing revenues of between $4.8 and $5.5 billion based on between 10,000 and 11,500 deliveries.

Speaker #2: We had solid results reducing both fixed costs and direct construction costs in the first quarter, and we expect this to continue in the remainder of 2026.

Speaker #2: We expect our SG&A ratio to decline in the second half of the year due to lower fixed costs and increased volume. Our effective tax rate for the second quarter is expected to be approximately 19%.

Speaker #2: The tax rate is expected to trend higher in the second half of 2026 due to reduced impact of energy credits. For the full year 2026, we expect housing revenues of between $4.8 and $5.5 billion, based on between 10,000 and 11,500 deliveries.

Speaker #2: This full-year guidance is based on current market conditions. We anticipate refining full-year guidance and providing additional details as we gain further clarity on the spring selling season.

Robert Dillard: This full year guidance is based on current market conditions. We anticipate refining full year guidance and providing additional details as we gain further clarity on the spring selling season. Turning now to the balance sheet. We continue to manage our capital with discipline, with a dual focus on funding growth and returning excess capital to shareholders. With over $5.7 billion in inventories, a 1% sequential increase, we believe that we are well-positioned to fund growth in the near and long term. We own or control over 63,000 lots, including approximately 26,000 lots that we have the option to purchase.

Rob Dillard: This full year guidance is based on current market conditions. We anticipate refining full year guidance and providing additional details as we gain further clarity on the spring selling season. Turning now to the balance sheet. We continue to manage our capital with discipline, with a dual focus on funding growth and returning excess capital to shareholders. With over $5.7 billion in inventories, a 1% sequential increase, we believe that we are well-positioned to fund growth in the near and long term. We own or control over 63,000 lots, including approximately 26,000 lots that we have the option to purchase.

Speaker #2: Turning now to the balance sheet. We continue to manage our capital with discipline, with a dual focus on funding growth and returning excess capital to shareholders.

Speaker #2: With over $5.7 billion in inventories, a 1% sequential increase, we believe that we are well positioned to fund growth in the near and long term.

Speaker #2: We own or control over 63,000 lots, including approximately 26,000 lots that we have the option to purchase. We continue to invest in growth, as indicated by the $567 million we invested in land and development, while also exercising discipline through our rigorous underwriting standards that resulted in abandoning contracts to purchase 3,400 lots at a cost of $2.2 million.

Robert Dillard: We continue to invest in growth as indicated by the $567 million we invested in land and development, while also exercising discipline through our rigorous underwriting standards that resulted in abandoning contracts to purchase 3,400 lots at a cost of $2.2 million. We believe that this rigorous land process has improved the quality of our land inventory and will benefit future profitability. We're confident that we'll continue to identify and execute land opportunities, matching our consistent cash flow and considerable liquidity. At quarter end, we had total liquidity of $1.2 billion, consisting of $201 million in cash and $1 billion available under our $1.2 billion revolving credit facility. As with last year, the $200 million in utilization of our revolving credit facility is seasonal in nature.

Rob Dillard: We continue to invest in growth as indicated by the $567 million we invested in land and development, while also exercising discipline through our rigorous underwriting standards that resulted in abandoning contracts to purchase 3,400 lots at a cost of $2.2 million. We believe that this rigorous land process has improved the quality of our land inventory and will benefit future profitability. We're confident that we'll continue to identify and execute land opportunities, matching our consistent cash flow and considerable liquidity. At quarter end, we had total liquidity of $1.2 billion, consisting of $201 million in cash and $1 billion available under our $1.2 billion revolving credit facility. As with last year, the $200 million in utilization of our revolving credit facility is seasonal in nature.

Speaker #2: We believe that this rigorous land process has improved the quality of our land inventory and will benefit future profitability. We're confident that we'll continue to identify and execute land opportunities matching our consistent cash flow and considerable liquidity.

Speaker #2: At quarter-end, we had total liquidity of $1.2 billion, consisting of $201 million in cash and $1 billion available under our $1.2 billion revolving credit facility.

Speaker #2: As with last year, the $200 million in utilization of our revolving credit facility is seasonal in nature. We have no debt maturities until June of 2027, and we will continue to be thoughtful in managing our capital structure to ensure we capitalize on favorable market conditions to refinance any maturities.

Robert Dillard: We have no debt maturities until June 2027. We will continue to be thoughtful in managing our capital structure to ensure we capitalize on favorable market conditions to refinance any maturities. We continue to target a debt-to-capital ratio in the neighborhood of 30% to support our strong BB+ credit rating. We are comfortable with our current 32.9% ratio. Our strong balance sheet, combined with the returns from our operations, has enabled us to return over $1.9 billion to shareholders in the form of dividends and share repurchases in the past four and a half years. In this period, we have repurchased 37% of our shares outstanding, which we believe is the highest percentage of shares repurchased during this time.

Rob Dillard: We have no debt maturities until June 2027. We will continue to be thoughtful in managing our capital structure to ensure we capitalize on favorable market conditions to refinance any maturities. We continue to target a debt-to-capital ratio in the neighborhood of 30% to support our strong BB+ credit rating. We are comfortable with our current 32.9% ratio. Our strong balance sheet, combined with the returns from our operations, has enabled us to return over $1.9 billion to shareholders in the form of dividends and share repurchases in the past four and a half years. In this period, we have repurchased 37% of our shares outstanding, which we believe is the highest percentage of shares repurchased during this time.

Speaker #2: We continue to target a debt-to-capital ratio in the neighborhood of 30% to support our strong double-B positive credit rating, and we are comfortable with our current 32.9% ratio.

Speaker #2: Our strong balance sheet, combined with the returns from our operations, has enabled us to return over $1.9 billion to shareholders in the form of dividends and share repurchases in the past four and a half years.

Speaker #2: In this period, we have repurchased 37% of our shares outstanding, which we believe is the highest percentage of shares repurchased during this time among our peer companies.

Rob McGibney: Among our peer companies. Returning capital remains a core part of our focus on delivering strong total shareholder returns in all market conditions. In Q1, we paid $17 million in dividends, representing a 1.8% yield, and we repurchased 843,000 shares for a return of capital of $50 million. We ended the quarter with $850 million available under our current repurchase authorization. We expect to repurchase between $50 and 100 million of common stock in Q2. As we look ahead, our strategy is to enhance our results through increased operating rigor as we shift our delivery mix towards higher margin built-to-order homes. We believe that this operating strategy, when combined with our shareholder-focused capital strategy, will maximize shareholder value over the long term. With that, we'll now take your questions.

Speaker #2: Returning capital remains a core part of our focus on delivering strong total shareholder returns in all market conditions. In the first quarter, we paid $17 million in dividends, representing a 1.8% yield, and we repurchased 843,000 shares for a return of capital of $50 million.

Speaker #2: We ended the quarter with $850 million available under our current repurchase authorization, and we expect to repurchase between $50 million and $100 million of common stock in the second quarter.

Speaker #2: As we look ahead, our strategy is to enhance our results through increased operating rigor, as we shift our delivery mix towards higher-margin, build-to-order homes.

Speaker #2: We believe that this operating strategy, when combined with our shareholder-focused capital strategy, will maximize shareholder value over the long term. With that, we'll now take your questions.

Speaker #2: John, would you please open the line?

Rob McGibney: John, would you please open the line?

