Beazer Homes USA, Inc.

Good afternoon and welcome to the Beezer Homes Earning Conference call for the first quarter and fiscal year ended December 31st, 2024. Today's call is being recorded and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the investor relations section of the company's website at www.beezer.com. At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.

Thank you. Good afternoon and welcome to the Beezer Homes Conference Call discussing our results for the first quarter of fiscal 2025. Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as to the date this statement is made. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. New factors emerge from time to time and it is simply not possible to predict all such factors. Joining me today is Alan Merrill, our Chairman and Chief Executive Officer. On our call today, Alan will discuss highlights from our first quarter results, the recent environment for new home sales, actions we're taking to improve performance as it relates to our fiscal year 2025 outlook, and the significant progress we're making towards our multi-year goals. I will then provide detailed guidance for our second quarter results, an update on our outlook for the full fiscal year, and end with a discussion of our land position, liquidity, and our commitment to generating double-digit returns. Alan will conclude with a wrap-up, after which we will take any questions in the remaining time. I will now turn the call over to Alan.

Thanks, Dave, and thank you for joining us on our call this afternoon. We had a profitable and productive first quarter that positions us to achieve both our full-year outlook and our multi-year goals. Despite experiencing an uneven sales environment and having to defer the closing of nearly 50 homes in backlog, There are three highlights from the quarter that demonstrate real progress toward our growth and profitability ambitions. The base of our business is expanding. Our ending community count was up nearly 20% versus the prior year, which allowed us to increase both sales and closings compared to last year. We also grew our active lot position by about 10%, providing visibility into further community count growth, both this year and next. Our balance sheet is more efficient and liquidity is improving. 59% of our lot position is now controlled through options, up from 53% last year. This growth in option lots leverages our investment in land, improving returns and mitigating risk. On the funding side, subsequent to quarter end, we upsized our revolver by more than 20%, providing ample seasonal liquidity to accommodate more communities and more homes under production. Our zero energy ready homes are gaining momentum. These homes represented more than 85% of our sales during the quarter, up from 43% in last year's first quarter. As our sales and closings have ramped up, we've reduced the cost to achieve the DOE standard by several thousand dollars per home. Although home buyer affordability is likely to remain the key challenge throughout the We're optimistic about the longer term outlook for new home sales and our growth prospects specifically. Having noted the highlights, it's important we acknowledge that we missed both our sales and closings guidance for the quarter, something we're not accustomed to doing. I'll tell you what happened and what we're doing about it. On the sales side, the strength we experienced in October, with paces up sharply over the prior year, softened in November and became materially weaker in December. As a result, we sold fewer homes and had to spend more on incentives for the sales we made. While our first quarter is our lowest volume quarter of the year, it is also the most difficult to predict because it occurs during many other builders' year-ends. Unsurprisingly, the most challenging markets were in Texas and Florida, where higher inventory levels led to sluggish sales and more aggressive incentives. Our absorption rate in many other markets, including California, Nevada, and the Mid-Atlantic, held up much better. Weaker-than-expected sales obviously played a role in our closings miss. But separately, we had to push out 47 closings from the quarter as we dealt with some unique utility issues, labor availability in Houston and meter availability in California. The ASPs and margins on these deferred closings would have really helped first quarter results. The good news is we don't expect these issues to persist, and all of these homes are now scheduled to close this spring. That's a summary of what happened. Now let's turn to what we're doing to improve results. I'll share four initiatives that are already well underway. First, we're activating more than 60 new communities before year end. That's the largest nine-month community launch effort in our recent history. Over the past three fiscal years, we've activated more than 150 communities, and we've gotten better at it over time. By building deep, qualified VIP interest lists, updating elevations and floor plans, and including the most relevant design features, we expect to generate robust grand opening sales activity in these new communities. Second, we're making mortgage financing for to-be-built homes more compelling. To-be-built homes let our buyers personalize their home, and they consistently carry higher margins. But short-term mortgage incentives, tied to specs that can close right away, have suppressed demand for homes that won't be available for six months. To address this challenge, we've worked with our lenders to offer one-way rate locks with an embedded permanent rate buy-down that provide protection from rising rates while allowing our buyers to benefit if rates happen to decline. Combining long-term rate locks with buy-downs is an important innovation for us, and I think it'll help with to-be-built sales. Third, we're improving the profitability of our specs. During the quarter, specs represented nearly 70% of our closings, the highest level in over a decade. While we're working hard to drive that percentage down, we're also focused on improving spec profitability. In fact, the margin profile on our spec should improve organically over the balance of the year as our prior series homes close out. We've also updated feature levels to better align with market conditions. We know we probably can't get spec margins to match to be built homes, but we do expect to narrow the gap. And finally, we're reducing construction costs. We've said many times that we expected to reduce the costs to deliver zero energy ready homes, and we're now doing it. but our cost reduction efforts are broader than that. We're also capturing savings from a more focused SKU list with our national partners and using our sizeable community count growth to rebid local labor and material providers. Since October 1st, we've been able to reduce build costs by about $3,000 so far, which will benefit to-be-built and spec homes that deliver later in the year. We are committed to translating these efforts into better sales paces and better margins this year. which is why we still expect our full-year performance to fall within the broad ranges we provided in November, even if market conditions and mortgage rates don't improve. Beyond 2025, we continue to have a very positive longer-term outlook for new home sales, and we remain fully committed to achieving our three multi-year goals, which include expanding our community count, deleveraging our balance sheet, and delivering a demonstrably superior home. We ended the first quarter with 163 communities, up nearly 20% versus the prior year, and we remain on track to end the year with a community count around 180. Our total land position grew about 10%, giving us a clear path to achieving our goal of ending FY26 with more than 200 communities. We also remain on track to have a net debt to net capitalization ratio below 30% by the end of fiscal 26. While our leverage was relatively flat, versus the prior year, as we continue to grow our land pipeline, the cumulative profitability and cash flow we anticipate over the next two years will allow us to reach this target. Lastly, we continue to make significant progress towards qualifying 100% of our starts as Zero Energy Ready by the end of the calendar year. In the first quarter, 98% of our starts met the DOE standard. Over the balance of the year, we have fewer than 100 starts, remaining in four closeout communities, related to our prior series. I know many observers haven't realized how important Zero Energy Ready is yet, but as you may have noticed on the cover slide, we're leaning into this advantage. Our homes are different, and they're better, and we can prove it.

