Ladies and gentlemen, greetings and welcome to the Tri Pointe Homes Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you to David Lee, General Counsel. Please go ahead.

Good morning, and welcome to Tri Pointe Homes Earnings Conference Call. Earlier this morning, the company released its financial results for the fourth quarter of 2022. Documents detailing these results, including a slide deck are available at www.tripointehomes.com through the Investors link and under the Events & Presentations tab. Before the call begins, I would like to remind everyone that certain statements made on this call which are not historical facts, including statements concerning future financial and operating performance are forward-looking statements that involve risks and uncertainties. A discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the company's SEC filings. Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through TRI Pointe's website and in its SEC filings. Hosting the call today are Doug Bauer, the company's Chief Executive Officer; Glenn Keeler, the company's Chief Financial Officer; Tom Mitchell, the company's Chief Operating Officer and President; and Linda Mamet, the Company's Chief Marketing Officer. With that, I will now turn the call over to Doug.

Thank you David and good morning. During the call today, we will review operating results for the fourth quarter and full year and outline strategic operating drivers for 2023. Let me begin by discussing our performance in the fourth quarter, where we focus on delivering our high margin homes and backlog as well as planning strategies to reposition our pricing and product going into 2023. Those efforts paid off and as we reported all-time highs for quarterly revenue of $1.5 billion, pre-tax income of $274 million and diluted earnings per share of $1.98. The strong finish to the year resulted in record breaking full year performance on both the top and bottom lines for the second consecutive year. For the full year home sales revenue increased 9% to $4.3 billion, pre-tax income increased 24% to $773 million and diluted earnings per share increased 35% to $5.54. These strong financial results led to positive cash flow generation of $444 million for the full year and allowed us to return $203 million to our shareholders through share repurchases. We ended the year with $890 million in cash and a 14.7% net debt to net capital ratio, both of which are record numbers for Tri Pointe. I'd like to thank all of our team members for these outstanding results and their tireless efforts navigating the supply chain hurdles throughout the year, all while continuing to deliver a premium product and experience to our homebuyers. In addition to the logistical challenges, our industry was also confronted with a challenging market in the back half of 2022, which found consumers facing a difficult home buying environment. Significant and persistent inflation and resulting seven Fed rate hikes that took place in 2022 had a major impact on housing affordability, particularly following a post pandemic pricing boom,…

Thanks, Doug. And good morning, I'm going to highlight some of our results and key financial metrics for the fourth quarter, and then finish my remarks with our expectations and outlook for the first quarter of 2023 and full year. At times, I'll be referring to certain information from our slide deck, which is posted on our website. Slide 6 of the earnings call deck provide some of the financial and operational highlights from our fourth quarter. We reported outstanding results on all key financial metrics this quarter that either met or exceeded our stated guidance. We delivered 2016 homes at an average selling price of 746,000, resulting in home sales revenue of approximately $1.5 billion. Our homebuilding gross margin percentage for the quarter was 25% and SG&A expense as a percentage of home sales revenue came in at 7.6%. This resulted in diluted earnings per share of $1.98, which was a 49% increase compared to the same period a year ago. We recorded 444 net new home orders in the fourth quarter on an absorption pace of 1.1 per community per month. As Doug mentioned, we have seen significant improvement in the early part of 2023 in response to our pricing and product strategies. For the month of January, we recorded 421 net new home orders on an absorption rate of 3.1 per community per month. And so far in February absorption rates have been approximately 4.0 homes per community per month. Cancellations as a percentage of gross orders remained elevated in the fourth quarter at 42% but as a result of improved orders and backlog buyer stability so far in 2023 cancellations have returned to more normal levels between 10% and 15%. Turning to communities, we opened 12 new communities during the quarter and closed out of nine…

Thanks, Glenn. With the doubling of interest rates since their lows in 2022 along with double-digit home price increases across the country it is no secret that the U.S. housing market has been under tremendous pressure. As we head into 2023, our company and our industry peers are tackling these market challenges with aggressive price discovery and mortgage incentives. It is early but is clear there is still very good underlying demand for new homes, which should continue to be supported by the lack of resale home supply. Our company is positioned with a very strong balance sheet and record margins going into the year. The industry is poised for continued growth, especially considering the significant housing deficit often reported by many industry and economic sources. As the millennial continue to form new households, and baby boomers, downsize Tri Pointe looks to capitalize on these long term demographic factors. Again, we cannot do any of this without the perseverance and commitment of all of our team members. With that, I will turn the call back to the operator for questions. Thank you.

Thank you. [Operator Instructions] First question comes from the line of Stephen Kim from Evercore ISI. Please go ahead.