Speaker #1: Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad.

Operator: Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up. Thank you. One moment please, while we poll for questions. The first question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Speaker #1: A confirmation tone will indicate that your line is in the queue. You may press star two if you'd like to remove your question from the queue.

Speaker #1: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up.

Speaker #1: Thank you. One moment, please, while we pull for questions. And the first question comes from the line of Matthew Boulay with Barclays. Please proceed with your question.

Speaker #3: Hey, good afternoon, everyone. Thanks for taking the questions. So first, I guess, based on the numbers you gave around inventory homes, it seems like the build-to-order orders really improved kind of beyond what you'd get just from cutting spec starts.

Matthew Bouley: Hey, good afternoon, everyone. Thanks for taking the questions. First, I guess based on the numbers you gave around inventory homes, it seems like the built-to-order orders really improved kind of beyond what you'd get just from cutting spec starts. My question is, obviously, you know, we talk about the sort of gross margin benefit that's pretty clear. You know, when you talk about mixing the business back to built-to-order, maybe this will be a preview of your Investor Day a little bit. What does that kind of more full and visible backlog do for your sales folks, your operators? What changes around your thought process on production and starts? Just any more color on why the business overall runs better relative to spec production.

Speaker #3: So, my question is, obviously, we, you know, we talk about the sort of gross margin benefit that that's pretty clear, but, you know, w-when you talk about mixing the business back to build-to-order, and maybe this will be a preview of your investor day a little bit, but what does that kind of more full and visible backlog do for your sales folks, your operators, what changes around your thought process on, on production, and starts, just any more color on, on why the business overall runs better relative to spec production?

Rob McGibney: Sure. Matthew, thanks for the question. When we look at our built-to-order business, as I mentioned in my prepared remarks, it's really part of our DNA. It's how we set up things. It's how we look at the world. It's how we train our salespeople. You know, we're not surprised to see the shift to built-to-order. Part of it is just we haven't been starting the specs, or we're not competing with ourselves in our own communities with both, you know, heavy spec load as well as built-to-order. The benefit that it provides to the business in predictability, you know, the first place I would go is that we've got this backlog of sold, not started homes that we can leverage. That gives us a cadence where we can operate on even flow production.

Speaker #2: Sure, Matthew. Thanks for the question. You know, when we look at our build-to-order business, as I mentioned in my prepared remarks, it's really part of our DNA.

Speaker #2: It's how we set up things. It's how we look at the world. It's how we train our salespeople. So, you know, we're not surprised to see the shift to build-to-order, and part of it is just we haven't been starting the specs, or we're not competing with ourselves in our own communities with both, you know, heavy spec load as well as build-to-order.

Speaker #2: But the benefits that it provides to the business in predictability—you know, the first place I would go is that we've got this backlog of sold, not started homes that we can leverage. That gives us a cadence where we can operate on even-flow production.

Speaker #2: That benefits all across the board, whether that's on our fixed cost or just managing to a consistent level of construction in our communities. Plus, we can use that, that cash, if you will, of homes that we have sold, not started, because it also gives our trade partners visibility.

Rob McGibney: That benefits all across the board, whether that's on our fixed cost or just managing to a consistent level of construction in our communities. Plus we can use that cash, if you will, of homes that we have sold not started because it also gives our trade partners visibility. Most of the markets that we're operating in right now, we're seeing starts are down pretty significantly year over year, and there are trade partners that are hungry for work. That's the first place that we point to with this guaranteed kind of sequence of starts that's coming up. You mentioned it, but one of the obvious ones is the big margin, incremental margin that we see within the same community selling built-to-order versus the inventory. From a customer's perspective, our view, my view is that we're creating something different.

Speaker #2: And most of the markets that we're operating in right now, we're seeing starts are down pretty significantly year over year, and there are trade partners that are hungry for work.

Speaker #2: So that's the first place that we point to with this guaranteed, kind of sequence of starts that's coming up. You mentioned it, but one of the obvious ones is the big margin, incremental margin that we see within the same community selling build-to-order versus the inventory.

Speaker #2: And from a customer's perspective, our view—my view—is that we're creating something different. And it's not just treating a home like a commodity or a widget, where people take what's out there and available, but they're getting to create their own personal value by picking their lot, picking their floor plan, picking their elevation, going through the design studio process, and really making that home their own and designing it to fit their needs and their lifestyle.

Rob McGibney: It's not just treating a home like a commodity or a widget where people take what's out there and available, but they're getting to create their own personal value by picking their lot, picking their floor plan, picking their elevation, going through the Design Studio process, and really making that home their own and designing it to fit their needs and their lifestyle and fit their budget as well, so.

Speaker #2: And fit their budget as well. So.

Speaker #3: Okay, got it. No, that's super helpful. Thank you for all that. Second one, just kind of jumping into the guide. So, I mean, you know, talked about, I guess, removing roughly 1,000 deliveries from the full-year guide.

Matthew Bouley: Okay. Got it. No, that's super helpful. Thank you for all that. Second one, just kind of jumping into the guide. I mean, you know, talked about, I guess removing 1,000 deliveries from the full year guide. You know, Q1 orders were up year over year. I know you mentioned that it wasn't the level you needed to hold on to the guide. What I'm trying to get at is, I guess, was that Q1 order number the entire driver of the guidance change, or is this, you know, should we also think, you know, you're trying to reflect any more recent shifts in the market, in March, you know, or any other changes on kind of the progression towards built-to-order?

Speaker #3: you know, Q1 orders, we're, we're up year over year. I, I know you mentioned that it, it wasn't the level you needed to, to hold onto the guide.

Speaker #3: what I'm trying to get at is, I guess, was that Q1 order number, the entire driver of the guidance change, or, or is this, you know, should we also think, you know, you're trying to reflect any more recent shifts in the market, in March, you know, or any other changes on, on kind of the progression towards build-to-order?

Speaker #3: A—Any, anything else that's kind of changed relative to when you gave this guidance in January? Thank you.

Matthew Bouley: Anything else that's kind of changed relative to when you gave this guidance in January? Thank you.

Speaker #2: Yeah, it’s really the combo of the things that you mentioned. Part of it is the orders. Our orders—well, you know, it was a positive year-over-year comp, and we’re pleased with the transition to more BTO sales.

Rob McGibney: Yeah, it's really the combo of the things that you mentioned. Part of it is the orders. Our orders, while you know it was a positive year-over-year comp, and we're pleased with the transition to more BTO sales, were below our internal expectations that we had and how we built the plan for the year. You know, as we get into the early part of March, you know, there's a lot of noise out there. We mentioned in our prepared remarks this conflict in the Middle East. That started right at the end of February, and we saw pretty good sales results the first week of March. The last couple of weeks have been a little softer than what we would like to see or what we normally get this time of year.

Speaker #2: They were below our internal expectations that we had and how we built the plan for the year. You know, as we get into the early part of, of March, you know, there's a lot of noise out there.

Speaker #2: And we, we mentioned in our prepared remarks this conflict in the Middle East. That started right at the end of February, and we saw pretty good sales results the first week of March.

Speaker #2: But the last couple of weeks have been a little softer. Then what we would like to see or what we normally get this time of year, and we just don't have a lot of, a lot of visibility right now, is I don't think anybody does, into how long this conflict may go on and how it's going to impact consumer psyche and confidence.