With that, I'll turn the call over to Dave. Thanks, Alan. This afternoon, I will concentrate on providing some more specifics on our second quarter guidance and our outlook for the fiscal year. I will conclude my comments with a discussion of our balance sheet, land position, and our commitment to generating double-digit returns. We have detailed our first quarter 2025 results in our presentation, our press release, and our 10-Q, and of course, we're happy to discuss them during the Q&A portion of this call. Let's start with our expectations for the second quarter. We know that our outlook doesn't contemplate an improvement in market conditions. We expect sales to be up about 10% versus the same period last year, as our average community count should be up about 15%. We expect to end the second quarter with around 160 communities. We anticipate closing around 1,050 homes with an average ASP of around $515,000. Adjusted gross margin should be up a bit sequentially. Our gross margin won't benefit from the delayed closings from our first quarter, and the activities Alan described to improve our profitability. SG&A as a percentage of revenue should be less than 13%. We expect our SG&A as a percentage of revenue to decline significantly in the back half of the year as our closings accelerate. We expect to generate more than $30 million in adjusted EBITDA. Interest amortized as a percentage of home building revenue should be just over 3%, and our effective tax rate should be approximately 11.5%. This should lead to diluted earnings per share of about 30 cents. Last quarter, we provided a range of potential outcomes on community count, sales pace, and gross margin for the fiscal year. First quarter results put some pressure on our full year outlook, and as such, will likely perform toward the lower end of our pace and margin ranges. Our year-end community count should be around 180, up about 10% versus the prior year. Our average community count for the year should be up between 18 and 22 communities, reflecting 12.5% to 15% growth. Despite the slower sales pace in the first quarter, we remain committed to achieving a sales pace between 2.5 and 3 sales per community per month for the full year, more in line with our historical norms. While we expect our sales pace to be off a little in the first half of the year, we expect substantial improvement in the back half. In part, this pickup is off to easier comparisons, but it also is related to the fact that we have so many new community openings. For the full year, we provided a range of our expected gross margin between 19.5% and 20.5%. Incorporating first quarter results and current conditions, we now expect full year margins around 19.5%. As it relates to our ASP and SG&A, our backlog ASP is currently about $540,000, up about 4% versus the prior year, and supporting our outlook that our full-year ASP should approach $530,000. Further, while we're still investing heavily for growth, our higher community count should lead to revenue growing faster than our overheads in fiscal 25, driving down our SG&A percentage to about 11%. Even at the low end of each of the ranges, we expect to generate adjusted EBITDA that would represent another year of double-digit return on capital employed. Since we pivoted to growth in fiscal 2020, our total land position has grown nearly 50%, from fewer than 19,000 lots to more than 28,000 lots today. And we've done that exclusively through increasing our option lots, which have gone from 29% of our total to 59%. In 2025, we expect land spend to be around $850 million, and our owned and option lot position should exceed $30,000. Our balance sheet remains healthy with total liquidity exceeding $335 million at the end of the quarter, no maturities until October 2027, and more than enough liquidity to fuel our growth plans. Earlier this week, we successfully upsized our revolver to $365 million. We expect to end fiscal 2025 with a net debt-to-net cap in the mid-30s. and we're on a path to reduce our net debt to net cap below 30% by the end of fiscal 2026, as our improving profitability, cash generation, and balance sheet management will sustain our deleveraging. Over the past five years, we've grown book value per share by about 19% on average. We're focused on consistently generating double-digit returns on capital employed and equity. While growth remains our primary priority for capital allocation, we consistently consider strategies that would contribute to sustaining double-digit returns. With that, I'll now turn the call back over to Alan.

