PulteGroup, Inc. (PHM) Q2 2022 Earnings Report, Transcript and Summary

Good morning. My name is Chris and I'll be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup Inc. Q2 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator instructions] Thank you, Jim Zeumer, you may begin.

Great. Thank you, Chris and good morning. I appreciate everyone joining today to review -- our PulteGroup conference call to review our second quarter results for the period ended June 30, 2022. Joining me to discuss PulteGroup's strong second quarter are Ryan Marshall, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; Jim Ossowski, Senior Vice President of Finance. A copy of this morning's earnings release and the presentation slides had accompanied today's call have been posted to our corporate website at pultegroup.com. We'll also post an audio replay of this call later today. I want to highlight that in addition to reviewing our reported Q2 results, we will also be reviewing adjusted results for the second quarter of last year. Adjusted results exclude the impact of a $46 million pre-tax insurance benefit, as well as a tax benefit of $12 million resulting from a change in valuation allowances associated with state net operating loss carryforwards. A reconciliation of our adjusted results to our reported financials included in this morning's release and within today's webcast slides. We encourage you to review these tables to assist in your analysis of our business performance. As always, 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. Thank you. And now let me turn the call over to Ryan, Ryan?

Thanks, Jim and good morning. As you read in this morning's press release, PulteGroup delivered another quarter of exceptional and in many cases record setting financial results. Led by price appreciation and a 430 basis point expansion in gross margin, our second quarter earnings of $2.73 per share increased by 44% and 59% respectively over last year's reported and adjusted earnings per share. Our strong earnings performance helped to further reduce our debt-to-capital ratio to below 21% while raising our return on equity for the trailing 12 months to north of 30%. We've talked in the past about wanting to deliver high returns over the housing cycle and building the financial strength to safely navigate changing market conditions. I'm proud to say that we're accomplishing both. I would also note that consistent with our stated plans, we continue to return funds to shareholders having repurchased an additional 3% of our shares during the quarter. As we approach the 10 year anniversary of reinstating our share repurchase program, I think it's worth noting that we have reduced our share count from roughly 387 million shares at the end of 2012 to the current 233 million shares, a decrease of almost 40%. Bob will detail the rest of the quarterly numbers. So let me spend some time reviewing the demand dynamics we experienced during the quarter. Between National Housing Data and Wall Street analysts surveys, I suspect my comments may only serve to reaffirm your understanding of the changing market conditions. It is clear that the 200 basis point increase in interest rates over the past several months finally caught up with consumers. After two years of meaningful home price appreciation, the jump in mortgage rates created sticker shock and pushed affordability out of reach for some first-time buyers. At the same time rising inflation, falling consumer confidence and the drumbeat of a possible recession caused some buyers, some move-up buyers to hit the pause button. As for our active adult consumers, the drop in the stock market combined with the overall uncertainty has created some to slow their home search process as they wait for conditions to settle down. While demand has slowed, it is by no means stopped as we continue to work with buyers to sell homes at the right price where consumers see value, they remain engaged in the home buying process. Consumers who are in the market right now were obviously accepting of and making decisions based on current mortgage rates. What we are experiencing with these customers is that given the volatility in mortgage rates, a higher percentage of these buyers are interested in spec homes that can close in the coming 30 to 60 or even 90 days, rather than building to order. Given the shorter time to close, buyers are using their own funds or available incentives to lock in a mortgage rate or buy the rate down to an acceptable level. In other words, during this period of rate volatility, some buyers are willing to trade the opportunity to personalize the home for greater financial certainty. Reinforcing this point, I can tell you that the majority of incentives in the second quarter took the form of longer-term rate locks or rate buydowns. Many of today's homebuyers can still afford the price of a new home. But some need a little help on the rate or want the mortgage rate certainty for a home that will close later in the year. After 18 months of exceptional demand, we entered the second quarter with only 64 finished specs. And while we have successfully increased spec production to our historic range of 25% to 30% of units, we had a limited supply of quick move in homes available. We have taken actions to improve our inventory position and now have specs that have advanced in the build process and will be available to sell and close in the third and fourth quarters of this year. During this period of interest rate volatility, our strategy is to start specs consistent with buyer demand. As market conditions evolve, we are prepared to continue starting specs, reemphasize build-to-order homes or slow starts entirely as demand conditions warrant. The Fed has been clear in articulating their intention to fight inflation through higher rates and we recognize the housing market has been and will continue to be impacted by these actions. Well, consumers are being understandably cautious, people still desire homeownership. Aging Millennials still need homes and there remains a long-term deficit in U.S. housing stock after years of under building. Let me turn the call over to Bob for a review of our second quarter results, Bob? Robert O’Shaughnessy: Thanks, Ryan and good morning. Following on Ryan's comments, our second quarter financial results demonstrate both the continuation of positive trends as well as some of the newer challenges which are impacting the market. In the second quarter, PulteGroup's home sale revenues totaled $3.8 billion, an increase of 18% over the prior-year. Higher homebuilding revenues in the second quarter were driven by a 19% or $83,000 increase in average sales price to $531,000. Given our construction cycle times, the increase in average selling prices primarily reflects strong demand and pricing conditions across all buyer groups in the back half of last year. In the quarter, we closed 7,177 homes, which is down less than 1% from last year and a few units below our guide. While the overall production environment remains generally challenging, the shortfall in deliveries is primarily attributable to a specific supplier issue that impacted our Florida markets. More broadly, I think it's fair to say that the supply chain remains challenging. While we are seeing areas of improvement, I would use the word fragile to describe overall conditions. Between limited inventory in the system and bottlenecks in distribution, any disruption in production or shipping can set back construction by a couple of days or weeks. In fact during the second quarter, our overall cycle times extended by another two weeks. That being said, we are feeling a little more optimistic about supply chain conditions getting better through the back half of the year, allowing us to begin playing back workdays next year. The mix of deliveries in the second quarter continued to align with our started targets with 35% from first-time buyers, 39% for move-up buyers, and 26% from active adult buyers. In the second quarter last year, the mix was 30% first-time, 43% move-up and 27% active adult. We reported 6,418 net new orders in the second quarter, which is a decrease of 23% from the second quarter of last