Rob McGibney: We just don't have a lot of visibility right now, as I don't think anybody does, into how long this conflict may go on and how it's going to impact consumer psyche and confidence. We feel that right now it's weighing on the consumer. Those are really the two reasons why we adjusted the guide and provided a little wider range than we normally would for full year deliveries and revenue because of the lack of visibility we've got into the short-term kind of acute nature of the market right now.

Speaker #2: But we feel it right now. It's—it's weighing on the consumer. So, those are really the two reasons why we adjusted the guide and provided a little wider range than we normally would for full-year deliveries and revenue, because of the lack of visibility we've got into the short-term, kind of acute nature of the market right now.

Speaker #3: And the next question will come from the line of John Lovalla with UBS. Please proceed with your question.

Operator: The next question will come from the line of John Lovallo with UBS. Please proceed with your question.

Speaker #4: Hey, good evening, guys. This is actually Matt Johnson on for John. I appreciate the time. I guess first, if we could just talk about gross margin a little bit, if I recall.

Matthew Johnson: Hey, good evening, guys. This is actually Matthew Johnson on for John. Appreciate the time. I guess first, if we could just talk about gross margin a little bit. If I recall, I think last quarter you guys had expected Q1 to be the low point for the year on gross margin. Now it looks like at the midpoint of your outlook, you're expecting Q2 to be down from Q1. If you guys could just give us some more color on what's driving that, kinda what's giving you guys confidence that margin will in fact ramp from Q2 to Q3. If you guys could give us some numbers.

Speaker #4: I think last quarter, you guys had expected Q1 to be the low point for the year. On gross margin, now it looks like at the midpoint of your outlook, you're expecting Q2 to be down from Q1.

Speaker #4: So I guess if you guys could just give us some more color on what's driving that—kind of what's giving you guys confidence that margin will, in fact, ramp from Q2 to Q3—and then, just if you guys could give us some numbers.

Speaker #4: I think you gave some numbers on the mix of BTO versus spec orders, but if you could give some numbers around the mix of BTO versus spec deliveries in Q1 versus Q2, that would be great.

Matthew Johnson: I think you gave some numbers on the mix of BTO versus spec orders, but if you could give some numbers around the mix of BTO versus spec deliveries in Q1 versus Q2, that would be great.

Speaker #2: Yeah, you know, as we thought about the sequential mix on where gross profit's gonna go, I think that we think that it's actually relatively flat, as we're guiding to a range.

Robert Dillard: As we thought about the sequential mix on where gross profit's gonna go, I think it's actually relatively flat. As we're guiding to a range, we're putting a range out there that we feel comfortable with. I think that if you think about the drivers individually between quarters sequentially, we don't expect meaningful changes in price, but we do expect to continue to get some delivery cost reductions. I think there should also be some mix factor in there that's gonna be driving it down before we see the ramp. As you think about H2, it's something that we've been talking about in the past, that the shift to BTO should accumulate to an increase in gross profit margin.

Rob Dillard: As we thought about the sequential mix on where gross profit's gonna go, I think it's actually relatively flat. As we're guiding to a range, we're putting a range out there that we feel comfortable with. I think that if you think about the drivers individually between quarters sequentially, we don't expect meaningful changes in price, but we do expect to continue to get some delivery cost reductions. I think there should also be some mix factor in there that's gonna be driving it down before we see the ramp. As you think about H2, it's something that we've been talking about in the past, that the shift to BTO should accumulate to an increase in gross profit margin.

Speaker #2: We're putting a range out there that we feel comfortable with. I think that if you think about the drivers individually between quarters sequentially, we don't expect meaningful changes in price, but we do expect to continue to get some delivery.

Speaker #2: Cost reductions. So I think there should also be some mixed factor in there that's going to be driving it down before we see the ramp.

Speaker #2: As you think about the second half of the year, it's something that we've been talking about in the past—that the shift to BTO should accumulate to an increase in gross profit margin.

Speaker #2: We, we do expect some seasonal, unit uplift that we would that we've kind of that's implicit in the guide, that should have some uplift in margins.

Robert Dillard: We do expect some seasonal unit uplift that's implicit in the guide, and that should have some uplift in margins. Also, you know, further cost reductions should have a benefit as well. It's really those three factors that we think are gonna benefit the margins as we go through the year. We are pretty confident in that because we're selling the houses now and marketing the houses now. That's one of the benefits of the model is that we know the margins of the BTO house before we build it, whereas with a spec, you kind of never know until it's done.

Rob Dillard: We do expect some seasonal unit uplift that's implicit in the guide, and that should have some uplift in margins. Also, you know, further cost reductions should have a benefit as well. It's really those three factors that we think are gonna benefit the margins as we go through the year. We are pretty confident in that because we're selling the houses now and marketing the houses now. That's one of the benefits of the model is that we know the margins of the BTO house before we build it, whereas with a spec, you kind of never know until it's done.

Speaker #2: And then also, you know, further cost reduction should have a benefit as well. So, it's really those three factors that we think are going to benefit the margins as we go through the year.

Speaker #2: And we have pretty confidence in that because we're selling the houses now and, and, and marketing the houses now. And that's one of the benefits of the model is that we know the margins of the BTO house before we build it, whereas with the spec, you kind of never know until it's done.

Rob McGibney: Yeah, I'd add to that as we look towards the back half of the year. I mentioned it in my prepared remarks, but we have a lot of things that are just structurally different that we see that are gonna lift margins. Rob mentioned the shift to BTO, leverage on fixed with greater scale. A big one that I mentioned is the shift or the transition back to a bigger, better business in Northern California. As we look to H2, we're getting deliveries from communities, from stores that are open in Northern California today that have a much higher ASP and have very healthy margins. As those become deliveries, some of these average selling prices are between $1.2 to over $2 million.

Speaker #4: At, at that, as we as we look out to towards the back half of the year, I mentioned it in my prepared remarks, but we, we have a lot of things that are just structurally different that we see that are gonna lift margins.

Speaker #4: And Rob mentioned the shift to BTO—leverage on fixed with greater scale. But a big one that I mentioned is the shift, or the transition, back to a bigger, better business in Northern California.

Speaker #4: So, as we look to the back half of the year, we're getting deliveries from communities, from stores that are open in Northern California today, that have a much higher ASP and have very healthy margins.

Speaker #4: And as those become deliveries, some of these average selling prices are between $1.2 million to over $2 million. So it has a big impact on the overall company margins.

Rob McGibney: It has a big impact on the overall company margins, and we see that happening today. You know, if you think about Northern California, we've gone through a little bit of a trough here with communities over the last couple of years. It used to be one of our biggest, most profitable businesses. In that area of the country, it takes a really long time to bring lots to market. We've been working on these things for years. They're finally here. We're delivering them. We like what we see, and it's gonna provide a real tailwind for margins on the back half of this year.

Speaker #4: And we see that happening today. You know, as you think about Northern California, we've gone through a little bit of a trough here with communities over the last couple of years.

Speaker #4: It used to be one of our biggest, most profitable businesses. And in that area of the country, it takes a really long time to bring lots to market.

Speaker #4: So, we've been working on these things for years. They're finally here. We're delivering them. We like what we see, and it's going to provide a real tailwind for margins in the back half of this year.