Thank you, Dave. While the first quarter challenged us, we're positioned to drive significant top-line growth and generate double-digit returns again this year, even as we invest heavily for the coming years. We're also well on our way to achieving each of our multi-year goals. I'm confident we have the team, the resources, and the strategy to create growing and durable value for our stakeholders in the years ahead. And with that, I'll ask the operator to take us into Q&A.

Thank you. If you would like to ask a question, press star 1. Unmute your phone and record your name clearly. If you need to withdraw your question, press star 2. Again, to ask a question, please press star 1. It will take a few moments for the questions to come through. Please stand by. Thank you. Our first question comes from Tyler Vittori of Oppenheimer. Your line is open.

Good afternoon. Thank you. First one for me, just on the demand side of things so far in Q2 and in January, just talk a little bit more about You know, what you're seeing in the field. You're not sure any anecdotes or any green shoots in terms of demand out there in your markets?

Yeah, I've been traveling a fair bit already this year, and I would say, first of all, online traffic stayed pretty strong through December, even as sales were more challenging. And that's usually a very good sign. People are online before they're offline for the most part. And, you know, it's early in the month. I don't have the last – week or so of activity, but you know, January feels okay. It's not a blowout, it's not gangbusters, but it has not taken another step down, and arguably, for seasonal reasons, at a minimum, it's a little better than December.

Okay, great. In terms of incentive levels, can you talk a little bit more about where you were on incentives in Q1, how that compares with Q4, and then talk a little bit more about your expectations for incentive activity the rest of this fiscal year.

