PulteGroup, Inc.

Thank you for standing by. My name is Jeannie and I will be your conference operator today. At this time, I would like to welcome everyone to the Pulte Group, Inc. Q1 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Jim Zoomer. You may begin.

Great. Thanks, Jim. Good morning. Let me welcome everyone to today's call. We look forward to discussing Pulte Group's outstanding Q1 operating and financial results. The period ended March 31, 2024. I'm joined on the call today by Ryan Marshall, President and CEO, Bob O'Shaughnessy, Executive Vice President and CFO, Jim Osowski, Senior VP, Finance. A copy of our earnings release and this morning's presentation slides have been posted to our corporate website at PulteGroup.com. We'll post an audio replay of this call later today. I want to alert everyone that today's presentation includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now let me turn the call over to Ryan. Ryan?

Thanks, Jim, and good morning. As you read in this morning's press release, Holti Group reported record first quarter results across many of our key financial metrics, from top-line revenues of $3.8 billion to gross margins of 29.6% to bottom-line earnings of $3.10 per share, It was an exceptional quarter. These strong first quarter results helped to drive a return on equity of 27.3% for the trailing 12-month period. Our strong first quarter results reflect long-term strategic planning and a disciplined capital allocation process that have underpinned Pulte Group's success for more than a decade. I would suggest that another driver of our record Q1 results are decisions we made in the fourth quarter of last year, decisions that I think are emblematic of the balanced approach we take to running our business and to delivering high returns. On our last earnings call, we talked about decisions we made in the fourth quarter of last year to not lower our prices in a chase for volume. As you will recall, demand in the fourth quarter of 2023 had started slowly but improved as interest rates began to moderate. Had we made the decision to push incentives aggressively as the quarter progressed, we likely could have delivered higher closing volumes in 23. With demand improving in the fourth quarter, we elected to hold our pricing and have had more inventory available for the 2024 spring selling season. The result of this decision is that we were in a position to sell and close more homes in the first quarter of 2024 and at higher margins. That's what you see in our Q&A results. Closings and gross margins above our guide as demand dynamics allowed us to sell more homes with better net pricing. When buyer demand is rising, we're often asked how many more homes we can sell. Given the value we place on entitled lots and our focus on driving high returns, more volume is not the only answer as we work to balance pace and price to drive high returns. Within our operating model, stronger demand provides choices. We can sell more houses or we can raise prices. Or, as was the case in the first quarter, we can do both. What we experienced in the first quarter is that areas of strong demand last year, such as the Southeast, Florida, and Texas, continued to perform well into 2024. Even more positive is that areas that had some struggles in 2023, notably Arizona, California, and Nevada, were much improved in 2024. Consistent with the favorable conditions in the first quarter, almost all our markets displayed pricing dynamics that were stable or improving, which allowed us to raise net pricing in more than half of our communities. As you've heard us say many times, our pricing decisions are made with the goal of delivering high returns and the best overall business outcomes. Depending upon the community and the buyer's wants and needs, we may have raised base prices or lowered incentives. The result being that net pricing in the quarter across many of our markets was up between 1% and 5%. The impact of these actions on our business performance is powerful. As Bob will discuss, we are increasing guidance for both full-year closings and gross margins. Against generally favorable demand conditions, the supply of available housing remains tight. We have the long-term structural issue resulting from a decade of underbuilding that has the country short approximately 4 million housing units. At the same time, the available inventory of existing homes for sale continues to be low as homeowners remain locked into their low mortgage rates. Life happens, so we are seeing some additional existing homes come to market, but the numbers remain well below historic rates. As a home builder, this is a great operating environment as we are supplying a product that a lot of people need and want. I appreciate, however, that our country's housing shortage can create hardships for today's consumers as the lack of supply keeps housing prices high. In fact, some of our recent buyers said that they made the decision to buy now because they couldn't wait any longer for rates to roll back. In a market where home prices are high and because of limited inventory, they will likely continue moving higher. Our company's ability to offer targeted incentives, particularly mortgage rate buy downs, is a powerful tool that can help bridge the affordability gap. For example, in the first quarter, approximately 25% of our home buyers used our national rate program. In a world where the consensus is that interest rates will be higher for longer, our interest rate incentives likely become an even greater competitive advantage especially relative to the existing home seller. Higher interest rates create additional challenges for today's homebuyers, but we appreciate that rates are moving higher because of a resilient economy and a strong job market. Given these conditions, we are optimistic about 2024 and Pulte Group's ability to continue delivering strong financial results. Now let me turn the call over to Bob for a review of our first quarter results. Bob?