Matthew Johnson: Yeah, that all makes a lot of sense. I appreciate all the color there. I guess then if I could just follow up on the direct costs specifically. I think you guys said they were down 8% year over year, which is really strong, obviously. Although it sounded like there were some puts and takes within that. So I guess if you guys could just talk a little bit more about the impact from materials versus labor within that. Obviously, it's early days here, but any disruption from what's going on in the Middle East, just broader supply chain, kind of what you're hearing from your suppliers in terms of potential price or availability impacts there.

Speaker #4: Yeah, that all makes a lot of sense. I appreciate all the color there. I guess then, if I could just follow up on the direct costs specifically—I think you guys said they were down 8% year over year, which is really strong, obviously.

Speaker #4: Although it sounded like there were some puts and takes within that, so I guess if you guys could just talk a little bit more about the impact from materials versus labor within that, and then just any—obviously it's early days here—but any disruption from what's going on in the Middle East, just broader supply chain, kind of what you're hearing from your suppliers in terms of potential price or availability impacts there.

Speaker #2: Yeah, you know, overall, we, like you noted, the number year over year, we've made good progress with the things that we can control.

Rob McGibney: Yeah. You know, overall, we, like you noted, the numbers year over year, have made good progress with the things that we could control, in value engineering our products, in rebidding and renegotiating, reworking our national contracts. So that's all structural and will stand. Lumber has started to tick up here recently, and we've got various locks in a lumber strategy where we have different lock periods for different divisions, and there's potentially some tailwind or headwind coming from that as we re-lock some of these, depending on what happens with lumber. But we think that our strategy is sound there and don't think that it's going to be a significant impact. Likely, you know, it may just be an offset to further direct cost reductions that we'd otherwise be able to go out and get and achieve.

Speaker #2: And value engineering in our products, and rebidding and renegotiating, reworking our national contracts. So that's all structural, and will stand. Lumber has started to tick up here recently.

Speaker #2: And we've got various locks in a lumber strategy, where we have different lock periods for different divisions. And there's potentially some tailwind or headwind coming from that as we relock some of these, depending on what happens with lumber.

Speaker #2: But we think that our strategy is sound there. And don't think that it's going to be a significant impact. And likely, you know, it may just be an offset to further direct cost reductions that we'd otherwise be able to go out and get and achieve.

Rob McGibney: As far as the impact from the situation in the Middle East, it's just really difficult to tell. With oil prices being higher, certainly that can bleed into land development and vertical construction. You know, a lot of the products that go into a home, there's petroleum that's involved in those products at some point. Potential cost increases there. We're hopeful that we can continue to offset that with some of the proactive things that we're doing, but it really is a total unknown at this point.

Speaker #2: As far as the impact from the situation in the Middle East, it's just really difficult to tell. With oil prices being higher, certainly that can bleed into land development and vertical construction.

Speaker #2: And then, you know, a lot of the products that go into a home—there's petroleum that's involved in those products at some point. So, potential cost increases there.

Speaker #2: We're hopeful that we can continue to offset that with some of the proactive things that we're doing. But it really is a total unknown at this point.

Matthew Johnson: Okay. I see.

Speaker #2: We haven't seen it yet. It hasn't showed up yet in our cost.

Rob McGibney: We haven't seen it yet. It hasn't showed up yet in our costs.

Speaker #4: Thank you. And the next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Operator: Thank you. The next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Speaker #5: Yeah, thanks very much, guys. Appreciate it. Yeah, the move to BTO is very clear. It's obvious that there's some margin benefits there.

Stephen Kim: Yeah. Thanks very much, guys. Appreciate it. Yeah, the move to BTO is very clear. It's obvious that there's some margin benefits there. With it, though, you're probably also gonna see, you would think, slower backlog turns and maybe a temporary drag on cash flow. I'm trying to get a sense for, you know, what we should be thinking in terms of a going forward backlog turnover ratio. You know, in 2017 to 2019, you know, pre-COVID, you were kind of running at, like, your exit rate of the year, your Q4, which usually was your highest, was, like, kind of in the low 60s. I'm wondering, is that, like, kind of a reasonable level that we should be thinking about for the business to kind of return back to that kind of a level?

Speaker #5: With it, though, you're probably also gonna see, you would think, slower backlog turns and maybe a temporary drag on cash flow. I'm trying to get a sense for, you know, what we should be thinking in terms of a going forward backlog turnover ratio. You know, in 2017 to 2019, you know, pre-COVID, you were kind of running at, like, your exit rate of the year—your fourth quarter, which usually was your highest—was kind of in the low 60s.

Speaker #5: I'm wondering, is that like kind of a reasonable level that we should be thinking about for the business to kind of return back to that kind of a level?

Stephen Kim: Do you think you can do better than that? You know, I noticed you said your build time was, like, 3.5 months. That would imply a backlog turnover ratio of, like, 86%. I mean, just some guidance here or some color would be really helpful.

Speaker #5: Or do you think you can do better than that? You know, I noticed you said your build time was like three and a half months.

Speaker #5: That would imply a backlog turnover ratio of like 86%. So, I mean, just some guidance here or some color would be really helpful.

Rob McGibney: Yeah, we don't really think about the business that way, but I think somewhere between that 60 number and the 80 number is probably where we'll fall. You know, the backlog turn that we've had has kind of been a false read versus what our typical business is because we're going into a quarter and we may have, you know, 500, 600, 700 sales, same quarter sales and closings of inventory turn that weren't in that beginning backlog number. It's pumping up that ratio. With our build times where we've got them, and we build the plan from the ground up when we do our quarterly and full year plans, and we're banking on the cycle time improvements, the build time improvements that we've gotten so far.

Speaker #2: So, yeah, we don't really think about the business that way. But I think somewhere between that 60 number and the 80 number is probably where we'll fall.

Speaker #2: You know, the backlog turn that we've had has kind of been a false read versus what our typical business is, because we're going into a quarter and, you know, we may have, you know, five, six, seven hundred same-quarter sales and closings of inventory turn that weren't in that beginning backlog number.

Speaker #2: So, it's pumping up that ratio. With our build times where we've got them, and we build the plan from the ground up when we do our quarterly and full-year plans, you know, we're banking on the cycle time improvements, the build time improvements that we've gotten so far.

Speaker #2: But, you know, I think 60 to 70 percent is probably a good target. Yeah.

Rob McGibney: You know, I think 60% to 70% is probably a good target.

Operator: All right.

Stephen Kim: All right.Yeah.

Rob McGibney: Yeah.

Jeff Mezger: Steve, to just clarify one other thing. Our built-to-order approach is actually better with cash. You think about carrying a couple thousand spec homes that you have to sell and close. They're fully loaded, and all the cash is out. We're setting this up where it's real-time deliveries. The home gets completed, the loan's approved, and the buyer goes and closes. It's actually better cash management if you can just roll through the WIP sold at the percentage we're targeting.

Speaker #3: Hey, Steve, just to clarify one other thing. Our built-to-order approach is actually better with cash. If you think about carrying a couple thousand spec homes that you have to sell and close, they're fully loaded and all the cash is out.

Speaker #3: And we're setting this up where it's real-time deliveries. The home gets completed, the loan's approved, and the buyer goes and closes. So it's actually better cash management if you can just roll through the WIP, sold at the percentage we're targeting.

Speaker #4: Gotcha. Okay, that's really helpful. Then, another side effect of moving to more BTO is that it potentially exposes you to higher cancellation rates. I know cancellation rates are super low this quarter.