year. The decrease in orders reflects both slower sales pace, and higher cancellations resulting from the significant increase in mortgage rates over the past several months. The slowdown in signups impacted all buyer groups. Although our first-time buyers fared the best with orders up 1% to 2,454 homes. Move up orders were lower by 37% to 2,172 homes and active adult orders decreased 27% to 1,792 homes. On a relative basis, the stronger orders among first-time buyers reflects current buyer preference for spec homes that can close sooner with that less interest rate risk. By design, our spec production has been heavily weighted toward our first-time communities. Our reported orders for the quarter also reflects an increase in cancellations as some consumers were impacted by the change in consumer confidence and today's higher rates. On a unit basis, we had 1,152 contracts cancelled in the second quarter up from 665 cancellations last year. This pushed up our cancellation rate for the period to 15% compared with 7% last year. We always want our homebuyers to complete the transaction and enjoy their new Pulte Home, but when cancellations do occur, we have been able to resell the home. In the second quarter we operated from an average of 791 communities, which is a decrease of 2% from an average of 808 communities last year. After several quarters operating at a year-over-year deficit on communities Q2 ship market and flagship point, as we begin showing growth in our year-over-year community counts. More specifically, in the third and fourth quarters we expect to operate from an average of 800 and 830 communities respectively. Both numbers would be up over the comparable prior year period as we begin realizing the impact of increased land investment over the last several years. We ended the quarter with a backlog of 19,176 homes, which is down 4% from last year. While units are down slightly strong price appreciation over the past year has raised our backlog value by 18% to a record of $11.6 billion. At quarter end we had 23,349 homes under construction, which is an increase of 35% over last year. Consistent with Ryan's earlier comments about buyers seeking to minimize time to close, we have increased spec starts and ended the quarter with 6,789 spec units under production. While we have been successful in increasing the overall number of homes under construction, longer cycle times mean that 70% of these units are at the start or framing stage. As such, we expect deliveries in the third quarter to be in the range of 7,000 to 7,400 homes. While we have the homes in production, given changing market conditions and ongoing supply chain issues, we now expect full-year deliveries to be in the range of 30,000 to 31,000 homes. Based on the anticipated mix of closings. We expect the average closing price of homes in the third quarter and for the full-year to be in the range of 540,000 to $550,000. Supported by a strong price appreciation we have realized over the past few quarters, PulteGroup generated substantial gains in our home building gross margin, which increased 430 basis points over last year to 30.9%. In addition to higher prices, our Q2 gross margins reflects the flow through of lower cost lumber purchased in the back half of last year. As we discussed on our Q1 earnings call, we've experienced meaningful cost inflation for labor and materials in the current year, led by a significant upswing in lumber cost at the start of this year. Although lumber has decreased again, which will impact our 2023 closings, we've continued to experience incremental house cost inflation as the year has progressed. Based on our most recent internal estimates, we now expect house costs for the year to be up 10% to 12% over last year. Despite the ongoing inflation in materials and labor, including the meaningfully higher lumber costs, we are raising our margin guide for the third quarter and now expect to realize gross margins of approximately 30%. At the present time, we are maintaining our prior guide for fourth quarter gross margins to be in the range of 29.5% to 30%. In the second quarter SG&A expense totaled $351 million, or 9.2% of home sale revenues. In the prior year period our recorded SG&A expense of $272 million, or 8.4% of home sale revenues included a $46 million pre-tax insurance benefit recorded in that period. Excluding that benefit, our adjusted SG&A expense in the second quarter last year was $390 million, or 9.8% of home sale revenues. Based on the number of homes we expect to close in the third and fourth quarters, we are targeting SG&A expense in the third quarter to be in the range of 9.1% to 9.3% of homebuilding revenues. At the midpoint, this would be a roughly 40 basis point improvement over last year. For the full-year we still anticipate SG&A expense to be 9.2% to 9.5% of home sale revenues. Our financial services operations reported pre-tax income of $40 million in the second quarter, which is down from $51 million in the same period last year. The decrease in pre-tax income reflects the extremely competitive market conditions that continue to pressure profitability and capture rate in the business. In the quarter, our capture rate was 78%, down from 86% last year, as we are unwilling to chase market pricing down to unprofitable levels. Our tax expense in the second quarter was $212 million, representing an effective tax rate of 24.5%. In the second quarter of last year, our reported tax expense of $136 million, or an effective tax rate of 21.3% included a tax benefit of $12 million, and the benefit of federal energy efficient home credits, which expired as of December 31 last year. Looking at the bottom-line, PulteGroup's reported net income for the second quarter was $652 million, or $2.73 per share. In the prior year, our reported net income was $503 million, or $1.90 per share with adjusted net income for the period of $456 million, or $1.72 per share. In the second quarter, the company continued its active share repurchase program buying back 7.1 million shares for $294 million, or an average price of $41.44 per share. Through the first six months of the year, we have repurchased 17.4 million shares, or 7% of our shares outstanding for $794 million. Throughout the past 10 years, we have taken a fairly systematic approach to our share repurchases. We plan to maintain a routine presence in the market, but given ongoing stock market volatility, we will incorporate more of an opportunistic approach to share repurchases. Over the near term, we believe this strategy allows us to be more responsive to changing market conditions. We ended the quarter with $732 million of cash and a debt-to-capital ratio of 20.8%. We continue to see value and the potential to achieve appropriate risk adjusted returns in many of the land assets we put under control over the last couple of years. As such, we invested $470 million in outright land acquisition during the quarter and invested another $655 million in the development of existing land assets, bringing our total land investment for the second quarter to $1.1 billion. We remain constructive on long-term housing demand, but we appreciate that market conditions are in flux. While we always maintain a disciplined approach to land investment, we are assessing the land positions we have under control to make sure that the underwriting assumptions supporting our investment reflect current market conditions, and that the projected returns still achieve our required return thresholds. At this time, we still expect to invest between $4.5 billion and $5 billion in land acquisition and development for the year with more than half of this spend allocated to developing existing land assets. Given today's changing market dynamics, the optionality of our land book becomes an even more important tool for potentially enhancing returns and controlling risks. We ended the second quarter with 243,000 lots under control, of which 54% were controlled through options. And as we highlighted on our last earnings call, we are assessing ways to meaningfully increase our option lot position to a target range of 65%, 70% of our lots under control. Now, let me turn the call back to Ryan.