Thanks, Ryan. Good morning. As Ryan noted, the company delivered exceptional operating and financial results in the quarter, which have us well positioned to realize outstanding financial performance throughout 2024. In the first quarter, we reported home sale revenues of $3.8 billion, which represents an increase of 10% over the prior year's first quarter. Higher revenues in the period were driven by an 11% increase in closings to 7,095 homes, partially offset by a 1% decrease in average sales prices to $538,000. The lower closing price compared with the first quarter of last year reflects a shift in the geographic mix of homes closed, as we realized relatively higher closings from our southeast and Florida markets, with more modest increases in our higher-priced western markets. Closings in the quarter came in above our guide as we had available spec inventory to meet the strong buyer demand we experienced in the period. As Ryan highlighted, by choosing not to chase volume in last year's fourth quarter, we had additional inventory in Q1 that we were able to sell and close with better margins due to the improving buyer demand activity in the quarter. Our spec production is predominantly within our first-time buyer communities, so on a year-over-year basis, we realized increased closings from first-time buyers. In the quarter, our closing mix included 41% first time, 36% move up, and 23% active adult. In the first quarter of last year, the mix of closings consisted of 38% first time, 36% move up, and 26% active adult. Reflecting the favorable demand conditions we experienced in the first quarter, net new orders increased 14% over last year to 8,379 homes. In the quarter, we realized a year-over-year increase in gross orders and a reduction in cancellation rates. Cancellation to the percentage of starting backlog fell to 10.1%, down from 12.7% in the first quarter last year. Average community count for our first quarter was 931, which is an increase of 6% over the prior year, and in line with our guidance for year-over-year community count, growth of 3% to 5%. month for the quarter was above our historic average for the period, excluding the pandemic-impacted years of 21 and 22. I would also like to highlight that orders in the quarter were higher across all buyer groups, which is another sign of the overall strength of the market. More specifically, net new orders among first-time buyers increased 8%, move-up increased 22%, and active adult increased 12%. Consistent with earlier comments, the large increase in orders among move-up buyers was influenced by improving market conditions in the West where our business mix is much more heavily weighted towards move up. Given this strong start to our spring selling season, our quarter end backlog increased to 13,430 homes with a value of $8.2 billion. We started approximately 7,500 homes in the quarter and ended the period with a total of 17,250 homes under construction. Our production pipeline includes approximately We are operating just above our target of one finished spec per community, but believe carrying a few more finished specs is the right strategy, given buyers' preferences and the fact that we are still in the more active spring selling season. Given the units we have under construction and their stage in production, we expect to close between 7,800 and 8,200 homes in the second quarter. With a strong start to the year in both orders and closings, We are raising our guide for full year closings to approximately 31,000 homes. This would represent an 8% increase over 2023, which is the higher end of our long-term goal of growing our closing volume between 5% and 10% annually. Closings in the first quarter had an average sales price of $538,000, which was slightly below our guide for pricing of $540,000 to $550,000. Relative to our guide, pricing in the quarter was influenced by the geographic mix of closings, along with a higher volume of spec homes closed in the period. As we move through the remainder of the year, we expect a mix of homes closed in each quarter will result in ASPs consistent with our prior guide of $540,000 to $550,000. For the first quarter, we reported a gross margin of 29.6%, which is an increase of 50 basis points over the first quarter of 2023. and a sequential gain of 70 basis points from the fourth quarter of 23. At 29.6%, our first quarter gross margin was also notably higher than our guide. Beyond Ryan's comments that we were achieving high returns by actively managing both pace and price, MIPS had an impact on our reported Q1 margins. Higher demand increased in the quarters as the quarter advanced, which allowed us to sell and close more homes in the period that forecasted. On a relative basis, more of these closings occurred in our higher margin markets in the southeast of Florida, resulting in a meaningful increase in reported gross margins for the quarter. Based on Q1 signups and the composition of our backlogs, we would expect the geographic mix of closings to be more balanced as we move through the remainder of the year. That being said, we're raising our gross margin guide for the remainder of 24. We had previously guided the quarterly gross margins of 28 to 28.5%, but we now expect gross margins in the second quarter to be approximately 29.2%. Based on current backlogs, we'd expect gross margins in the third and fourth quarters to be approximately 29%, but we still have homes to sell and close, so demand conditions over the coming months will impact the results we ultimately report. Beyond buyer demand and near-term pricing dynamics, the gross margin guide for the remainder of 24 also reflects expected changes homes we expect to close. Given recent sign-up trends, we anticipate closing more homes in our west region, which currently have a lower relative margin profile, due to the fact that we adjusted pricing in these markets over the course of 2023 to achieve appropriate sales paces. Looking at our costs, reported SG&A in the first quarter was $358 million for 9.4% of home sale revenue. As noted in our press release, our reported SG&A for the period includes a $27 million pre-tax insurance benefit. SG&A in the first quarter of 23 was $337 million for 9.6% of home sale revenues. Consistent with our previous guide, we continue to expect SG&A expense for the full year to be in the range of 9.2% to 9.5% of home sale revenues. Based on normal seasonality, we expect to realize increased overhead leverage as we move to the remaining quarters of the year. Our financial services operations reported pre-tax income of $41 million for the first quarter, which is an increase of almost 200% from last year's pre-tax income of $14 million. The increase in Q1 pre-tax income was driven by better market conditions across our financial services platform. Financial services also benefited from higher capture rates across all business lines, including an increase to 84% up from 78% last year in our mortgage operations. As noted in this morning's press release, in the first quarter, we completed the sale of a joint venture that resulted in a gain of $38 million. On our income statement, this gain was recorded in equity income from unconsolidated entities. Our reported first quarter pre-tax income was a period record of $869 million, an increase of 24% over last year. Against that, we recorded tax expense of $206 million, which represents an effective tax rate of 23.7%. Our reported Q1 tax rate was impacted by energy tax credits and stock compensation deductions recorded in the period. For the balance of the year, we continue to expect our tax rate to be in the range of 24% to 24.5%. In total, our reported Q1 net income was $663 million for $3.10 per share, compared with prior year reported net income of $533 million, or $2.35 per share. Earnings per share in our most recent quarter benefited from a 6% reduction in share count compared with the prior year as we continue to systematically repurchase our stock. Moving past the income statement, we invested approximately $1.1 billion in land acquisition and development in the first quarter. Consistent with our recent land activity, 60% of our land spend in the quarter was for the development of our existing land assets. Our Q1 land spend keeps us on track with our plan to invest approximately $5 billion in land acquisition and development for the full year, of which we continue to expect about 60% will be for development, with the remainder for the acquisition of new land positions. We ended the quarter with approximately 220,000 lots under control, of which 51% were held via option. The purchase of several large land positions in combinations with decisions not to move forward with a few option transactions during the quarter lowered our lot option percentage from the end of 2023. I would highlight, however, that 74% of the lots we approved in this most recent quarter were under option. As our first quarter numbers indicate, we continue to work toward our multi-year goal of controlling 70% of our land pipeline via option. Looking at our community count, we continue to expect average community count in 2024 to increase 3% to 5% in each quarter over the comparable prior year period. Along with investing in our business, we continue to return capital to shareholders. In the quarter, we repurchased 2.3 million common shares at a cost of $246 million for an average price of $106.73 per share. In the quarter, we also opportunistically purchased approximately $10 million of our outstanding bonds. After allocating approximately $1.4 billion to investment and the return of funds to shareholders, we ended the first quarter with $1.8 billion of cash. Taking all of this into account, our quarter end gross debt-to-capital ratio was 15.4%, while our net debt-to-capital ratio was only 1.7%. Now let me turn the call back to Ryan for some final comments.