Stephen Kim: Gotcha. Okay. That's really helpful. Another side effect of moving to more BTO is that it potentially exposes you to higher cancellation rates. I know cancellation rates were super low this quarter. It's one of the things I've been thinking about is that, you know, your customer deposits as a percentage of ASP are about 2%, which is, you know, pretty low even for other builders relative to other built-to-order builders. I know you've traditionally run with some lower, you know, customer deposits than other builders. I'm curious if you could sort of talk about why that is, what why you adopt that as part of your strategy, and is that something that you might, you know, change going forward?

Speaker #4: And it, it, it's—one of the things I've been thinking about is that, you know, your customer deposits as a percentage of ASP are about 2%.

Speaker #4: which is, you know, pretty low, even for other built to, relative to other built-to-order builders. And I know I, I know you've traditionally run with some lower, you know, depos customer deposits.

Speaker #4: …than other builders. And I'm curious if you could sort of talk about why that is—what it is, why you adopt that as part of your strategy.

Speaker #4: And, and is that something that you might, you know, change going forward?

Rob McGibney: Steve, I'd say it's something that we always evaluate and we might change going forward depending on market conditions. You know, when market conditions are really strong, it's easier to command a higher deposit. Today, with the way things stand, we don't want to let that deposit up front be a major obstacle to somebody purchasing their home. My view on it is that when somebody comes in and buys a personalized home, and they go through that process that I described earlier, and they're creating their own personal value that's unique to them, that's as much of a hook at getting them to stay in the deal as the deposit is. We don't anticipate that we're going to have a real issue with cancellations. The backlog quality that we've got, the buyer profile is very healthy.

Speaker #2: Steve, I'd say it's something that we always evaluate, and we might change going forward depending on market conditions. You know, when market conditions are really strong, it's easier to command a higher deposit.

Speaker #2: But today, with the way things stand, we don't want to let that deposit upfront be a major obstacle to somebody purchasing their home. And my view on it is that when somebody comes in and buys a personalized home, and they go through that process that I described earlier, and they're creating their own personal value that's unique to them, that's as much of a hook to getting them to stay in the deal as the deposit is.

Speaker #2: So we, we, we don't anticipate that we're going to have a real issue with cancellations. The backlog quality that we've got, the buyer profile is very healthy.

Rob McGibney: They're creating their own value in their home, and we feel good about how we're positioned with that.

Speaker #2: They're creating their own value in their home. And we feel good about how we're positioned with that.

Operator: Thank you. The next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.

Speaker #4: Thank you. And the next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.

Michael Rehaut: Thanks. Good afternoon, everyone. Thanks for taking my questions. I wanted to first just revisit kind of the Q1 and March to date sales trends, which was obviously behind the guidance reduction, and also just better understand, if possible, how the year-over-year sales pace trended throughout the Q1 in terms of December, January, February, and if there's any incremental color in terms of, you know, at least on a year-over-year basis, how that kind of played into March.

Speaker #5: Thanks. Good afternoon, everyone. Thanks for taking my questions. I wanted to first just revisit kind of the first quarter, and March to date sales trends, which was obviously behind the guidance reduction.

Speaker #5: And also, just to better understand, if possible, how the year-over-year sales pace trended throughout the first quarter in terms of December, January, February, and if there's any incremental color in terms of, you know, at least on a year-over-year basis, how that kind of played into March.

Rob McGibney: Sure. Our sales cadence or the order cadence progressed generally as we would expect seasonally, really improving each week as the quarter unfolded. As we mentioned, we delivered three and a half sales per community for the quarter. December was a slower start for us and put us behind on our year-over-year comp. We saw solid momentum through January and February and ultimately finished the quarter up 3% year over year. As to March, as I said, the last couple of weeks of March have been a little softer than we would have liked.

Speaker #2: Sure. Our sales cadence, or the order cadence, progressed generally as we would expect, seasonally—really improving each week as the quarter unfolded. And as we mentioned, we delivered 3.5 sales per community for the quarter.

Speaker #2: And December was a slower start for us and put us behind on our year-over-year comp. Then we saw solid momentum through January and February, and ultimately finished the quarter up 3% year-over-year.

Speaker #2: As to March, as I said, the last couple of weeks of March have been a little softer than we would have liked.

Rob McGibney: This conflict in the Middle East, I think, which kicked off right at the end of February, beginning of March, there's clearly some near-term pressure on the consumer psyche from that, and that's one of the things that's limiting some of the visibility in the short term. As I mentioned before, we don't know how long that's gonna go or how long this will weigh on the consumer. We've reflected that, I think, appropriately in our guidance by taking a more measured approach with that, including a wider full-year revenue and delivery range than we'd normally provide at this point.

Speaker #2: And this conflict in the Middle East, I think, which kicked off right at the end of February, beginning of March, there's clearly some near-term pressure on the consumer psyche from that.

Speaker #2: And that's one of the things that's limiting some of the visibility in the short term. But as I mentioned before, we just—we don't know how long that's gonna go or how long this will weigh on the consumer.

Speaker #2: But we've reflected that in, I think, appropriately in our guidance by taking a more measured approach with that, including a wider full-year revenue and delivery range than we'd normally provide at this point.

Michael Rehaut: Okay. That's helpful. I appreciate that. And I guess secondly, you know, with regards to the gross margin outlook for the H2, I know you talked about ASPs in the mix benefiting from California, more California in the H2. I think it'd be extremely helpful if there's any way to kind of size or give any type of rough degree of magnitude or range, 50 bps, 100 bps, 200 bps, however you wanna characterize it.

Speaker #5: Okay, that's helpful. I appreciate that. And I guess, secondly, with regards to the gross margin outlook for the back half, I know you talked about ASPs and the mix benefiting from more California in the back half of the year.

Speaker #5: I think it would be extremely helpful if there’s any way to kind of size, or give any type of rough degree of magnitude or range—50 bps, 100 bps, 200 bps—however you want to characterize it.

Michael Rehaut: Any way to quantify perhaps the degree of magnitude of improvement that you're expecting in Q3 and Q4 gross margins relative to your Q2 guide? I think it would be very, very helpful for people to try and get their arms around, you know, modeling and trying to anticipate what level of improvement you're thinking of at this point.

Speaker #5: But any way to quantify, perhaps, the degree of magnitude of improvement that you're expecting in Q3 and Q4 gross margins relative to your Q2 guide? I think it would be very, very helpful for people to try and get their arms around.

Speaker #5: You know, modeling and trying to anticipate what level of improvement you're thinking of at this point.

Rob McGibney: Yeah, Michael, there's a couple key factors that we're thinking about that have been driving that H2 margin uplift that are giving us a lot of confidence. The first one that I believe we've talked about in the past is the BTO shift. If you can just do the rough math around increasing BTO mix from where it is today to around 70%, and then the 300 to 500 basis points differential in the margin there, that equates to about 50 basis points of margin uplift as you get to that BTO mix where we're targeting. Further, we've got regional mix in there, which is relatively meaningful.

Speaker #2: Yeah, Michael. There are a couple key factors that we're thinking about that have been driving that second half margin uplift, that are giving us a lot of confidence.