The more challenging demand conditions that developed in the quarter have continued through the month of July as the significant increase in mortgage rates has impacted consumers throughout the country. While all consumers are impacted by higher rates, we are seeing differences across our markets. Lower priced markets in places like Florida, Texas, and the Southeast areas of ongoing high end migration are holding up better. Higher priced markets are those which have realized outsized price appreciation in recent years have incurred a more meaningful slowdown and demand. In tech hubs like Austin or in our Western markets in California and Washington were prices routinely approach or exceed a million dollars. Sales bases have slowed as buyers struggle with the combination of elevated prices and increased mortgage rates. Housing is clearly in the sights of the Federal Reserve and its fight against inflation that the Fed desires depending upon the community. Home price appreciation has slowed, stopped or through the use of incentives is taking a couple of steps back. Through much of the second quarter, incentives were mostly tied to the mortgage, but this is now expanding to include discounts and options and lot premiums. In the end these are variations on a path toward lower price, which is what the Fed needs to see as it assesses when they have moved rates high enough. While we are still early in this process, we are starting to see some impact on the cost side commodities like lumber, copper, and aluminum have rollover. The fallen lumber prices alone could save us upwards of $10,000 per home beginning in 2023. And while land prices are notoriously slow to adjust, deals are getting cancelled and/or renegotiated. We walked away from a handful of deals in the second quarter. And as mentioned earlier, we are reassessing all of the land transactions we currently have under control, given ongoing changes in housing demand dynamics. We remain constructive on the long-term outlook for housing demand. But right now, higher mortgage rates were having an impact. We have to work harder to sell homes. We have to be more nimble in the market to make sure we have the right product available. We have to be responsive to changes in the competitive landscape. This is how homebuilding typically operates. And I am extremely confident in PulteGroup's ability to compete. I would highlight that we operate from a position of strength with an outstanding balance sheet, a strong land pipeline, unmatched product quality, and most importantly, experienced and talented people throughout our organization. So let me end by thanking our entire team for their hard work and commitment.

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 in this call. We ask that you please limit yourself to one question, one follow-up. Thank you. And Chris, if you would open the lines, we'll get started with Q&A.

Certainly. [Operator Instructions]. And our first question is from Matthew Bouley with Barclays. Your line is open.