Yeah, so I totally understand the question. I'm going to do the best I can to answer it. The challenge with incentives is that there are a number of components, and and they're kind of in different places. So there's a closing cost amount. There are restrictions in loan programs against maxes that you can do there. There are discounts that may be in the form of design center credits or price reductions. And so when you think about incentives, it's really what are all of those parts and pieces. And then, of course, there's differences between specs and to-be-built. What we actually saw, and this was a bit of a concern for me, is that incentives on 2B builds were going down into our first quarter, but we weren't selling enough of them. And that's really what led to unpacking this, creating a financing mechanism that was more compelling for buyers where they felt like there was an opportunity to lock a long rate below current market rates. And I think that will help. And it's well within the structure of incentives that we otherwise provide on the closing cost side. On the spec side, there's no question. In November and then really accelerating into December, the combination of price discounts and incentives that we had to offer spiked. And it differed, of course, by market. But I would tell you it took a point or two out of sales that we sold and closed just between the middle of November and the end of December. We have not extended that into January. That was kind of keeping up with the Joneses, and I feel a little better about not doing that so far this year. The other thing, Tyler, is rates moved about 50 basis points after our last earnings call before the end of the year. It was 42, but they moved about 50 basis points. For buyers that were in backlog, one of the things that we saw was, gosh, you know, there are some very aggressive rate promos out there. We're in backlog with you, but we'd like a little help against this rate that may have moved. And so anytime you get an upward spike like that in a short period of time, you can see some movement in incentives. It wasn't huge, but there was some effect there. Now, you know, I take all that together. It's hard for me to give you an exact percentage because we're constantly changing base prices and included features, and then, of course, you've got the closing cost. But I think if you tried to, if you had perfect information, you'd see there's been about a point of pressure over the last, call it, four months that has developed. You know, as rates have started to move up being part of it, And then that year-end selling that a lot of our peers were doing in their fourth quarter, a combination of those two things I would put roughly in that bucket of about a point.

You know, frankly, Tyler, just to add to that, we talked about last quarter being 19.5% to 20.5% on the gross margin. We talked about this quarter being closer to that 19.5% number, and that's kind of what Alan's talking about. That's the impact of it, in part also by the new communities coming online, but you can kind of see there's a lot of moving pieces there. I don't know if I made it better or worse, Tyler.

No, that was very good detail. Very good detail. I appreciate that. And kind of a segue to my last question, just on the gross margin guide. And, you know, it implies a pretty significant ramp, I think, in the back half of the year. So let me talk a little bit first about what's driving the sequential progression in the Q2 period. and then talk a little bit more about just the inflection, if you will, in the second half of the year, too.

Sure. So relative to the first quarter moving into the second quarter, and we said it'll be up a bit, really there are a few things going on there, but we'll get the benefit of those homes that pushed out of the first quarter, which is nice because they had terrific margins. Our mix of specs in our closing count is going to be a little lower. A lower percentage... of the specs that close are from the prior series, and we're starting to see just the very first homes closing with lower construction costs. So, you're going to get little bits from all four of those, which is why we expect, sequentially, a little bit of improvement. When you play that out over the balance of the year, of course, the pushouts, that was kind of a discrete activity, but the other three are all in place. We do expect to have a lower mix of specs over the balance of the year, and heck, if it just moves from 70 to 60, that's a big difference in our reported margin because of the three to five point differential between to-be-built and specs. Not having the prior series homes, and I don't remember which month we'll close our last of those when it gets down to such a de minimis number, but it was still a meaningful share of the Q1 closings. It won't be by Q4 of this year. And, you know, while I'm happy about the $3,000 we've been able to take out of our directs so far, our plans are larger than that, and a larger share of our homes as we move through the year will get the benefit. So as Dave said, and I think I said, we're not expecting more robust conditions or lower mortgage rates. It's really those discrete items that give us the confidence that we're going to be able to have a progression through the year and have a back half from a margin perspective that looks better than the first half.

Okay, that's all for me. Thank you.

Thanks, Tyler.

Thank you. Our next question comes from Alan Ratner of Zellman and Associates. Your line is open.