Speaker #2: The first one that I believe we've talked about in the past is the BTO shift. And if you can just do the rough math around increasing BTO mix from where it is today to around 70%, and then the 300 to 500 basis points differential in the margin there, that equates to about 50 basis points of margin uplift.

Speaker #2: As you get to that BTO mix, in the where we're

Speaker #1: Targeting further . We've got regional mix in there , which is relatively meaningful The the difference in gross profit and some of those higher margin communities can be as much as , you know , 1000 basis points .

Rob McGibney: The difference in gross profit in some of those higher margin communities can be as much as, you know, 1,000 basis points, and it's something that will have a meaningful impact just on that with the price. Things that you should consider there is that there will be a shift in the ASP that's just associated with mix, and there will be a shift in the profitability that's just associated with mix as well. Other factors are, you know, the reducing costs and then the uplift in units, which could have you know, we're not really calling that, and that's the component that we're still thinking about. But that's anywhere historically in the range of 0 to 100 basis points.

Speaker #1: And it's something that we'll have a meaningful impact just on that with the price. So, things that you should consider there is that there will be a shift in the ASP.

Speaker #1: That's just associated with mix, and there will be a shift in the profitability. That's just associated with mix as well. Other factors.

Speaker #1: Are , you know , the reducing costs . And then the the uplift in units , which could have , you know , we're , we're not really calling that .

Speaker #1: And that's the component that we're, we're still thinking about. But that's anywhere, historically, in the range of 0 to 100 basis points.

Operator: Thank you. The next question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Speaker #2: Thank you. And the next question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your question.

Alan Ratner: Hey, guys. Good afternoon. Thanks for all the details so far. First, you know, just on the pricing side and the strategy, obviously with the shift to BTO, I know you've also been focused on, you know, more of a base price model as opposed to a heavy incentive model. I'm just curious, as you look at your portfolio, obviously, there's uncertainty in the market and maybe, you know, there might need to be adjustments on the pricing side. You know, what have you seen over the last month or two in terms of pricing at your communities? Or, you know, do you feel like you've hit that point of, you know, where pricing has stabilized? I know you mentioned orders were a little bit below your expectations for the quarter.

Speaker #3: Hey , guys . Good afternoon . Thanks for all the details so far . First , you know , just on the pricing side and the strategy , obviously , with the shift to Vto , I know you've also been focused on more of a base price model as opposed to a heavy incentive model .

Speaker #3: And I'm just curious, as you look at your portfolio, obviously there's uncertainty in the market, and maybe there might need to be adjustments on the pricing side.

Speaker #3: You know , what have you seen over the last month or two in terms of pricing at your communities ? Do you feel like you've hit that point of , you know , we're pricing has stabilized ?

Speaker #3: I know you mentioned orders were a little bit below your expectations for the quarter. So are you still seeing a meaningful percentage of your communities where pricing is still drifting lower?

Alan Ratner: Are you still seeing a meaningful percentage of your communities where pricing is still drifting lower?

Rob McGibney: Alan, as I always say, it's really a community by community story. Overall, pretty stable. About 70% of our communities during Q1 either had no change or they had some level of small price increases. They were outpacing what our, some optimal projections are. We did have still about 30% of our communities where we've moved price down further and different degrees depending on the community as we just work to find the market and optimize that asset. It's, you know, changes from quarter to quarter. But again, you know, that is a community by community focus. It changes not just on a metro level, but a sub-market level and then down to within the community.

Speaker #4: Allen . It's as I always say , it's really a community by community story overall , pretty stable about 70% of our communities during Q1 either had no change or they had some level of small price increases .

Speaker #4: They were outpacing what our optimal projections are. We did have still about 30% of our communities where we moved price down further, in different degrees depending on the community, as we just work to find the market and optimize that asset.

Speaker #4: So it's , you know , changes from quarter to quarter , but again , you know , that is a community by community focus .

Speaker #4: It changes not just on a metro level , but a submarket level . And then down to within the community . And , you know , degree of change .

Rob McGibney: You know, degree of change, it can be anywhere from, you know, it might be a $2000 change or it might be, you know, $10,000 change. We're making these incremental movements to try to hit the optimal pace to get the best return result out of each community.

Speaker #4: It , it can be anywhere from , you know , it might be a $2,000 change or it might be , you know , $10,000 change , but we're making these incremental movements to try to hit the optimal pace to get the best return result out of each community .

Alan Ratner: Got it. Okay. That's helpful. Then second on your, you know, your backlog, which is obviously growing here. I'm curious how you're thinking about the risk of higher rates now that rates are beginning to creep up again. I guess what I'm trying to get at is, you know, if you go back a couple of years ago, obviously when rates surged, you know, people that entered a contract expecting to close at a certain mortgage rate either had difficulty qualifying at that higher rate or simply, you know, didn't want to move forward at that higher rate.

Speaker #3: Got it . Okay , that's helpful . And then second , on your , your backlog , which is , which is obviously growing here .

Speaker #3: I'm curious how you're thinking about the risk of higher rates now that rates are beginning to creep up again . And I guess what I'm trying to get at is if you go back a couple years ago , obviously , when rates surged , you know , people that entered a contract expecting to close at a certain mortgage , you either had difficulty qualifying at that higher rate or simply , you know , didn't want to move forward at that higher rate .

Alan Ratner: I know you're trying to get away from incentives and rate buydowns, but how are you thinking about the folks that might have written contracts over the last month or two when rates were 25, 30, 40, even 50 basis points lower than they are today? Is there risk there? Are you working with those buyers to lock in a rate or buy down a rate if necessary to get them to qualify? Just curious how you're thinking about that if rates do continue to move higher here.

Speaker #3: And I know you're trying to get away from incentives and rate buy downs , but how are you thinking about the the folks that might have written contracts over the last month or two when rates were 25 , 30 , 40 , even 50 basis points lower than they are today ?

Speaker #3: Is there risk there? Are you working with those buyers to lock in a rate or buy down a rate, if necessary, to get them to qualify?

Speaker #3: Just curious how you're thinking about that. You continue to move higher here.

Rob McGibney: Yeah. It's a good question. I'd say if you go back to what you were drawing the comparison to before in different market conditions, one of the things that was challenging for us there is the way that build times had expanded. When you're getting up to 8 or 9 months from sale to close, you're exposed to a lot of rate volatility in that time period. Now that we're building in 108 days, we've got less time exposure there. You know, certainly with rates being as volatile as they have been over the last couple of weeks, there's some exposure to a limited number of the homes that we've got in backlog. Generally, we're trying to get the buyers locked in with a loan before that home starts, at least, if not before.

Speaker #4: Yeah , it's a good question . I'd say if you go back to what you were drawing , the comparison to before in different market conditions , one of the things that was challenging for us there is the way that build times had expanded .

Speaker #4: And when you're getting up to eight or nine months from sale to close, you're exposed to a lot of rate volatility in that time period.

Speaker #4: And now that we're building in 180 days , we've got less time exposure there . You know , certainly with rates being as volatile as they have been over the last couple of weeks , there's some exposure to a limited number of the homes that we've got in backlog .

Speaker #4: But generally, we're trying to get the buyers locked in with a loan before that home starts, at least, if not before.