Hey, good morning everyone. Thank you for taking the questions. First one just on the buyer segments, clearly a wide difference there between first-time buyers, move-up and active adult, just curious if you could elaborate a little bit on what's going on there, clearly with first-time buyers, sort of by definition, potentially more financially constrained into this environment. And as you mentioned, more impacted by the move in rates. And yet you have this significant difference between the Buyer segments. So could you sort of just elaborate a little on what you think is going on there? Thank you.

Yes, Matt. Good morning, it's Ryan. The biggest thing I'd highlight here is the availability of quick move in homes in the first-time buyer segment, what we've seen with all buyers is that there's a real preference toward having a home that can deliver in the near-term. I think the uncertainty around supply chain delays and some of those things have certainly proved to be more predictable and better. But the biggest thing is just this the certainty of being able to lock in the interest rate without a whole bunch of incremental rate lock points, and then they've been able to use incentives to buy down the current rate to something that they can make work from a overall affordability standpoint. So I think that's the biggest difference. As we highlighted in some of our prepared remarks, each of the buyer segments or the consumer groups we target have been impacted in the current environment for different reasons. But it's really the availability and quick movements that allowed the first-time segment to outperform.

Got it, thank you for that, Ryan. And then second one on the incentives. I think I heard you say at the end, what was initially more related to or the initial incentives being more related to rate buy downs and such now sort of progressing into option and lock premiums coming down. I guess number one, apologies if I didn't hear you, but if you could actually put some numbers or quantify that statement. And number two just as these incentives has progressed, are you actually starting to see any elasticity there? Are you actually starting to see some buyers sort of react positively to those changes in incentives? Thank you.

Yes, so it's a good question. Let me maybe start first with the incentive load that we saw with signups. And this is actually new contracts that we wrote in the second quarter. They were in the range of about 2%, which is still below probably what we would consider to be a normal range of 2% to 3% if you went back to pre-COVID timeframes, and that includes all incentives. So incentives on options, mortgage rate type incentives, financing incentives, et cetera. It gets a little harder to quantify the change in lot premiums, because we're always repricing and always re-leasing new lot option or a lot premium pricing as we release new phases. So that becomes a little bit more subjective. But what we highlighted is accurate. We are starting to see not only in our own business, but in the competitive set, some additional incentives that are starting to go beyond just financing related incentives.

All right, much appreciated. Thank you very much.

Thanks, Matt.

Our next question is from Truman Patterson with Wolfe Research. Your line is open.

Hey, good morning, everyone. Thanks for taking my questions. First, on your build-to-rent strategy, I believe there have been about 1,400 lots approved through the strategic relationship and I think first closings in '23, you all put out initial kind of five year plan, I'm just trying to understand whether those targets are still good. And really whether you've seen any shift and appetite from any of the build-to-rent operators or your partner in particular?

Truman, good morning, we're right on target with our kind of five year run of 7,500 units in terms of kind of moving through that in a very programmatic way. So we feel very good about how the partnership is working and the progress that we're making. We've not changed any targets to this point. And candidly based on our performance and discussions with our partner, if anything, I would tell you maybe the appetite could potentially slightly increase as we go into maybe some choppier time. So, no updates from us yet. We like the way the partnership is working, and we plan to continue kind of moving down the path.

Okay, okay. Thanks for that. And then you all mentioned your -- to an extent updated land strategy. But have you all started to rework any of the option deals now that demand has softened? And are you making any changes to that strategy to get to the targeted 65% to 70% option land, I'm thinking, are you attempting to walk down the number of owned lots extend the takedown timeline of some of the option deals, et cetera? Robert O’Shaughnessy: Yes Truman, it's a fair question. In terms of strategically, no, we are not changing where we have been for what is essentially a decade now. We still desire optionality, we still start with individual sellers. What we've offered is that in order to get from where we are today 54% in this most recent print to 65% and 70%, we're likely to be looking at more institutional type relationships. That process is underway, we'll give you updates as we make as transactions occur there, we still think that we can move up from 55% into that 65% to 70% range, take a little bit of time. But in terms of how we're approaching it, not at all, in terms of your question, as it relates to our current attitude and negotiating stance, we've said in the prepared remarks, we've always been, I believe pretty disciplined in how we evaluate our land position and negotiate transactions. That hasn't changed and maybe it's even been heightened. We are taking a close look at everything we are closing on. So as an example, if we put a contract, a parcel under control 18 months ago, that was waiting final entitlements, before we take that down, we are revisiting the underwriting that we had when we approve the transaction to make sure that the absorptions and the pricing and our cost structure because vertical construction costs are up, horizontal development costs are up. So we're looking at it holistically does this transaction makes sense? I will tell you, we have walked away from a couple of transactions where for a number of reasons we just didn't think it made sense whether it was locational or economic, we are also trying to make sure that the timing of takedowns makes sense. And so we have had discussions with sellers that said, hey, our original takedown structure was A, B, and C, and we'd like it to be A, D and E now. I think the sellers, I haven't seen a change in value propositions out there. But the ability to work with time is something that does, and we have taken into account. So long story short, hopefully this is really just continuing to be disciplined in the land buying process. And in a choppy market, yes, you're going to see time become more important to us and in some cases, dollars. So we'll proceed further.