Yes, thanks very much, guys. Appreciate all the color. Interesting times here. Obviously, there's a lot of attention being paid to your comments about January and February so far. So I just had a couple of questions on that, if you don't mind. I guess the first is related to that, that was -- you had previously said, I think you were willing to tolerate an absorption rate as low as 1.5 to 2 or something like that. So I'm curious, is that still your view if demand were to weaken in the near-term? And then given that you ran so much stronger than that in January and February, can you talk about how your incentive activity may be changed or was adjusted or moderated or I would assume, in the quarter so far?

Yes, Stephen, it's Doug. Going into the year-end and then looking into the crystal ball into 2023, we planned on seeing absorption paces of around 2. But as we pointed out, we spent a considerable amount of time looking at price on a community basis. We looked at product. We made adjustments so that when we open in 2023 and actually, some of the divisions even by the end of December, we would have some momentum going into the year. We mentioned in our result -- in our comments, net-net, on average, we brought pricing down 10% to 15%. So the combination of price discovery, mortgage incentives, has given us the tools to get absorption. Now, the other thing I'd note is the consumer went through 7 rate hikes last year. That was a lot of shock and awe to the consumer. I don't believe the Fed is done. They've moderated, so to speak, but you can't put the consumer on the sidelines forever. There's a need for housing. There's an undersupply of resale housing. So we definitely saw the consumer reengaged. But it's too early to really tell. Do we have a no landing, soft landing, hard landing? It's anybody's guess. But we've got strong margins going into the year, so does the rest of the industry, strong liquidity. So we're very excited to see how this year plays out. But it's way too early to make the call. As far as incentives, I'll turn it over to Linda to talk about that.

Good morning, Stephen. So just to give you some sequential perspective on incentives. In the third quarter, our centers were at 5%. And then that increased in the fourth quarter with rates increasing. So incentives on orders were 6.2% and quarter to date this year incentives have been relatively consistent at 6.1% with the addition of the base price increases that Doug referenced.

Decreases.

Decreases.

Got you. What do you mean, by the addition of the base price decreases? He was he was mentioning, I think 10% to 15%, is obviously we're talking about?

Yes, that's correct.

Okay. So when we think about all-in net price sort of inclusive of any discounts or any other sort of incentives that you are offering, if we think about what you experienced, let's say, in 3Q versus what you experienced in 4Q on your orders, how much of a deterioration in net all-in things you're giving to the customer would you say that you have -- you saw how much of a deterioration in, let's say, basis points, including price?

Well, relative to 3Q to 4Q hey Stephen, this is Tom, it was not super significant. But I would say it would be a couple 100 basis points, differential.

Perfect. That's very helpful. The second question related to what's been going on recently is, one, I think the rates have been extremely volatile. They came down a whole bunch; right, in January and then they've just in the last couple of weeks bounced up and so forth. Just -- I know its super early, but these have been pretty big moves. And so I'm curious whether there's -- it's your view that the rebound that we saw in January and so far in February was -- how much of that do you think was directly tied to rates? And I guess if you could color your comments with sort of maybe how you've seen this recent bounce-up in rates affect any of the trends that you just sort of talked about.

Yes, it's a good question. We've got a saying here, you've got to be nimble. You've got to be very nimble in today's market. As you pointed out, Stephen, I think last week rates went up, what, 40, 70 bps. So we continue to see positive demand trends and we really overcome those rate concerns with buy-downs, rate buy-downs and locks. So it's anybody's guess, as I mentioned earlier. It's way too early to really forecast any sort of straight line direction of this market. But as I mentioned earlier, I started in this business when mortgage rates are 15%. Ultimately, the consumer and the builders adjust to pricing and payment and there's definitely a need -- a great need for housing. And in this particular cycle, the homebuilders have very strong balance sheets and go into the market with very strong margins compared to what I saw 20, 30 years ago. So it's going to be an interesting time. You got to be quick on your feet and adjust to what the market can give you.

Stephen, the only thing I would add to that is we are certainly very pleased. And it definitely points out the high level of demand that is out in the marketplace today. And the response to our products, the core location design and innovation specifically, is very encouraging.

Wonderful. Thanks so much, guys. Appreciate it.

Thank you.

Thank you. Our next question comes from the line of Mike Dahl from RBC Capital Markets. Please go ahead.

Morning thanks, Doug and team for taking the questions and the color so far. Just to follow up on Steve's question and just for clarity, what -- and so, Linda, I think when you're saying the 6.1% quarter-to-date incentives plus the price decreases, just to be 100% clear, that, that 6.1% is part of the net 10% to 15% that we should be thinking about in terms of cumulative reductions, right?