Thanks, Bob. As you would expect, given the strength of our first quarter results, buyer interest was high in the period as order of paces increased beyond typical seasonality. That sales momentum continued into April, although we are now seeing some moderation of traffic into our communities due to the recent increases in interest rates, particularly within the Suntex brand. While the change is relatively modest and based on a limited number of days, Consumer feedback suggests that higher rates are causing some buyers to evaluate the timing of their activity due to the volatile interest rate environment. We'll continue to monitor how buyers respond to changes in the rate environment and are prepared to adjust pricing or incentives to ensure we are appropriately turning assets. During our last earnings call, we talked about the opportunity for Pulte Group to grow its business 5% to 10% annually. Given the lengthy land investment process, organic change in this industry takes time to accomplish, but we have been systematically planning and positioning to deliver against this goal for the past few years. I think that the company's efforts are reflected in the allocation of capital into growing our business. Including our Q1 spend, since 2021, our operating teams have invested approximately $14 billion in land acquisition and development, with plans to invest another $5 billion in 2024. Along with the land, we have been investing in our people and working to ensure the needed trade capacity is available to support our expanding operations. I'm proud to say that we've accomplished this while adhering to the same underwriting hurdles and investment disciplines which have been the cornerstone of Pulte Group for the past decade. Such discipline has allowed Pulte Group to more consistently grow its earnings, drive substantial cash flow from operations, and deliver high returns. And we've accomplished this while maintaining the superior build quality and customer experience which Pulte Group home buyers have come to expect. Before opening the call to questions, I want to take a minute to recognize and celebrate our team for once again being named a Fortune 100 Best Company to Work For. What makes this recognition so important and gratifying based on feedback from all of our employees. This marks Pulte Group's fourth consecutive year on the list and is a testament to the culture of personal caring and professional development that we work to maintain. I am proud to lead such an organization that is committed to taking care of our customers and each other. Let me now turn the call back to Jim Zoomer. Great. Thanks, Ryan.

We're now prepared to open the call for questions so we can get to as many questions as possible during the remaining time of this call. We ask that you limit yourself to one question and one follow-up. Dean, if you would explain the process, we will get ready to get started with Q&A.

Thank you. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, for today's session, we request that you limit to one question and one follow-up. Your first question comes from the line of Stephen Kim with Evercore ISI. Please go ahead.

Yeah, thanks very much, guys. Impressive results, and I appreciate all the guidance that you provided. I guess my first question relates to your longer-term targets with respect to land. Ryan, I think the last time I asked you this question, I was curious about sort of where your long-term target is, and I think I stated it in terms of years owned. I understand that you want to have about seven years controlled with about 30% optioned over the long term. That would put you at about a little, you know, over two years of owned land. You're quite a bit above that now. And so my question is, am I thinking about that right? Is your long-term target for owned land, you know, a little over two years owned? And over what time span do you think we should expect you to migrate to that if that is in fact your target?