Perfect, thank you guys.

Thanks, Truman.

The next question is from Stephen Kim with Evercore ISI. Your line is open.

Yes, thanks very much guys. I was wondering if you could elaborate a little bit on some of the comments you made with respect to market conditions. In particular, I wanted to ask about your assessment of the alternatives that your customers are evaluating. You mentioned that there's a preference respects, they can move into quickly, you said that they're remaining engaged. We know there's not a lot of standing inventory out in the marketplace, either on the new or existing. And we've also begun to hear that some of the other larger public builders have slowed their role a little bit on production. And so bottom line question is, are you seeing that your customers are finding alternatives out in the market or you continuing to find that they are remaining on your interest list and things of that nature? And have you seen anything specific in terms of your competition doing anything particularly disruptive with respect to their production? In other words, have they -- have you seen an increase in production activity? Or have you actually seen the opposite?

Yes, Stephen, good morning. There was a lot there. So let me see if I can unpack it one at a time, in terms of our competition, we've actually seen competition pull back slightly in terms of the amount of inventory production that they're putting into the market. And that's specifically for some of our competitors that I think are predominantly spec builders. We haven't seen anything that's been irrational, or widespread, irrational disruptive type behavior, when it comes to incentive, or price drops or things of that nature. Of course, there's the anecdotal builder in a specific market, in a specific submarket that might have a unique or particular challenge that they're working against, but we haven't seen anything that that we would highlight at a national level. In terms of the choices and the opportunities that buyers have, I think it's still the market to find homes that are in the right place at the right price, with the timing that matches up to what buyers want. And more than anything, Stephen, what we've tried to kind of highlight. And Bob and I were just out in the market a couple of weeks ago and we were in multiple sales offices in multiple different cities over the course of two or three days. And spec inventory is definitely preferred. And I think it's all about the financial certainty that a buyer can get by being able to lock in the rate without paying a whole bunch of extra discount points, which you have to pay for a longer-term rate lock, or they're able to take the current market rate and put some incentive dollars against that and buy it down, or do a five year arm or a seven year arm or something of that nature. So I think, what we're seeing with buyers, if they can find the home that meets their needs, and they're able to get certainty around the financing. We're seeing buyers move forward. As part of the reason that we highlighted in our prepared remarks that buyers are remaining engaged in the process. We've been very successful in getting our backlog across the finish line for the most part. As we've looked at the reason for cancellations, they're vary like they always have been. There's not surprisingly been a disproportionate change in financing. So we're still able to get buyers across the finish line and qualified in the cases where buyers are canceling. We've been successful in getting those homes resold pretty quickly. So it's a choppy market out there, Stephen. I think we're doing some really nice things, we continue to emphasize quality of the homes that we're building and customer service, buying land in the right locations. And I think over the long-term in a broad housing environment that we're very constructive on. We think over the next year two, three years, we've positioned ourselves to be very successful with our overall strategy.

Great. That's really helpful. I mean, particularly your comment about the certainty versus the qualifications. It sounds like for a lot of buyers, it's not math, it's mental. And that's encouraging. I wanted to follow-up regarding your commentary about incentives -- excuse me, still being lower than normal. I think you said 2% on new contracts versus normal is as much as three. And that people are preferring these rate lock, or these buy downs. A couple of things, one, we had heard that rate buy downs have gotten even cheaper that used to be typical 4:1 ratio. And now we've heard ratios as low as like 2.5:1. So I was wondering if you can comment on that, whether that's been benefiting you? And then secondarily, we were -- it was interesting to see that your order price actually was quite strong, again, despite a pretty heavy mix of entry level buyers. And so I'm curious if you could comment on that. Did you actually see order price increase in all three segments or exactly what was going on there that drove the very nice growth in order price this quarter?

Yes, Stephen, I'll take the first part of that, and I'll let Bob, give you some details on the order pricing. In terms of kind of incentives that are out there, I think all are speaking for ourselves, but I think our competitive set as well. I think we've been, we've worked to be smart in finding kind of where the market is, and what will move the needle for buyers. You mentioned that just a second ago, I think as much as anything, this is mental versus price. And so we've been cautious not just to cut the bottom of the market out from underneath, what I think we've all work so hard to achieve, because that may not ultimately move the fear that's out there in the minds of a lot of buyers, specifically our move up in our active adult buyers. As far as rate buy downs. I'll let Bob, maybe comment on the ratio, we do have currently advertised on our national website, a 4.25% interest rate, which is on a seven year arm or a seven six arm as I think they're now doing. But we think there, we think there are solutions out there, providers that are ready to move forward. And we're not having to completely give away the farm in order to define some of those interest rates that I think are more like what we saw 90 days ago. Bob, do you want to touch on his question on the pricing? Robert O’Shaughnessy: Yes, it's interesting, if you look at our ASP in the most recent print, were up 19% the highest kind of growth of ASP is in the first time space, which was up 24% move up and active adult were up about 20%. And so the 19% growth for the company is mix adjusted, right? If you look at our backlog, what we've seen is to answer your question, pricing up across all three. So our backlog ASPs are higher for all three of our key demographics first time move up and activate bill.