Yes, Mike, that's correct, cumulative.

Okay. And then the question related to this is -- so if you look at your first quarter guidance, your margins are down kind of 350 basis points to 450 basis points from your peak 3Q margin. Obviously, you guys have kind of a longer-dated backlog than some others, but -- and you're talking about some of these cost saves as you go through the year. Any color you can give us on thinking about that 10% to 15% reduction in price relative to your peak margin, how to think about the cadence of margins over the course of the year? Do we go lower in kind of 2Q, 3Q before those cost saves flow in or just order of magnitude on that would be helpful.

Hey, Mike it’s Glenn. It's a good question. And like Doug mentioned, it's, it's early, and there's a lot of moving pieces. So we're not given specific guidance for Q2 and Q3, but directionally, there will be a little bit of pressure on margins based on some of the incentives and price changes we've seen. But it's early to see and we'll see how the rest of the spring selling season goes on to really dictate kind of the level of margin going forward.

Okay. Fair enough. And then my second question, just on the spec strategy. Obviously, kind of a lot of builders have reached similar conclusions about bringing a certain level of specs to market in the current environment. Doug, you talked about being nimble on your feet. How does this -- how does what you've seen over the past few months or a year or a couple of years, how does that affect your longer-term strategy of how you see the business in terms of spec mix or different buyer segmentation? Is this more you kind of meeting the market where it is today, but you still have a different longer-term strategy? Or do you think that strategy has evolved in a more permanent way on how you view this?

That's a good question, Mike. As we've mentioned, our company has positioned more of our product offering at what I would call the entry-level premium first move-up. And that buyer profile definitely would like to have a home. And in the near-term, 60 to 120 days we can still offer our premium brand experience, but you're going to continue to see specs as a percentage of our starts, about 65% going forward. They may push on that a little bit in the short end right now in '23. That's called being nimble because the consumer definitely would like to lock in the rate and find something sooner than later. But going forward, I'd say it's generally going to be around 65% plus a little bit.

Yes Mike, its Tom. As we, as we've looked at our business, and you know this very well, the West is predominantly done in a phase building technique, which we get a lot of efficiency out of, and therefore requires a pretty strong level of spec. And we've done that throughout our career. We are trying to expand that to other markets in a line building philosophy, which we think will create similar efficiencies. So that spec count that that Doug mentioned does appear to be something that we're going to continue to push on going forward.

Yes, that line building part seems potentially incremental. So thank you for that guys.

Thank you. Our next question comes on the line Truman Patterson from Wolfe Research. Please go ahead.

Actually, it's Paul [Indiscernible] good morning guys. I guess looking at your absorptions in 1Q and net improvement, any color you can add there, across geographies, or any particular consumer segment that may be seeing some relative demand improvements.

Well, as far as trends in the first 12 or 18 -- first month and a half of this year, I think all the markets are performing okay. You've got to be in an A submarket. I mean, there's B minus C submarkets and many of our marketplaces that are not performing as well. Overall, though, I would say demand trends have been a little bit stronger when you look at the 15 divisions in the Inland Empire here in California and in Charlotte.

Okay. All right. And going a little bit higher level here. You talked about expanding your geographic footprint, broadening your consumer exposure. Have you seen the privates get more rational with pricing maybe allowing for some expansion in this inflection?

To be honest with you, Paul, I haven't we haven't paid a lot of attention to the privates. I think the public homebuilding cohort has been something that we continue to watch and have been more aggressive in what I would call the price discovery and mortgage incentives. Oh, M&A Oh, I'm sorry. We -- yes, we haven't seen any M&A activity come across our desks yet on the private side.

Okay. And then -- and just one final one. How are you addressing the rate lock conversation with the move-up and active adult buyers coming into your office? How do you get them to basically double their mortgage rates or all move-up buys either divorce or job transfer driven right now?

Yes Paul, this is Linda. I would say this [Indiscernible] activity to mortgage rates in active adults because they typically come with large down payments and a higher percentage of cash buyers. And then for move up buyers, we're finding a lot of our move up buyers are interested in programs like temporary rate buydown, like a 3,2,1 rate buydown so that they're getting a very attractive first year rate, maybe 3.99%, with the idea that they could refinance again in the future, but get a lower rate initially.

Okay, appreciate it. Thank you.

Thanks, Paul.

Thank you. Our next question comes from the line of Alan Ratner from Zelman & Associates. Please go ahead.