Hey, guys. Good afternoon. Thanks for all the detail, as always. I guess first question on the order paced through the quarter. You know, you gave the guide roughly midway through, and... You know, I certainly understand the closing shortfall and the impact that that had on margin. I guess I want to focus a little bit more on the order side in terms of what transpired there. You know, as you look at kind of results in the back half of the quarter, obviously December wasn't a great month, but there something you could put your finger on specifically that you feel like really contributed to that um shortfall at least in your results like was it your competitors got more aggressive than you did on incentives were there specific markets that that really drove that shortfall any color you can kind of get there would be helpful absolutely alan um look i i understand we had just come off in october where we had a big pace improvement year over year and online activity was good we felt pretty confident

about pace improvements in November and December. We didn't have it in November. And, you know, November can be a little bit of a funky month. You get Thanksgiving and travel and weather. So you don't really know what that means. It was really in December where we stopped, particularly in Texas and a little bit in Florida, although our business there is pretty small. But we really saw what I would call shock and awe on pricing and incentives. And, you know, we participated to some extent, but maybe not fully. It's always a challenge to decide how much of that to engage in. But, you know, you're aware of where the inventory numbers are in all of the markets in Texas that we participate. And I think we were – I was surprised. I won't blame anybody else. I think I was surprised by how deep folks went to move finished inventory. And here's the thing. When those incentives are floating around, I mean, I don't ever attribute to our peers that they do anything that's illogical or not financially astute. They may advertise, call it a 299 rate, and that rate applies to these three homes that can close within this time period. But that rate is now in the market. So everybody they see, everybody we see says, gosh, that would be a great rate. Well, there's no path, you know, necessarily for every home to that rate. And so what do those buyers do? They hold out. They say, well, we'll check back with you in January. Now, I will say I think a lot of folks could have made great deals in December that are finding it generally more difficult to make those deals in January. But there was definitely a promotion that spiked up. And for us, particularly in Texas, is where I observed it.

Got it. Now, that's – helpful additional color there, so thank you. Second question, just on kind of the energy efficiency strategy and kind of the benefits you've seen on the tax rate side, I'm just curious, from an economic standpoint, I know you've kind of touted, obviously you feel like you can get a premium for this product in the market, but there's also this benefit on the tax line as well. As you think about the new administration and kind of the seeming de-emphasis on a lot of the energy efficiency side of things, are you rethinking some of the moves and the investments you're making in this category under the possibility that perhaps it's less beneficial going forward if there is tax reform there, or are you kind of full steam ahead still on this move?

The short answer is we're full steam ahead, and I'd like to take just another minute or two. When we committed to Energy Star in 2011, which coincided with me having this opportunity, it was not about tax arbitrage. It was about building a better, more efficient home, and we've been on a consistent path for 15 years to make our homes better than they had to be as a part of what makes us different. As you know, five years ago, we committed to Zero Energy Ready, and to date, we are the only ones that have. We made that commitment knowing the building science and not on the basis of any expectation for tax credits. In fact, the tax credit associated with Zero Energy Ready arose more than a year, I think two years after we committed to Zero Energy Ready. I have to tell you that it was nice, it's appropriate, it certainly provides some financial incentive, but our reason for doing it was different. I don't know anyone on any side of the political aisle that would say they should pay more for energy than they have to, and we've built a home that you can pay a lot less. I don't know anyone who doesn't want a home that is comfortable in every room and still is super inexpensive to operate. And for many people, most importantly, I don't know anyone who doesn't want the cleanest possible indoor air. So when you stack those up, I do think that between the savings, the comfort, and frankly the health benefits of having indoor air that we are able to provide, I can't imagine going backwards. Now I don't know what the administration's gonna do. They may attack this issue along with others. They may not. It sort of preceded IRA. where parts of the 45L code preceded the IRA. So I don't know if they're going to leave it in place or not. I can tell you I don't think our industry is going to move backwards. I like the competitive advantage that we have, but you don't have to talk to very many buyers about those three things to realize it makes a difference, and I'm frankly excited to be able to be the leader in that category.

all right well said and i appreciate the conviction there um if i can add one one more um possibly just um you know if i look at your current margins today obviously you expect improvement in the back half of the year but right now you know the the operating margin is pretty thin in terms of cushion overall which you know leads me to believe there's at least some communities maybe even divisions that are kind of hovering closer to break even for the time being Can you give us any framework to think about impairment risk or abandonment risk on any land deals or markets where the margins might be thinner than company average?