Bob was that sequential? Is that a sequential comment or it just yours? Robert O’Shaughnessy: That is versus the first quarter of this year.

Great. Robert O’Shaughnessy: And interestingly, the highest increase on a relative basis among those is the move up. Now mix matters and all that, but that move up buyer space is probably the biggest contributor to that increase.

Okay, thank you so much. Robert O’Shaughnessy: Yes.

Our next question is from Mike Dahl with RBC Capital Markets. Your line is open.

Good morning. Thanks for taking my questions. There's still a lot to dig in on here. Ryan, Bob, I know typically you don't give things like monthly trends, but just in light of this being such a unique and quickly changing environment. Wondering if you could quantify your order trends by month and give us a little more quantification on how July is tracking?

Yes, Mike, I think we're going to stick with our previous kind of practice and not get into the monthly detail. I will tell you that we did see a decline as we move through the quarter. April, was still relatively strong, May slowed, and then June slowed again, specifically, after the 75 basis point increase that we saw from the Fed last month. We saw a big change in June. And then that's really kind of continued through July. We have seen an uptick in cans, as we've moved kind of through the period as well. I think, again, all kind of related and tied to the kind of buyer's remorse and the fear of maybe potentially buying at the top of the market, as we potentially go into a recessionary type environment. I think that's weighed heavily on buyers. So we're still, I'll just, I'll leave it at that Mike.

Okay, maybe just quick kind of part two, before I ask the second question. Just if July is still tracking similar, I don't know, if it's similar or worse than June. We have effectively retraced that entire last 75 basis point move up in rate. So just it doesn't seem like we've seen an order trends improve really across the group based on your comments specifically. So wondering if you can kind of reconcile that? But my second question is around land and following-up on some prior questions and your comments around managing strategy and you've always been disciplined. If we look on a forward basis, based on where you're kind of tracking on orders, your lock position might end up at call it like nine to 10 years, if we were using orders as the denominator, which is obviously quite elevated. So how are you thinking about incremental acquisition dollars, or as I think Truman may have asked paring back your own land position more aggressively looking out?

Yes, Mike, I appreciate the question on land. Let me just I'll finish your question about kind of what we've seen from buyers as rates have pulled back over the last call it three to four weeks a little bit. So I think that's certainly been helpful. We have seen a slight up tick in our ability to sell and get new deals done, as I think buyers have kind of come to terms with the current environment. But when you combined the higher rates, along with I think the overhang of low consumer confidence, some combination, it's pretty volatile cocktail that I think we're all dealing with and helping the consumer to make what is the single biggest purchase of their lives. So, there's a lot wrapped up in there, we're going to continue to focus on a lot of the basics, we're going to continue to focus on making sure that our community execution is great that we've got the right product that we've got, that were priced competitively, we're not going to find ourselves in a position where we're giving up market share because we're being too margin proud. We're very -- we're obviously very happy with the work that we've done on the margin side. But I do want the investment community and our investors to know that we're going to continue to be very market competitive. Moving to the land side. Mike, there's a couple of things here that I'd highlight. Number one, we continue to be very focused on through cycle investment, and delivering high return on invested capital. So the way that we have allocated capital, the amount of land that we've put under control, the way that we have structured our purchase transactions has all been toward maximizing return, I think we've done an unbelievable job there. As we move into this period of time where demand is clearly slowing, and we've got lower new orders to your point, you could end up with more years owned or more years controlled than what you realistically probably need. We think that's the beauty of the option strategy that we have undertaken over the last number of years. And so we've got two potential options, yes, you can work to trim the owned land position, but you can certainly also trim the option land percentage as well, or as Bob highlighted, we've got the opportunity to renegotiate some of that on time. So, this is a business where you clearly need forward land, we like what we have under control, but we're not blindly rushing into every contract without given everything a second, third and a fourth look to make sure that it still makes sense, based on current market conditions, but also based on our overall land pipeline, and what we think we need to run a profitable high returning business in the future. Bob, anything else you'd add on land or land pipeline? Robert O’Shaughnessy: No, maybe the only thing I'd add, if you look at our owned lot position, we own 113,000 lots three months ago, that was 112,000. So despite the investments that we've made in the current quarter as an example, it's not like we're bulking up the owned position. To Ryan's point, we've got flexibility with the option, if you look at our quarterly growth in the balance sheet as an example, we put a lot of money on the balance sheet in this quarter, the majority of that was house, which is going to be quick turning for us. So we put $800 plus million into inventory in the quarter, which is reflective of that $1.1 billion that we spent on land and development. But again, a lot of that is house and it's the cycle time extension that we've talked about. And so we'll get that money back pretty quickly. So hear you loud and clear. We have the ability to influence what our owned lot position looks like, based on the strength of the book we have today.