Yeah, Steven, thanks for the question. I think your overall target of seven years controlled is about right. And then we've stated our long term target of optionality at 70%. We do think it'll be a multi year journey in getting there. And that's, that's really driven by the fact, Steven, that we want to do it in a very um organic natural way that drives uh ideal economics for each individual transaction um we highlighted in the prepared remarks bob did uh that in the quarter 74 of the deals that we approved were under option um we think that type of activity over the next uh several years will have us arrive at our long-term target in a very natural way when we do that

To your point will be right around something just over two to two and a half years of own land at that point Yeah, and thanks for that and then you know as you progress in that manner It will unlock some additional cash flow in addition to your you know net earnings And so I wanted to turn to cash flow next I think you gave a guidance a guide for cash flow from operations for the full year previously at about 1.8 billion and you've taken up, you had a great one queue, you've taken up your outlook for both volume and gross margin and let's just say operating margin for the year. Can you give us an update on where you're thinking cash flow from operations may come in for the full year in light of those changes? And maybe even more importantly, what should we expect in terms of deployment into dividends and repurchases? I noticed this quarter, for example, it was pretty much buybacks was pretty much equal to cash flow from operations and your leverage is pretty much stabilized in low single digits. So is it right to think that maybe whatever you generate in cash flow from operations, you know, with a little bit of flex quarter to quarter, but in general, that's about what you would deliver in terms of, you know, repayment, sorry, repurchases and dividends?

Yeah, Steven, it's Bob. Good morning. We didn't update the guide on cash flow. It's early in the year. You know, we're thinking about What we're investing in the business, you can see if you look at the balance sheet just since the end of the year, we're up about $300 million in investment in the balance sheet, roughly half land, half house. And so to your point, we certainly expect with incremental volume and incremental margin that will generate a pretty healthy amount of cash. Some of that will be invested to meet that 5% to 10% growth that we've talked about. um so you know more to come on that as the year progresses certainly um but i think the bias would be for more cash from operations um and to your point on capital allocation i think you know we've been pretty consistent right for the last 10 years since we laid out our our strategy for capital allocation a invest in the business pay a dividend that grows with earnings um you know buy back stock with excess capital against a modest debt profile obviously the leverage is lower than we had anticipated um you know we look at liability management as part of our capital allocation so i don't know that i'd go so far as to say you know cash flow from operations will equal repurchase activity you know i think we've been pretty clear we're going to report the news on what our repurchases are going to be um but we obviously in a world where we're generating cash at that level particularly if we have less invested in the balance sheet as we move towards that 70%, it will free up capital and we'll work through what to do with that capital as we generate it.

Okay. Well, we'll be staying tuned. Thanks a lot, guys, and congratulations on the strong results.

Thanks, Stephen. Thanks, Stephen.

Your next question comes from the line of Matthew Bowley with Barclays. Please go ahead.

Morning, everyone. Thank you for taking the questions. So in the fourth quarter, you, as you mentioned, sort of didn't raise incentives to chase volume. Now, speaking to rates being higher for longer, eventually we'll be past the peak of the spring demand and all that. So I guess going forward, how are you thinking about that tradeoff with incentives from here, given where your margins are? Is there an opportunity to perhaps trade a little bit of that margin to drive better growth, obviously in the context of supporting returns? Thank you.

Matt, good morning. It's Ryan. Thanks for the question. We've said in the past we're not going to be margin proud, and I would tell you that remains true. As we highlighted in some of my prepared remarks today, we believe our operating platform and how we've positioned our specific community investments we're in a great position to command excellent pricing, get pace and price, which you saw in this most recent quarter. Um, we, we, you know, given the interest rate environment that we are clearly going into higher for longer, we've got the ability to use the very powerful tool of forward mortgage, uh, rate commitments that allow us to offer a pretty attractive, um, you know, a pretty attractive incentive program. Right now we're at 5.75% nationally and about 25% of our buyers are taking advantage of it. The other thing I'd highlight is that 60% of our business is move up and active adult, which tends to not be quite as rate sensitive as the first time buyer. With that first time buyer, that's where predominantly our Centex brand, predominantly first time buyers, And we see a higher percentage of those buyers take advantage of the four great commitments. The last piece, Matthew, that I'd probably point out is that our guide for the balance of the year assumes that the incentive load that we currently have, which on the most recent quarters closings was running at 6.5%, we've assumed that that stays flat going forward.

Gotcha. Okay. Thank you for that, Ryan. The second one, I wanted to move to the topic of land costs and land inflation. I think last quarter you had spoken to the potential for mid to upper single digit inflation in land, but maybe it wasn't totally clear on exactly when that would impact your gross margin. I'm curious, you know, can you kind of walk us through the timing of sort of land costs flowing into your gross margin you know, and then kind of what are you seeing in real time in the land market? Has the market started to decelerate at all, or is it kind of still kind of chugging along at that mid-upper single-digit rate? Thank you.

Yeah, Matt, it's Bob. That mid-to-high single-digit increase in our lot costs was in our Q1 and is expected to continue through the balance of the year. So when we gave margin guide you know we had pretty good visibility into our lot costs because those are lots typically on the ground already so it's there in terms of the current market conditions you know it's still competitive out there you know i've said this before you know land hasn't gone on sale um and you know slight variations in market typically don't result in prices declining um You know, the market's super efficient on the way up, a little bit sticky on the way down. So, you know, for quality parcels, it's competitive.