Hey, Alan, it's Dave. A couple things. You know, one, we give a pretty fulsome discussion of our impairment evaluation process in the queue. It's on page 11 of the queue. You'll note you've been reading our queues for a long time. Nothing's changed in many, many years. So the methodology is exactly the same. I'd tell you a couple other things. We don't disclose a watch list number, but I can tell you from what we see, really don't have any expectations for material changes. Still room and still feel real comfortable with where the land position is. And I'd add a couple other thoughts. One, we look at the John Burns data. You can kind of see what's happening for land in the market today. Look, I think what we're paying for land is very much in line with what our competitors are paying. We're very much in the fairway of where land prices are. And, yeah, margins are under a little bit of pressure right now. We expect some improvement as we go through the year, but really I don't think we overpaid for land, quite frankly. And then the last thing I'll tell you is we get kind of a check on this on a pretty regular basis, right? If we have a community that's not really performing or maybe the way we underwrote it, the fees change a little bit and we go out and sell land, we have a pretty good idea of what we paid versus where the market is, and we feel we're right on the market. So, you know, I can't go too much further into detail other than I don't have any expectations for material changes from where we are now, given current market conditions.

Well, Alan, I'm not going to rebut anything Dave said. That would be silly, but I want to add something. I think a growing company will have abandonment charges as a part of the regular diligence. And ironically, I think one of the things that was most challenging for us as a company was as we pivoted to growing community count, something we didn't do for a decade, was allowing ourselves the idea that pre-underwriting could result in walking away. I mean, we went a decade without taking impairments on things that we bought. You know, there were some previous land held assets that got impaired. But honestly, I don't want to take abandonment charges, but part of being in the market, that is a part of doing business. I do think about that as being very modest and infrequent and completely differently from impairments. But because you said abandonments, I didn't want to leave you with a misimpression. I think it is a healthy part of growing a business that there will, from time to time, be modest abandonment charges.

Understood. All right, guys. I appreciate the thoughts.

Thanks, Alan. Thanks, Alan.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your phone. Again, please make sure that your phone is unmuted and state your name clearly when prompted. Our next question comes from Julio Romero of Sudoti and Company. Your line is open.

Julio?

Sorry, I was on mute there. Good afternoon, guys. I guess maybe starting on, can you maybe expand on the two factors that kind of led to a little bit of sales softness in the first quarter? I think you talked about in the prepared remarks about labor availability in Texas and meter availability in California. If you could give a little more context on those two issues and then also what kind of gives you the comfort that those issues kind of won't persist.

Right. So that related between them to 47 homes, which happened to be pretty high ASB and pretty good margins. And that related to closings, not sales. Those were homes in backlog that, sitting in mid-November, we had every anticipation that they were going to close in the first quarter, and they didn't. I think 34 or 35 of them were in Houston, and they were delayed for months. I would say a good reason, and that is that the utility companies prioritize service repair over hooking up new builds. And in October and November, there were a number of storms that led to dislocation of power in a particular part of the greater Houston metro area, and the power company, frankly, reallocated their resources for hooking up existing customers and repairing lines rather than doing new build work. Hard for me to find fault with that. I understand that. It was disadvantageous for those buyers in backlog and for us, but temporarily. So that was a unique circumstance with the reallocation of labor in one part of Houston. In the other instance, it was just over a dozen homes where You know, there are still occasionally little gremlins in the supply chain, and we had some gas and electric meter availability from the utilities that we do business with where they looked at us in the early part of December and said, yeah, we're not getting any more before the end of December. And we said, well, fellas, we've been working on this, and, you know, it's ordinary course. And they said, yeah, we'll see you in January with the meters. It was a little random, but that's what happened that related to the 47 homes.