Hey guys, good morning. Thanks for all the details so far. First, I'd love to drill in a little bit more on the comment you made regarding kind of the price positioning and product offering the analysis you guys have done there. And I guess tie that into the community count guidance a little bit, the guidance while it's still, very strong growth for the year. I think it's about 10% lower than you had guided for previously as far as where you expect to end 2023. I'm curious, are there is there anything going on behind the scenes there maybe kind of retooling some of the product on new communities and resulting in some delays and openings or am I reading too much into that?

No, Alan, good question. And you hit it actually. Some of that community count difference from what we guided in the last call is just looking at product, repositioning, looking at community setups and making sure we're opening at the best possible position to have success. And so that has pushed a few community openings out. Overall, we still have a strong community count pipeline. And like you said, there's still strong growth there. There'll just be a little bit more communities in 2024 from 2023 from our previous guidance. And from an overall mix perspective, I think that's the first part of your question. As we've discussed in the past, there is more entry-level first move-up focus in that mix, which is why our overall ASP is going down, more communities in Charlotte, Dallas, areas like that, that are a little bit more attainable price points as part of that mix.

Got it. That's helpful. Second, just thinking about the spec versus build order mix of your business. You guys do have a design studio platform for bill to order. I know historically, I think the margins on those sales have been stronger than spec. So can you just talk a little bit about where kind of the current margin differential looks like on spec versus DTO? And where you see that going forward?

Yes, Alan, this is Tom. Good questions, for sure. Our design studio business has been really phenomenal and it is a big differentiator for us. The one thing I would just caution is that even when we are performing our spec strategies, we still are able to get customers into our design studio so they can personalize their homes. It's obviously dependent at what point in time they purchase the home, but we are very successful. On average, our percentage of revenue was very strong last year, still about similar to where we've been in prior years, 10.9%. It's about $77,000 per house. Our studio business generated over $400 million in revenue. So it's been very positive relative to that. You're absolutely correct. Typically, margins have been a couple of hundred points basis points better on a build to order just because of the ability for people to thoroughly customize their home. But right now, given the incentive environment that we're seeing, we're not seeing that great of a differential between the spec margins and build to order margin.

Got it. That's helpful, Tom. If I can just squeeze in one last one on that point. Just curious if the improvement on absorptions you've seen quarter-to-date, would you say that's been pretty consistent across both build to order or spec? Or have you seen kind of more of an acceleration on those quick move-in homes given kind of more of the immediacy factor?

Thanks, Alan. So we did have a higher level of stake orders in the fourth quarter as you would expect. But in the third quarter, we are seeing an improvement in to be built orders as well and about a third of our orders quarter to date to be built.

First quarter first. Thank you. Thank you, everybody. Appreciate all the color.

Thanks Alan.

Thank you. Our next question comes from the line of Jay McCanless from Wedbush Securities. Please go ahead.

Hey, thanks. Good morning, everyone. Linda, if you could stay on that topic for a second because that was going to be my question. Just how many of the sales right now are homes that got canceled during fourth quarter that have been discounted and you're reselling them, versus new demand? I don't know a better way to phrase it. But someone coming in looking at a newer spec that you guys have started in buying that house. And I don't know if you have the breakout of this. But just kind of a sense of how much of this demand in the first eight weeks of the year is actual real new demand, versus you guys putting a heavy discount on a spec and getting it sold?

I would say it's really more new demand. Whether it's a cancelled home or a home that we have started as a spec home, we would have been looking to make them price competitive in either case. And we're typically finding that more cancellations happen closer to the closing and there is demand for quick moving home. So those are quickly absorbed.

Right, that's good to hear. And then I guess maybe if you guys could update us on where your mix of communities is between first time active adult and move up now and where you think that mix will be by the time we get to January 2024?

Yes, Jay. In the fourth quarter, orders were 46% entry, 49% move-up, with the small rest being luxury and active adult. I think that's a pretty good metric of where we're going based on the new community count and where those community counts are.

And then the only other question I had congrats on getting the net debt down below 15% knowing that you have a maturity coming up in 2024, I guess how much lower could that net debt ratio go? And we're, what's the business case? I guess protecting it even lower than it is now.

Yes, so we do have those 24s coming up, and we're going to put ourselves in a position to be opportunistic, and paying those off. We’ll obviously watch the bond market and will always be opportunistic there and balanced capital needs and growth plans. But we could see leverage continuing to go lower, since we're generating so much cash right now.

Okay, great. Thanks for taking my question.

Thank you.

Thank you. Our next question comes from the line of Carl Reichardt from BTIG. Please go ahead.