Gotcha. All right. That's clear. Thanks, Bob. Good luck, guys.

Your next question comes from the line of Carl Riker with BTIG. Please go ahead.

Thanks. Morning, guys. Saying this is the first time since mid 2020 when you haven't addressed construction cycle times. So I thought at least I'd ask across the the markets, products and and geographic markets are cycle times effectively normalized now for you? Or are we still? Are we still a little bit longer than than you were pre COVID?

Morning Carl, thanks for the question. We saw a couple of days of cycle time improvement in the most quarter, so we were at 128 days down from the 130 that we ended the fourth quarter of 2023 in. We are still on track and still are targeting being at 100 days by the end of the year. When we look deeper at our Q1 numbers, we had some long-cycled closings that had been in production for a long time, and many cases were multifamily and condo buildings. um that we think kept the overall number that i i just shared with you of 128 days a higher a little bit higher than than what we think um is our actual run rate at this point um when we look at a lot of our markets we're already back to kind of pre-covered cycle times of uh you know even sub 100 days so we've made a lot of progress in in a lot of places we have a few markets that are a little stickier where we're working hard to get cycle times back to where we'd like them to. But by and large, we still feel that the target we've set of 100 days is very much in reach.

Great. Thank you, Brian. And then you talked a little bit about existing home inventory creep that I think we're seeing in some of the data. If we dig into that, Ryan, if you can dig into that, Is this inventory that you'd expect would be effectively a net neutral impact of the demand supply? In other words, these are houses to move elsewhere versus vacant capacity, meaning investors or second homeowners who are putting their homes on the market effectively vacant. Because I think there's an important difference between the two. So to the extent that you know, what are you seeing? Thanks.

Yeah, outside, you know, there might be, I'm sure there's some markets, Carl, where There is vacant investor-driven inventory that you could characterize as new supply. The majority of the markets where we operate, we think any existing resale inventory that does come to market, those are buyers that are going to go buy another home somewhere else. So we think it's largely neutral on the overall supply side.

Thank you, Rod. Thanks, all.

Thanks, all.

Your next question comes from the line of Anthony Pettinari with C. Your line is open.

Good morning. I was wondering if you could talk about maybe the potential impact of the NAR settlement on your business or maybe the broader industry and any kind of potential secondary impacts to Pultean.

Yeah, Anthony, we're watching it closely, as I think a lot of the real estate world is. Where we think it ultimately goes is it'll create better transparency around the fee structure and will likely change over time the way that the providers of those services charge. And the users or the consumers of those services ultimately pay. So, you know, we, realtors are an important part of our business. And, you know, we're probably 60% of the sales that we have include a buy-side realtor involved. So, you know, we certainly support the realtor community. They've been an important part of our company for a long time. But, you know, we are watching the way that the landscape there will certainly change.

Okay. And then, you know, you talked about stronger trends regionally. I think in Nevada, Arizona, California, if I got that right. Is there anything particularly driving that in your view? And maybe you can just talk about the kind of long-term attractiveness of that region as you kind of build out the community count.

Yeah, a couple things happened there. It was a market that saw a lot of price appreciation in the COVID years. Affordability, we think, got strained for certain. Last year, we did a fair amount of price discovery as we worked to right-size what our go-to-market price was in those markets. Um, you know, that combined with, I think a general improvement in buyer sentiment contributed to, um, you know, the lights coming back on in the Western market. So, um, you know, some of the markets that we'd highlighted pretty consistently last year, um, Seattle, Northern California, Southern California, Las Vegas, Phoenix, uh, those were strong contributors to our overall results in this most recent quarter. We'd expect that to continue. Bob highlighted that the relative margin contribution out of those markets will be lower than some of the other parts of our business. We've incorporated that incremental volume that we're getting at a slightly lower margin contribution profile into our guide. So look, we're pleased that those markets are contributing. We've got a lot of capital invested there. big housing markets. People want to live there for a number of reasons, you know, climate jobs, etc. So, you know, we're pleased that they're doing well.

Okay, that's helpful. I'll turn it over.

Your next question comes from the line of Michael Rahot with JP Morgan. Please go ahead.

Hey guys, good morning. This is Andrew Ozzy on for Mike. Quick one, I just wanted to drill down if I could on the demand trends you've been seeing over the last few months, just given the change of rates and some concerns in the market. I'd love any kind of progression you saw in the quarter and here into April.

Yeah, it was a strong quarter, strong first quarter. We highlighted that we saw some trends that were even stronger than normal seasonality. You know, the first few weeks of April have continued to show signs of strength. We did highlight that, you know, as we look at traffic, new traffic that's coming into the stores, while a limited number of days in that data set, you know, we are seeing a small downturn that we think is reflective of the change in the rate environment. So, you know, we're going to keep an eye on it. You know, we don't at this point think it's anything to be too alarmed about, but we're watching it.

Great. Thank you. And then, I guess, secondly, on the material costs, how have these kind of trended and any kind of detail in how that's reflected in your 2Q gross margin, kind of your assumptions for stick and brick costs?