Gotcha. Very helpful context. So I guess no broader effect that you guys are seeing from either kind of like immigration issues or wildfires or anything of that nature? Okay.

No, it was not related to that. They were to anomalies, and frankly, if we had had the sales environment that we had hoped for and kind of expected, I think it probably wouldn't have been noticed. But the combination of not quite getting the gross sales that we expected and to lose that roughly 50 closings, that was not what you would call a happy daily double.

Understood. You know, it sounds like you're very much on track for your community count goals this year. You said you're activating more than 60 new communities before year end. Can you maybe just touch on how does the cadence of closeouts kind of affect your expectations for the year?

Well, sure. I mean, just simple math. We're about 160. We're going to end up around 180. So if we're adding 60 plus, we're going to drop 40. Right? That's the math. The net adds will be about 20. But that 60 in nine months, you know, they're not perfectly evenly distributed, but you're talking about more than one a week, right? I mean, it's a lot more than that, but it's six, seven a month. So that's kind of the cadence of the startups. Now, and we've got that well controlled. Like most of them will be March, April, May, June. because we really have the benefit of capturing the stronger part of the so-called selling season, the closeouts will happen based on the pace of sales in those communities. So they probably happen on a somewhat less easily programmed cadence.

Very helpful. And then the last one for me is just taking a broader view. Obviously, affordability is going to be a big challenge in fiscal 25, but maybe looking at a little broader than that, just talk about your ability, how you're positioned to improve margin and profitability once the broader market would improve?

I think all industry participants would benefit enormously from a reduction in rates. I think we're all spending a very large share of our incentives to get to a monthly payment for the buyers that are out there. But the things that we're uniquely doing, I mean, we've absorbed all of the costs. It's been in our overhead. It's been in our gross margin. It's in our cost of goods sold to build a home that is fundamentally different from everybody else's. We're excited about that. And honestly, our ability to explain that, get paid for that, that is where I think we have an alpha opportunity that literally none of our competitors have. Now, you know, we start gaining traction in markets or in communities, I know they're going to come for us. So we've got ideas about where we need to go next, but I can tell you for the next several years, we have a significant head start. Anyone with health issues, anyone with utility bill phobia, anyone who really is into advanced construction science, we are their builder. They may not know it yet. And our job is to make sure they come to know that before they buy their next home. But that's our opportunity.

Very helpful. Thanks very much.

Thank you, Sarah.

Thank you. Our next question comes from Jay McCandless of Webb Bush. Your line is open.

Hey, everyone. Thanks for taking my questions. Got a few of them, so we'll go rattle them off as quick as I can. I guess the first one, on the deportation, the immigration issues, are y'all seeing any impact of that in the field yet or hearing any impact on that from your subs?

Jay, honestly, I have not. And we check in regularly. We've got a hotline set up internally to sort of anything, and I have not heard any news on that. I won't be surprised if there is some information in markets that we do business and in the industry, but so far I have not heard of any.

And then could you talk about where your gross margins are on the average spec right now versus dirt starts?

Yeah, I mean the differential is between three and five points depending on the market So, you know, they're with a two in the dirts and they're three to five points below that on the specs. So 70% of the lower number is what is leading to the current margin profile. I mean, it's just the weighted average of those two numbers. So, you know, the math for us is simple. Change the spec percentage to be a lower percentage and improve the margins on our specs. And I think they're good reasons for us to believe we can do both of those things.

What do you think the long-term goals should be for that, Alan?