All right. Thanks, Ryan. Thanks, Bob. Appreciate the color.

The next question is from Alan Ratner with Zelman and Associates. Your line is open.

Hey, guys, good morning. Thanks for commentary and information so far. Bob, maybe on that last point, just talking about the inventory build and primarily the whip build there. I just wanted to clarify your start pay strategy at this point. Ryan, I think your message is loud and clear that you guys are seeing relatively stronger demand on homes that are closer to delivery, which I think makes a lot of sense. At the same time as bill cycles where they are, you guys do kind of need to make a decision on where you potentially see demand going over the next six, nine, 12 months. So have you actually been maintaining that pace of spec starts assuming that that's where the demand will continue going forward or have you started to dial that back a bit from where you were earlier in the year?

Yes, Alan, the pace of spec starts has been dialed back from where we were in the first part of the year, no question, because we've seen -- we've seen demand subside or pullback for to be built, as well as specs. But on a relative basis, there is more ability to get buyers across the finish line, when we've got homes that are within kind of a 30 to 90 day delivery window. So, proportionately we're starting more specs relative to sales compared to historical norms. That's a mouthful there. So on an absolute basis, it's less across the board. On a relative basis, we're doing more specs compared to dirt sales, when you think about historical norms. So, Alan, I think the best way I can describe is we got one foot on the gas and we got one foot on the brake. We are managing this very aggressively. We want to have inventory that is available. The last thing we want to do is put ourselves into the penalty box by having too many finished stocks.

Okay, that makes sense. And obviously with cancellations normalizing, there's probably some unintentional specs that come out of that as well. And on that point, you mentioned that you're up to this point have been able to resell those cancellations pretty easily. Curious, what's the margin differential been on those resales compared to what you thought the margin was going to be based on the initial sale and backlog versus where it's likely going to settle out at once you deliver the home, now that's going to result?

Yes, it's interesting. Alan, the reality is that most of the cancellations are pretty fresh, right. It's usually in the first 30 or 60 days, where either somebody can't get financing or has buyer remorse. And if you look at the body of cancellations that we had in this quarter, we didn't see a big up tick in the number that were financing related, it was more buyer remorse. And so we haven't seen a big change in the margin profile for the folks that were in the backlog for a long time. So they may have signed their contract late in 2021. Honestly, let's say, they just can't get financing for whatever reason. When we're reselling those homes, we actually see higher prices. And again, that's not the majority, because most of the churn is earlier in the backlog. So not a huge differential, because pricing hasn't moved that much in the 30, 60 days since people signed the contract.

Got it. That makes sense, I appreciate it guys. Thanks a lot.

Thanks, Alan.

The next question is from John Lovallo with UBS. Your line is open.

Good morning guys. Thank you for taking my questions. Ryan, I think I heard you say something, what I found very interesting, I just want to make sure I heard it correctly. But I think you said that as rates have sort of settled here a bit, that the ability to sell has improved. So I wanted to make sure that I heard that correctly. And I wanted to kind of get your thoughts on you've been through this many times before. Do you see this being a time of a prolonged sort of slowdown? Or do you think that this is something that's kind of more of a pause? And that once rates do settle, I mean, who knows what they're going to sell higher or lower. But once they do finally settle, I mean do you think that we're going to be back sort of on track again?

Yes, John, I'm going to probably stop short of trying to prognosticate and forecast what the future will hold. But I will tell you, and we said it in our prepared remarks, we're long-term very constructive on housing. We have a fundamental shortage of housing in this country. And I believe that as the Fed navigates this tricky situation of 40-year record high inflation and all the stimulus money, and supply chain issues, and all the things that have kind of -- that are going into our current economic environment, I do believe that housing will continue to have a very strong run. So -- it's with that mindset that we're running our company, we're making decisions on how we invest, that we're making decisions on how we allocate capital, et cetera. So I think, as we move forward, maybe in the medium term, the combination of affordability and consumer confidence is going to continue to drive kind of what happens with housing. We are seeing incomes go up. So somewhere in the middle of all of that soup, I would like to believe that over the long pole housing continues to be successful. And then, John, I think I missed maybe the first part of your question, remind me what that was?

Sure. Just that I think that you had mentioned, when rates have settled and pulled back here a bit more recently, then your ability to sell has actually improved?

Yeah, it probably a little bit of a dead cat bounce, John, I think it was really tough following the last Fed meeting. I think we saw the consumer react quickly. And then as I think the consumer has come to terms with that, as well as we've seen rates actually come down. I think there's been a positive trend in our sales offices. So there's a lot out there as I think we've said, both financially and psychologically, and I think that consumers trying to deal with all those things.