Rob McGibney: It's limited exposure to a subset of houses that we have in backlog, mostly in our sold, not started yet universe. If we need to and find that we have to, you know, we're not so rigid on the no incentive approach that we're not willing to help out and do something to buy that rate down to keep that buyer basically in the same position. It's something that we'll evaluate as we go. You know, rates have been bouncing around wildly, from day to day. When we hit the low spots, we're gonna work to lock as many buyers as we can.

Speaker #4: So, it's limited exposure to a subset of houses that we have in backlog, mostly in our sold, not started yet universe.

Speaker #4: And if we need to, and find that we have to, you know, we're not so rigid on the no incentive approach that we're not willing to help out and do something to buy that rate down, to keep that buyer basically in the same position.

Speaker #4: It's something that we'll evaluate as we go, and, you know, rates have been bouncing around wildly from day to day. So when we hit the low spots, we're going to work to lock as many buyers as we can.

Operator: Thank you. The next question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.

Speaker #2: Thank you. And the next question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.

Susan Maklari: Thank you. Good afternoon, everyone. My first question is on the SG&A. You mentioned that you did some headcount reductions. Can you talk about how comfortable you are with where the business is running today, and how we should think about that potential benefit and the flow-through of that coming in over the upcoming quarters?

Speaker #5: Thank you . Good afternoon , everyone . My first question is on the sG&A . You mentioned that you did some headcount reductions .

Speaker #5: Can you talk about how comfortable you are with where the business is running today, and how we should think about that potential benefit and the flow-through of that coming in over the upcoming quarters?

Rob McGibney: Well, Susan, I would say that the adjustments that we made were to adjust to the new reality of what our deliveries, our revenue, and our production levels are. As we look ahead, if the market were to improve and volumes go back up, I think there's some structural change in there that we'll be able to get the benefit of. The moves that we've really made on headcount and other fixed cost changes are to rebalance and reposition things with where we now think revenues are headed for the year.

Speaker #4: Well, Susan, I would say that the adjustments that we made were to adjust to the new reality of what our deliveries and our revenue and our production levels are.

Speaker #4: So, as we look ahead, if the market were to improve and volumes go back up, I think there's some structural change in there that we'll be able to get the benefit of.

Speaker #4: But the moves that we've really made on headcount and other fixed costs changes are to rebalance and reposition things with where we now think revenues are headed for the year.

Susan Maklari: Okay. All right. Turning to land, can you just talk a bit about what you're seeing there? Has there been any adjustment on the land market, and what you're watching for to potentially start to ramp up some of your spend on that side?

Speaker #5: Okay. All right. And then, turning to land, can you just talk a bit about what you're seeing there? Has there been any adjustment on the land market, and what are you watching for to potentially start to ramp up some of your spend on that side?

Rob McGibney: We're still in the land market. We're searching every day for the right deals that fit our profile and that fit the return hurdles that we believe that we need to drive profitable growth over time. It's been a little more challenging on the land front to drive a lot of deal flow because the market's been pretty sticky with price, and there's patient land sellers that generally have not adjusted to the new reality of what's happened with sales prices and demand over the last year or so. You know, as we look at our existing portfolio of deals or deals that we have under contract to purchase, we're having success with landowners in renegotiating terms.

Speaker #4: So we're still in the land market . We're searching every day for the right deals that fit our profile . And that that fit the return hurdles that we believe that we need to drive profitable growth over time .

Speaker #4: It's been a little more challenging on the land front to drive a lot of deal flow, because the market's been pretty sticky with price, and there are patient land sellers that generally have not adjusted to the new reality of what's happened with sales prices and demand over the last year or so.

Speaker #4: You know, as we look at our existing portfolio of deals, or deals that we have under contract to purchase, we're having success with landowners in renegotiating terms.

Rob McGibney: That's generally been the easiest thing to renegotiate, which is helpful on the financial side of things too, because often that means we're doing a structured takedown instead of a bulk purchase, or we're able to kick out the closing to tie that close of escrow on the land much closer to when we can start turning dirt in development of the lots or in some cases, actually going vertical on the houses. Overall, I think there's still some adjustment that's got to happen in the land market to reduce the gap between the bid and the ask. At the same time, there are still, you know, sellers out there that have adjusted, and that's what we're really focused on, is building up our portfolio with new deals that fit our return hurdles today based on current conditions and current pricing and costs.

Speaker #4: That's generally been the easiest thing to renegotiate, which is helpful on the financial side of things too, because often that means we're doing a structured takedown instead of a bulk purchase, or we're able to kick out the tie to the close of escrow on the land.

Speaker #4: Much closer to when we can start turning dirt in development of the lots, or in some cases, actually going vertical on the houses.

Speaker #4: But overall , I think there's still some adjustment that's got to happen in the land market to reduce the the gap between the bid and the ask at the same time , there are still sellers out there that have adjusted and that's what we're really focused on , is building up our portfolio with new deals that fit our return hurdles .

Speaker #4: Today, based on current conditions and current pricing and costs,

Operator: Thank you. The next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Speaker #2: Thank you. And the next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Stephen Kim: Hey, everyone. You've actually got Stephen Kim on for Mike Dahl today. Thanks for taking my questions. I was hoping to dive more into the BTO versus inventory dynamic. The messaging of BTO typically being like 300 to 500 BPS above inventory isn't really helpful. I was hoping you could unpack how this dynamic has been rolling through your most recent orders, given all the adjustments to the base price you've had to make in, you know, all directions, given the choppiness of the market. Like, are you trending on, like, higher end, lower end, or is there any sort of potential expansion or shrinking of this delta, like, embedded within your outlook? Thanks.

Stephen Mea: Hey, everyone. You've actually got Stephen Kim on for Mike Dahl today. Thanks for taking my questions. I was hoping to dive more into the BTO versus inventory dynamic. The messaging of BTO typically being like 300 to 500 BPS above inventory isn't really helpful. I was hoping you could unpack how this dynamic has been rolling through your most recent orders, given all the adjustments to the base price you've had to make in, you know, all directions, given the choppiness of the market. Like, are you trending on, like, higher end, lower end, or is there any sort of potential expansion or shrinking of this delta, like, embedded within your outlook? Thanks.

Speaker #6: Hey , everyone . You've actually got Steve and Mia on for Mike Bell today . Thanks for taking my questions . I was hoping to dive more into the BTO versus inventory dynamic .

Speaker #6: The messaging of BTO typically being like 300 to 500 bps above inventory has been really helpful. But I was hoping you could unpack how this dynamic has been rolling through your most recent orders, given all the adjustments to base price you've had to make in all directions.

Speaker #6: Given the choppiness of the market , like are you trending on the higher end , lower end , or is there any sort of potential expansion or shrinking of this delta , like embedded within your outlook ?

Speaker #6: Thanks .

Rob McGibney: Are you referring to the margin difference or the percentage of sales?

Speaker #4: Are you referring to the margin difference or the percentage of sales?

Stephen Kim: The margin difference.

Stephen Mea: The margin difference.

Speaker #6: The margin difference ?

Rob McGibney: I would say that stayed pretty consistent. You know, we're able to. We've got visibility in that on both the closing side as well as the sales side, and haven't seen much of a change there. It's been pretty consistent in that, we've got that 300 to 500 basis point delta, where built-to-order margins are better than inventory. One of the things that I think we're starting to see now is, as we have cleared out some of the inventory and you don't have as much in a community, and there's buyers for that community that may want or need that quick move-in because they've got a apartment lease or something that's coming up.