It's a great question. It's a little different, honestly, Jay, than I would have told you four or five years ago. I think it's a little bit higher to the spec side. If you had asked me five years ago, I would have told you 70-30 to be built felt really comfortable. I think it's probably more like 60-40. And in some of our markets, it may be 50-50. But I would like to see us get back to, and I think we can, being a majority to be built versus spec, I do think sort of slaying the dragon here on the financing side is a part of it because you can appreciate where something is being heavily incentivized and promoted, that quick move in home with a rate teaser, if there isn't anything that's comparable on the long-term side, it makes it harder. And that's why we put so much work into this program with our lenders to make sure that we've got an opportunity for those buyers who do want that to be built.

And actually, could you touch on that for a second? Because I guess for a cost differential or gross margin differential, are you giving up some of that advantage in the to-be-built by using that longer-term rate lock? And I guess, I don't even know if y'all have even done this yet, but what would the gross margin differential be versus a spec that closes in two months versus a to-be-built that closes at seven months using that rate lock?

The way I think about it is we are allocating incentive dollars that we generally provide to to-be-built homes in a different way. Instead of more dollars in a design center, we can use a larger share on this new structured program. One of the things, and I can't help myself, but one of the things that I like about our mortgage choice program is we really believe in choice. I mean, we insist on it, in fact. Anytime we roll out a program like the one I described today, there is more than one lender We're never going to put the customer in a position where you can have, like the Henry T. Ford Model T, you can have any color as long as it's black. We have multiple lenders making those offers available. There is nothing that keeps the pencil sharp and the wits alert. We're pricing competitive than having multiple lenders competing for that buyer's business. So I think we've mitigated kind of the economic cost of that. But what we're really doing, frankly, is allocating incentive dollars to rates. And that's what spec homes have been doing for the last year or two, is directing their incentive dollars toward rate. And we now have a way to do that on 2B builds.

Okay, thanks for that. And then on the fiscal 25 guide, it looks like it's the same as what y'all had in the fourth quarter slides. except you guys are pointing to the low end of the gross margin range. I think that's the only real change I heard in the prepared comments.

That's right. That's right, Jay. We talked about the potential that the pace would be a little bit closer to the lower side, but yeah, the gross margin is really only the difference towards the 19.5%.

And then if you look at the West, you guys had a decent order growth there, I think 10%, 11%, which based on what she said about Texas, would imply, I think, that California, Arizona, et cetera, probably were up 30%, 40% in orders, and then Texas was down. I guess, do you have the community count coming online in California and Arizona to keep that up, or should we expect the West to slow down a little bit after such a robust quarter?

Yeah, I would expect that, because what's really going on is it has been outside of California easier to activate communities in the west than in many of our eastern or, you know, the midwestern markets, just either because land development is simpler, the entitlement process is a little bit faster. So our community count has been able to grow in that west segment a bit faster, and that's been one of the things that has driven that. But, of course, having strong sales in California and Nevada in particular was helpful, and, You know, I don't see reasons to think that that's going to change anytime soon. But I do think our non-Western markets are likely to grow community count here over the next 12 months faster than our Western markets.

I think 2J, you know, we've talked about a pace between 2.5 and 3 sales per community per month for the year. That is not in any way an elevated pace for us, right? That's kind of below what we've done historically. The business tends to run between 2.8 and 3.2, so... you know, when you think about longer-term pay, I don't think we're really in danger. Again, your point, we're seeing a big fall-off to your question.

And thanks for that, guys. And the last one I had, just, you know, knowing that you called out the $3,000 savings there, I guess, did you talk about what that $3,000 represents as a percentage of the average build cost on a home?

Yeah, I mean, it's about a point. It's a little over a point, actually. I mean, it's 60 basis points against our ASP, and so, you know, it's a little bit more than 1% of the build cost of the home.

Okay, great. That's all. Thanks, Jeff. All right. Thanks, Jay.

Thank you. At this time, we have no further questions.

I want to thank everybody for joining us on our call this quarter and we look forward to talking to you on our second quarter call. This concludes today's call. Thank you.

Thank you. This does conclude today's conference. You may disconnect at this time. Thank you and have a good day.