Got you. And then kind of dovetailing off of what Alan asked, I believe, the strategic decision towards more specs to kind of target the first time buyer in the quick moving, makes a lot of sense in this environment. I guess, how far are you guys willing to shift here? And then how quickly could you actually pivot back if we saw some stabilization?

Yes, it's not just the first time buyer, will be starting specs across the spectrum. And in terms of pivoting back, it can be quickly that is a decision as, it's really just how many homes we want to start and how much demand there is. So if there is a leveling out of the market, such that demand is pretty consistent, we can pivot back particularly for that move up an active adult buyer, where we think the real value of the build-to-order model is very quickly.

Okay, thank you guys.

Yes.

The next question is from Mike Rehaut with JPMorgan. Your line is open.

Thanks. Good morning, everyone. I appreciate you taking my questions. First, I just wanted to circle back to some earlier comments around the increase in incentives, but also kind of highlighting some of the decrease in some of the input costs, you highlighted. Lumber, obviously, where you said maybe 10,000 a home, copper, some other materials. As you think about the increase of specs today, maybe going up, call it a 150 basis points, lumber itself at 10,000 on a 500,000 plus home, that's also perhaps 150 basis points. As you look out, just kind of considering those factors in and of themselves, because obviously, there are a lot of other variables. Does that kind of point to potentially first half gross margins holding 4Q levels or are there other factors that we should be considering as well?

Hey, Mike, I think it's too soon for that, honestly. We've obviously given a Q3 margin guide and a full-year margin guide. We've got a big backlog. And so we've got good visibility and what that margin profile looks like. And then we've certainly made an estimate on the specs that that will sell and close between now and the end of the year, but we'll give our 2023 margin guide later in the year.

Okay. All right. Fair enough. Secondly, obviously gotten a few questions about your spec strategy. And I think overall, we would still be fair to consider you guys predominantly a built to order builder. Just wanted to clarify, though, when you talk about, you'd said earlier, that specs are still down on an absolute basis, but you're trying to raise or increase the percentage. If I heard it correctly, I thought that the percentage that you're currently adding that you're trying to increase is more trying to get back to a normalized target even within your build-to-order model, or am I not thinking about that, right. And perhaps you're stretching the limits of where you would normally be in pushing a little bit of a higher level of spec on a relative percent of closing spaces?

Yes, Mike, I think that's right. We're at 30% today. So we're at the high side of what our historical ranges, you'll probably see us push a little bit behind that, but beyond that, but it's not as if, we're going to go to 70% spec production. So I think you'll see us predominantly stay a build-to-order builder that's what we believe that's the right way to run a home builder for us, based on the consumers that we target and the way we do communities, but yes, you're going to see a stretch a little beyond maybe what our normal range is. Bob highlighted that by design. We normally have more specs in our Centex communities, which are targeted to the first time buyer. You'll see us put more spec inventory than what we normally do into our move up in our active adult communities. But on a -- it'll be a little bit more than normal.

All right. Thank you very much.

Yes.

Our final question for today is from Anthony Pettinari with Citi Group. Your line is open.

Hi, this is [indiscernible] in on for Anthony. Thanks for squeezing me in. I just want to know if interest rates stay roughly where they are now, should we expect your sort of elevated cancellation rate to persist into 3Q? Or maybe a drops back down more rapidly as sort of sticker shock wears off? And are you seeing elevated cancellation rates on the homes you're selling in July?

Yes, so I think as Bob highlighted, the uptick that we've seen in cancellations has really been in the last 30 to 60 days. And the probably the leading drivers than buyers are more. So I think a big part of that comes from buyers that were caught. They made it a buying decision during the run up and interest rates and as interest rates and talk of recession have increased, their buyer's remorse has also increased or their fears increased with it. So I think as we get to stability and predictability, we'll likely see, we should see that drop. And our expectation would be that cancellation rates ought to more come into a normal range.

Great. Thanks. And then I heard it correct on the call, you kind of kept your community count guidance unchanged from last quarter. And so just, if I'm understanding correctly, a slowdown in sales would or would normally saw a community close out, so maybe like a higher community count. So it's just it's the reason for the unchanged guide, maybe a deliberate slowdown in community openings, or maybe some incremental horizontal development challenges, like, for example, permitting?

Yes, obviously, we are dealing with the same kind of challenges everybody else's. So it takes things a little bit longer to get open. What we tell you is that close out the impact isn't that great of stuff that didn't close that we thought was going to. So this is pretty much where we thought would be and reflective of as challenging market to get things open.

Okay, great. Thanks. That's very helpful. Thanks for taking my question.

Yes.

That concludes our question-and-answer session. I'll turn it over to Jim Zeumer for any closing remarks.

Great. Appreciate everybody's time this morning. We'll certainly be available over the course of the day for follow-up questions. Have a good day and we'll look forward to speaking with you on the next call.

Ladies and gentlemen this conclude today's conference call. Thank you for participating. You may now disconnect.