Speaker #4: I would say that that stayed pretty consistent . You know , we're able to we've got visibility in that on both the closing side as well as the sales side , and haven't seen much of a change there .

Speaker #4: It's been pretty consistent in that. We've got that 300 to 500 basis point delta. We're built to order. Margins are better than inventory.

Speaker #4: One of the things that I think we're starting to see now is, is we have cleared out some of the inventory and you don't have as much in a community.

Speaker #4: And there are buyers for that community who may want or need that quick move-in because they've got an apartment lease or something that's coming up.

Rob McGibney: In communities where we've only got a handful of inventory and we're primarily selling BTO, there's a little bit less of a reduction in the margin on those inventory sales versus where in the past we've had, you know, quite a few to choose from, both in inventory that's completed as well as build to order. As we're making this transition to the build to order, you know, I think we're definitely getting higher margins on the build-to-order sales, and it'll probably help somewhat on the inventory that we do have as well.

Speaker #4: So in communities where we've only got the handful of inventory and we're primarily selling BTO , there's a little bit less of a reduction in the margin on those inventory sales versus where in the past we've had , you know , quite a few to choose from , both in inventory .

Speaker #4: That's completed as well as built to order . So as we're making this transition to the built to order , I think we're definitely getting higher margins on the built to order sales .

Speaker #4: And it'll probably help somewhat on the inventory that we do have as well.

Stephen Kim: Got it. That's super helpful. Thank you. Lastly, just very broad question, just what you're seeing in your markets at a regional level. If you could speak to any notable pockets of strength, and potential areas that are lagging, just would be helpful to get a heat check considering all of the choppiness that's out there. Thank you.

Stephen Mea: Got it. That's super helpful. Thank you. Lastly, just very broad question, just what you're seeing in your markets at a regional level. If you could speak to any notable pockets of strength, and potential areas that are lagging, just would be helpful to get a heat check considering all of the choppiness that's out there. Thank you.

Speaker #6: Got it . That's super helpful . Thank you . And then lastly , just very broad question . Just what you're seeing in your markets at a regional level , if you could speak to any notable pockets of strength and potential areas that are lagging , just would be helpful to get a heat check considering the choppiness that's out there .

Speaker #6: Thank you .

Rob McGibney: Sure. You know, every market's got its own story, and there's places in each metro that are still doing just fine and selling very well, and there's other places within the metros that our challenge, but from a regional perspective, we're seeing relative strength on the West Coast, including most of California, Seattle, and Boise. Las Vegas continues to perform very well. Texas remains more competitive. Houston has held better, with Austin and San Antonio both grappling with higher inventory and just a very competitive market to secure those customers who are ready to transact. Florida is a little more mixed. Orlando and Jacksonville, I'd say, are seeing better demand than Tampa right at the moment. Overall, pricing in Florida, I think, still has stabilized.

Speaker #4: Sure. Every market's got its own story, and there's places in each metro that are still doing just fine and selling very well.

Speaker #4: And there's other places within the metros that are challenged . But from a , from a regional perspective , we're seeing relative strength on the West Coast , including most of California , Seattle and Boise , Las Vegas continues to perform very well .

Speaker #4: Texas remains more competitive. Houston has held better; Austin and San Antonio both grappling with higher inventory and just a very tough market to secure those customers who are ready to transact, a little more mixed.

Speaker #4: Orlando and Jacksonville , I'd say , are seeing better demand than Tampa right at the moment . But overall pricing in Florida , I think still has stabilized .

Rob McGibney: It's just that the level of demand isn't quite producing the volume that we'd like to see. Every market's got its own story, and each metro's got those communities that are performing well and those that aren't. Appears to be maybe a little bit of a flight to quality with the top submarkets performing better than maybe some of the drive-til-you-qualify type communities, but that's not the bulk of our business anyway.

Speaker #4: It's just that the level of demand isn't quite producing the volume that we'd like to see, but every market's got its own story, and each metro has got those communities that are performing well.

Speaker #4: And those , those that appears to be maybe a little bit of a flight to quality with the top submarkets performing better than maybe some of the drive to qualify drive to qualify , type communities .

Speaker #4: But that's not the bulk of our business anyway.

Operator: Thank you. Our final question comes from the line of Sam Reid with Wells Fargo. Please proceed with your question.

Speaker #2: Thank you. And our final question comes from the line of Sam Reid with Wells Fargo. Please proceed with your question.

Sam Reid: Awesome. Thanks so much. Actually just wanted to confirm your start pace in the first quarter. I can back into that based on your homes in production, but maybe just wanting to confirm the number because I believe the math would imply something less than 1,000 units, versus say, the 1,800 that you started in Q4. Then maybe just piggybacking off of that, how start pace versus sales pace should look as we move through Q2, Q3, and Q4.

Speaker #7: Awesome . Thanks so much . Actually , just wanted to confirm your start pace in the first quarter . I can back into that based on your homes and production , but maybe just wanting to confirm the number because I believe the math would imply something less than 1000 units versus , say , the 1800 that you started in Q4 .

Speaker #7: And then maybe just piggybacking off of that, how start pace versus sales pace should look as we move through Q2, Q3, and Q4?

Rob McGibney: Yeah. As we've mentioned, we've intentionally been pulling back on the spec starts and matching our starts to our built-to-order sales. Our starts were down, but it was right around 1,800. I believe it was 1,805 in Q1. As we look ahead into Q2, we expect to generate more BTO sales and generate our starts from those sales. Right now, we've got a healthy backlog of homes that haven't started yet that are at the sold not started stage, and that's gonna feed our starts over the next couple of months.

Speaker #4: Yeah , so as we mentioned , we've intentionally been pulling back on the spec starts and matching our starts to our built to order sales .

Speaker #4: So our starts were down , but it was right around 1800 , I believe it was 1805 in the first quarter . So as we look ahead into Q2 , we expect to generate more sales and generate our starts from those sales .

Speaker #4: And right now, we've got a healthy backlog of homes that haven't started yet, that are at the sold, not started stage. And that's going to feed our starts over the next couple of months.

Sam Reid: That's helpful. If it was already covered, I apologize, but maybe could you just give me the final expectation for Q2 on spec versus build to order, and any context on what spec versus build to order looked like on orders for Q1? Thanks.

Speaker #7: That's helpful . And then if it wasn't already covered , I apologize . But maybe could you just give me the final expectation for Q2 on spec versus built to order and any context on what spec versus build order look like looked like on orders for the first quarter .

Speaker #7: Thanks

Rob McGibney: I walked through the cadence on that earlier, so I don't know, Rob, if you have the overall average. We exited February about 68% BTO, and January and December were slightly below that. Kinda looking at that as the rearview mirror. As we go forward, we know we exited February 68%. Early March, we're tracking above 70%, and we think we'll, you know, maintain that or get at least to 75% as we move through Q2.

Speaker #4: Going or I , I , I walked through the cadence on that earlier . So I don't , I don't know , Rob if you have the overall average , but we exited February at about 68% .

Speaker #4: BTO and January and December were slightly below that , but kind of looking at that as the rear view mirror . So as we go forward , we know we left , we exited February at 68% .

Speaker #4: Early March. We're tracking above, set above 70%, and we think we'll, you know, maintain that or get at least 75% as we move through Q2.

Operator: Ladies and gentlemen, thank you. That does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines.

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