Sure. Build costs, they were stable in the first quarter, about $80 a square foot for base house. That's flat with Q4 of 23. It's actually down from $84 a square foot in the first quarter of last year. As we look at 24, we expect cost inflation on labor materials to be pretty manageable with low single-digit increases, and we factor that into our guide.

Thank you so much. I appreciate it. Congrats on the quarter.

Thank you. Thank you.

Your next question comes from the line of John Lavolo with UBS Financial. Please go ahead.

Good morning, guys. Thank you for taking my questions as well. So the revised full year gross margin, excuse me, full year gross margin outlook is about flat year over year. And I think, you know, previously you had talked about Pricing being kind of flat year over year. That was a little bit better in the first quarter for sure. Mid to high single digit land cost depreciation, kind of low single digit construction cost appreciation. Just curious how you guys are managing that to actually achieve a flat year over year gross margin in that kind of cost environment with what had previously been expected to be sort of flattish pricing.

Yeah, I think it's the strength of the market, John. We highlighted that we're raising prices in a number of our communities at 1% to 5%. That's really the driver combined, certainly in this first quarter, with the mixed differential that we had highlighted.

So is it pricing and mix a little bit better than previously expected?

Yeah. And the mix, just to be clear, John, the mix was really a Q1 issue. We think that smooths out. based on the relative strength of volume that Ryan highlighted out west. So we'll get more of that relatively lower margin profile in the back half of the year.

Okay, and that was sort of my follow-up is, you know, if we think about the positive mixed impact in the first quarter, I mean, how much of the, you know, slight step down from 29.6 to 29.2 in the gross margin outlook for the second quarter is the reversal of that mixed impact, or is that really more of a back half, you know, phenomenon?

It's both, right? But you'll see some of it in Q2 based on the sales that we did in the first quarter, and then you'll see more of it later in the year. That's part of the reason for the step-down margin. The other thing that we highlighted on the call, we still have a lot of homes to sell for the back half of the year. And so the point we were making is it depends on how the demand environment holds up. If it does, that's good. If the market changed, you could see plus or minus depending on whether it's the positive change or a negative change.

Understood. Thank you, guys.

Your next question comes from the line of Sam Reed with Wells Fargo. Please go ahead.

Awesome. Thanks so much, guys, for taking my questions. And thanks for the incremental color on April, especially the traffic detail. I mean, it definitely makes sense that the syntax buyer is a bit more rate slash payment sensitive. But I wanted to drill down on this a bit more and maybe see if you had any perspective on traffic across other parts of your business, that 60% that's kind of active adults and move up. And what you're seeing from that buyer cohort, if anything, is rates move.

Sam, we're not parsing the traffic data quite that finely for the purpose of this call. You know, one other data point that I will tell you, while we've seen traffic into the stores moderate over the last, you know, several days, traffic to the website's been incredibly strong. So, you know, we still think that there's high buyer demand and desire for home ownership. You know, certainly anytime there's rate fluctuations, it can cause um you know some disruption in buyer behavior but we think the fundamental um you know uh or the overall demand for housing remains incredibly strong and we're still in a very supply constrained environment um so the overall thesis about this has been a strong operating environment for the industry and this company and what's been a pretty high interest rate environment You know, we think the environment that we would expect for the balance of the year, we can continue to show, you know, success in that type of situation as well. Affordability is, there's no question, it is the headwind that we'll continue to navigate for, you know, the balance of the year. And we think we've got the tools to do that.

No, that's helpful and then maybe switching gears here. It's been a little while since this topic has come up, but can you talk to your relationship with invitation on the single family rental side and give us an update on where things stand? Perhaps how many homes you're looking to sell to them this year? Any color there would be great. Thanks.

Yeah, we targeted when we kind of kicked off the, you know, the philosophy or the strategy that we had on single family rental. with uh invitation homes and you know we also partner with some some other uh local uh single family rental operators as well we've targeted to be somewhere around five percent of our total volume uh would go into the single family rental kind of channels um you know the current year the closings that we have that will go into that pipeline or right uh kind of in that five percent range Um, you know, certainly the interest rate environment, um, currently I think makes it harder for the single family rental operators to underwrite, uh, their deals. Um, you know, we wouldn't expect that to necessarily, um, you know, be the case, uh, forever. Um, but you know, in the, in the kind of right here and now a little harder to make those deals pencil for those SFR operators. It's part of the reason that we've said. We want it to be part of our business, but not such an outsized component that it creates disruptions in how we operate.

That's helpful.

I'll pass it along, guys.

Your next question comes from the line of Rafe Jedrosich with Bank of America. Please go ahead.

Hi. Good morning. Thanks for taking my question. I was wondering if you could talk a little bit about, on the cost side, what are you seeing today in terms of the cash costs for land and materials relative to what's flowing through your P&L? And what's kind of the outlook on the cost side?