Thanks, good morning everybody. I wanted to talk about that 10% to 15% peak to now sort of all in pricing number. On the very highest end, what markets are you seeing that in? And then on the lowest end, same thing? And then obviously, Arizona, Colorado, Nevada orders during Q4 were fairly weak? Are you seeing some elasticity now in those particularly soft markets with the pricing that you're putting in place?

Well, just to clarify, it’s Doug. Our comments were adjusted net pricing on average down 10 to 15. So there's some markets that are above that, and some markets below that. I would say the markets above that are have been more tailored towards Austin, Houston, and I would say Phoenix to some of the markets below that DC Metro, San Diego, Carolina’s. So that's why I said on average is 10 to 15. It's across the board.

Right, thanks for that clarity, Doug, I appreciate it. And then on the 10% to 20% cost reductions. Can you expand on that a little bit, Tom or Doug? Is that in part a function of just mixed to smaller product and mix to markets where it might be cheaper? Is that a per foot type of number? And can you expand just on how you intend to get there beyond we know lumbers down. And I'm just curious, what specific elements of Tri Pointe are driving that number lower, just tactically? Thanks.

Yes, Carl, good question. And without a doubt, the teams have been doing a phenomenal job and working really hard. So a lot of that is just assessing our product doing value enhancement, value engineering and making sure we are producing the most cost-effective product possible. So we have been making a lot of changes to our product offerings, simplifying as well as lowering square footages. In general, we typically talk about those cost reductions on a per foot basis. And as you know, the biggest component of that is the structural components of the home. So that's where we've been focused on. We're seeing results. So we've already begun to generate, I'd say, close to that 10% number in terms of reductions so far. And lumber does pay a big part of our cost, obviously, and we've had favorable tailwinds in lumber. So we anticipate we're going to continue to work. But a lot of it is done through that repositioning of our products. And we've got great product offering. So we're not sacrificing the quality or the design of our homes.

I appreciate Tom. Thanks, everyone.

Thank you. Our next question comes from the line of Alex Barron from Housing Research Center. Please go ahead.

Yes, thanks for the many questions. And congrats on a strong performance at year end. I wanted to ask about the three markets that seemed to have the lowest orders, Colorado, Arizona, and Las Vegas, just kind of curious about, what drove those numbers. Was it just like panic in the market, high cancellations because of high interest rates? Or was it just you guys weren't really, interested in I don't know dropping prices or matching what other people were doing that cost maybe, you guys could be at a slight disadvantage for a second there?

Yes, Alex it’s Doug. As we mentioned we placed a higher priority on getting our backlog through and close at the end of the year. And so the absorption pace, and it was very slow and the market was going through a lot of interest rate adjustments. So that was the primary driver in the fourth quarter as we reposition both pricing product, mortgage incentives going into this year. We've seen the consumer reengage, and we're able to provide the right product, the right price and the right payment.

And Alex, let me add to that. It feels consistent with the rest of the market. And those markets as well, if I'm looking at our competitors in Colorado and Arizona, we've seen similar results with our peer set.

Yes, it's pretty obvious that some, some builders had really low results and others did not. But I I'm guessing the ones who didn't probably sacrifice their margins quite a bit to get those numbers. Just kind of curious about philosophy now, around that? Some I guess what that means is that starting this year, you guys adjusted the pricing or the incentives, and now you've seen the rebound in activity. Has it been stronger? Would you say then the other markets, where that didn't happen? Or is it just been a strong lead on across the board?

Well, as we mentioned, it's been good demand in A submarkets. It is important to provide the right product and be positioned in the right submarkets. Sales are still not easy. We're working for every order that we write. But again, it's all based on focusing in on pace over price as we go into this year and the repositioning that we put in place going into 2023 so far has generated good results. But it's way too early to judge the entire year and we still got the spring selling season, which I'm sure will be very competitive.

And Alex, just to be clear, we have employed that strategy of repositioning in all 15 of our operating divisions. So it's a universal strategy. And as Doug said, we're seeing good strong results across all markets right now.

Got it. And I also wanted to ask about the announcement of the share buyback. I believe you guys didn't do any share buybacks in fourth quarter. So I'm curious if this new authorization is meant to be more opportunistic or just more like steady -- some programmatic amounts per quarter. And how are you guys thinking about that?

I think we're going to continue to be opportunistic, but we do like we said in our prepared remarks plan to be active this year in our share repurchases.

Got it. Okay. Well, best of luck, guys. Thank you.

Thanks, Alex.

Thank you, ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the conference over to Doug Bauer, CEO for closing comments.

Well, thank you for joining us today. We look forward to sharing our Q1 results with you in April. Thank you and have a great week.

Thank you. The conference of Tri Pointe Home has now concluded. Thank you for your participation. You may now disconnect your lines.