Well, certainly on the material side, it is pretty consistent, as Jim highlighted, There are built cost per foot flat. You know, the only, you know, the only thing where we're really feeling any pressure there is on OSB, which has run up a little bit. You know, in terms of the land, you know, we've highlighted that, you know, high single digit increase in lot costs. That is, you know, candidly continuing a theme that has been going on for a number of years. and it's likely to persist. I've often described it as a conveyor belt of land. We have three years of lots that we buy at any or control at any one point in time, and they kind of roll on. The most recent year falls off. Every new year coming on is a little bit more expensive, and that's a combination of increased land costs and increased development costs. But we haven't seen a step change in that, if that's really what you're focused on. So, again, I think you can and should expect to see our lock costs going up, you know, for the foreseeable future.

Got it. That's helpful. And then just looking at the first quarter gross margin, can you just talk about the drivers of the quarter, the 70 basis, when it's quarter over quarter step up? And then, you know, what were the upsides to your initial values?

Sorry, are you asking sequentially or year over year?

Sequentially.

Yeah, so you've got 70 basis points. Certainly a part of that is going to be the strength of the relative to our guide of the strength of the market where for the spec homes that we sold, we got better pricing, which was a relative margin benefit over the fourth quarter. And the other thing is the mixed shift. not just in terms of geography which we had highlighted but on a sequential basis we also had a mixed shift towards move up which has this higher margin profile relative to first time which is where the margin came from they have i hate to use this but there's mix and there's a couple of different mixes going on um but when you're looking at the sequential margin performance. Certainly it's the strength of the market relative to what we thought coming into it, and also it's a little bit more move up, which has a higher margin profile for us.

Great. Thank you.

Yep.

Your next question comes from the line of Mike Dahl with RBC Capital Markets. Please go ahead.

Hi. Thanks for taking my question. I'm going to stick with margins. You know, Bob, you kind of alluded to this. It's a tricky time when you've just had this great move. You're maybe just on the front end of seeing some traffic impacts, but you're having to give guide out a few quarters. And so I appreciate that there's still some uncertainty when you've got a third of your full year closings yet to be sold. So, maybe just talk through, you know, the assumption for flat incentives against this move in rates. Just talk about kind of why that is kind of baseline assumption or if it just felt like kind of right placeholders and matches kind of what your backlog margins look like today. Maybe just a little more detail on how you went through this process at kind of an odd time when the rate move just happened.

Yeah, it's interesting. I'd refer back to something Ryan offered, which is that affordability is still a challenge. And so it gets that backdrop. Our expectation is that we will need to continue to incentivize folks. And the predominant way we're doing that today is through our national commitments and some sort of rate band support. So our expectation is that that continues. That was our expectation coming into the year. In the first quarter, you all occur to say it was 6.5% again, just like the fourth quarter. That's roughly $35,000, $40,000 a house. In a world where rates are actually trending back up, I think that we're going to need to continue to support that. It's a little bit challenging to your point, but I think on balance, our expectation is that's where we're going to need to be to meet some of the affordability needs. It's one of the reasons we think you'll continue to see this strong market performance on a relative basis of new versus resale because we can offer those incentives.

And I guess as my follow-up, more specifically, that kind of implies that you'll let your advertised rate float up over time to match what the market move is and maintain your relative incentive. And so if you're allowing your rate to kind of float up, call it 40, 50 basis points from where it may have been a month or two ago. What have you done or seen in terms of kind of thinking about sensitizing some of the recent demand trends, particularly in your Centex brand? I understand that it's not going to be a major, potentially not as major a dynamic for your move up or or active adult, but in your syntax brand, you know, what's the sensitivity to a 40, 50 basis point move in rates that you've kind of seen or thought about?

Yeah, well, certainly for that true entry-level buyer, it's the game, right? And so, you know, we've got programs that offer them lower cost incentives, so we're giving them more rate support relative to others who have choices. know it's worth it to remember we offer a national program but there's a lot of you know detail in terms of what we can and actually do offer to people and what they what they want to kind of access in terms of our support um you know there will be some people with rates moving up that will literally fall off the ability to buy a home um you know that's not the case for our active adult move-up buyers and candidly for a lot of our centex buyers You look at our average sales price at $419,000 in this most recent quarter. That's not typically your true entry-level buyer. We're at a little bit higher price point. Our first-time communities are typically a little bit closer in. And so I think it depends on who your buyer is. But to answer your question about will we vary our offering, the answer is yes, we have to.

We are...

actively managing these national programs. We're buying commitments in relatively small amounts so that we don't get caught by market changes. And what it allows us to do is change our offering based on what the market is doing. So as the market rates floated down, we moved our offer rate down somewhat to try and be responsive to deliver a real savings versus the street rate that they can get on their mortgage. As rates tick back up, we're moving those rates up a little bit. It's an art, not a science, but I think what you can expect us to do is listen to the consumers in terms of what they need and seek to offer them programs that give them what they need.

Thanks, Bob. Appreciate that.

Your next question comes from the line of Alan Ratner with Zellmer and Associates. Please go ahead.

Hey, guys. Good morning. Thanks for sending me in here. Nice quarter. So, you know, we'd love to get your updated thoughts on specs versus bill to order. I know you and others kind of ramped the spec production, you know, as cycle times were elongated and there was, you know, a premium or at least kind of that margin differential spec versus BTO was kind of smaller than it historically has been. I'm just curious if you're thinking about that any differently today with cycle times continuing to normalize and rates seemingly being higher for longer. Sounds like maybe the Centex offering, which is predominantly spec, I would think, is maybe seeing more of that impact from the move in rates. So are you at the point now where you are kind of dialing back the spec starts a bit, or do you still want to maintain the current mix of your businesses?

know we're pretty happy with where we're operating um and we look at a couple i mean the first thing we look at is what's the percentage of build to order versus spec sales um right now it's running around 50 50. um and then you know we highlighted it bob's prepared to march 40 40 of our whip is spec and we've got uh you know a little bit higher than one one final per active community so um you know we we pay attention to it closely it's something that we spend a lot of time managing and being responsive to what we're seeing in the market to your point most of our spec uh our syntax business is spec um we certainly have a little bit of spec in in the other two brands but ulti and dell web tend to be more of a bill to order um kind of model and we're certainly responsive to that as well so We're going to watch it, but in a higher interest rate environment, having available specs that you can more efficiently and effective apply the most powerful incentive to in the form of the forward mortgage rate commitments. You can do that better on spec inventory, which makes it more attractive. So you'll probably see us stay pretty close to where we're at.

Great. Appreciate your thoughts there, Ryan. And then pivoting to kind of the incentive environment, I think obviously you guys certainly made the right call by not chasing the market lower in the fourth quarter based on your performance this quarter. It sounds like from your guide for flattish incentives, you're not expecting to have to ramp discounts as the selling season kind of moves into its later stages. But what is the sensitivity you're looking at there? How much longer will the more recent, I guess, softer traffic trends or maybe sales activity, how long would that have to persist before you would sit there and say, you know what, we need to maybe increase those incentives a little bit to bring up the sales pace? Is it a few months? Is it kind of getting past the peak of the selling season and you're sitting on more inventory than you'd like? What does the decision process there look like?

Yeah, Alan, we look at sales rates every single day. It's one of the first emails that I look at is, you know, what did sales for the prior day come in at? And we look at, you know, qualitative and quantitative feedback that we get from our field operations and going through that decision-making process. You know, what I can tell you is the change in rate Never mind what it was and never mind what it's going to, just the mere fact that something changed. We've seen that cause pauses in buyer behavior over the last 24 months. Anytime there's been a step change in rate and the media cycle that goes with it, that certainly has a pretty profound impact on buyer behavior. Time does seem to cure it. Um, you know, the only thing that I would continue to kind of caveat and put out there is that affordability continues to be, you know, a real issue. And so, you know, we've got to, we've got to balance the, you know, the, the change there. Um, we think, um, you know, one of the things that, that we're going to continue to do is pay attention to what the headline rate is. And Bob talked about that a few questions ago. Our national mortgage rate incentives have got the flexibility to move based on what the market's doing. So we still think we can have a compelling offer out there relative to the street rate that doesn't necessarily cost us a whole bunch more relative to what we're currently paying. The last piece, Alan, is we are going to keep our production machine moving. We are a production builder, and we're going to do that in a way that we think optimizes kind of return. So, you know, if there are price changes or discount changes that ultimately have an impact on affordability that allow us to continue to turn the asset and keep the market share that we have, we'll definitely do that.

Thanks a lot for the thoughts, guys. Appreciate it.

We have reached the end of the call, and we'll take our final question from Ken Zener with Seaport Research Partners. Please go ahead.

Good morning, everybody.

Hey, Ken.

I wonder if you could just give some context on the regional comments you made. And I want to narrow it down to Florida, because it's a segment that obviously generates quite a bit of your EBIT. Can you, within Florida, talk about how that existing market supply rising affected, let's say, the Centex first-year move-up brands, realizing, you know, Orlando is different than coastal markets, but it's such a big market for you guys profitability-wise. You could maybe give a little color related to the margin swings. You're kind of staying with those trade-up buyers entry. within markets that are seeing it pick up an inventory specific to Florida. Thank you.

Yeah, Ken, I want to make sure that I understood kind of the full question. Maybe I'll give you a little bit of Florida commentary, and then if there's more follow-up, I'll let you ask that. Florida is a tremendous part of our business. We're in nearly every major housing market there. save miami um and and a big part of our business there tends to be focused on move up and age targeted um you know we have some entry-level business in our tampa and orlando businesses but the other the other big markets are predominantly move up and age targeted uh we get a little bit of move up in jacksonville as well or a little bit of entry level on jacksonville as well so um really strong business. Um, you know, a lot of job relocation there, a lot of, um, you know, folks that want to be there because I've got flexible work arrangements that allow them to work from home or work from elsewhere. Um, you know, the headwinds in Florida are, um, definitely affordability. Uh, we've seen, um, strong price appreciation in most Florida markets. Um, and then the other kind of headwind that you've got there's around uh property taxes and insurance um so certainly those things kind of play into that but florida continues to be a big part of our business and a real bright spot for our business as well that was sufficient thank you very much okay i will now turn the conference back over to jim zoomer for closing remarks

Great. Appreciate everybody's time today. We're around the remainder of the day for any follow-up questions, and we will look forward to speaking with you at various upcoming conferences and or on our next quarter's earnings call. Thanks for your time.

This concludes today's call. You may now disconnect.