James Zeumer:

Great. Thanks, Rob. I want to welcome everyone to PulteGroup's earnings call to discuss our strong financial performance for our second quarter ended June 30th, 2024. Here to review PulteGroup's Q2 results are Ryan Marshall, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; Jim Ossowski, Senior Vice President, Finance. 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 Marshall. Ryan?

Robert O'Shaughnessy:

Thanks, Ryan, and good morning. PulteGroup generated second quarter home sale revenues of $4.4 billion, which represents an increase of 10% over the second quarter of 2023. The increase in revenues for the period was driven by an 8% increase in closings to 8,097 homes, in combination with a 2% increase in our average sales price to $549,000. On a year-over-year basis, the increase in our ASP reflects modest price increases in our first-time and active adult communities, while prices in our move-up communities were consistent with last year. The increase in our average sales prices for the quarter also reflects the impact of mix, as we recorded higher closings within our move-up business, which at $650,000 carried much higher prices than our first-time and active adult business. Broken down by buyer group, closings in the second quarter consisted of 40% first-time, 37% move-up and 23% active adult. This compares with the mix of closings in the second quarter of last year, which was 41% first-time, 34% move-up and 25% active adult. Reflecting the headwinds caused by higher rates and other market dynamics, our 7,649 net new orders were down 4% from last year's exceptionally strong results. In particular, I would highlight that last year's Q2 orders benefited from Del Webb grand opening and built-for-rent sales that are lumpy in nature. As has been well reported, operating conditions in select Florida and Texas markets got more competitive in the second quarter as interest rates rose during the month of April. On our first quarter earnings call this year, we indicated that buyer traffic had slowed during the first few weeks of April and this slowdown did ultimately impact orders as we moved through the period. For the second quarter, our average community count was 934, which is an increase of 3% over the same period last year. The resulting absorption pace of 2.7 orders per community per month in the quarter is above the pre-COVID average, but down from the 2.9 we generated last year. More granularly, our net new orders in the second quarter decreased 3% among first-time buyers, increased 4% among move-up buyers, and decreased 17% among active adult buyers. While we continue to see strong demand among active adult buyers, we did report a larger year-over-year decrease in their second quarter quarters. That decrease primarily reflects lower community count in the current year and some impact from the timing of openings and closings of several of our Del Webb communities. Adjusting for the impact of these dynamics, our net new orders at stores that were operating consistently in both periods shows an order decrease of only 3%. Consistent with our overall order results, on a unit basis, our quarter end backlog was down 4% to 12,982 homes, although backlog value was down only 1% to $8.1 billion. Turning to production. We started at approximately 8,100 homes in the second quarter and ended the quarter with a total of 17,250 homes under construction. Of the 17,250 homes under construction, approximately 6,900 or 40% of spec, including an average of 1.3 finished specs per community. These levels are in line with our targets of 40% and one finished spec per community and put us in a position to meet our delivery targets over the balance of the year. As always, we are prepared to adjust our cadence of spec starts up or down in response to sustained changes in overall higher demand. Based on the units we have under construction and their stage of production, we currently expect to close between 7,400 and 7,800 homes in the third quarter and continue to expect to close approximately 31,000 homes for the full year. As noted, we realized an average sales price of $549,000 in the second quarter, which is consistent with our prior guide for pricing of $540,000 to $550,000. Looking ahead, we expect closings in the third and fourth quarters to be in that same range of $540,000 to $550,000. While our average price and backlog is higher than our guide, we have a lot of homes left to sell and close this year, most of which will be spec production with our first-time buyer communities where pricing is lower. We reported second quarter gross margin of 29.9%, which represents an increase of 30 basis points over both the second quarter of last year and the first quarter of this year. As in Q1 of this year, our reported gross margins reflect a favorable mix of closings and a generally supportive pricing environment for many of the spec sales we closed in the quarter. Second quarter gross margins also benefited from opportunities we've taken in prior quarters to improve net pricing in a number of communities across our portfolio. Consistent with such actions, incentives on closings in the second quarter was 6.3% selling price, which is down from 6.5% in the first quarter of this year. While recent macro data has sparked optimism about the potential for Fed rate cuts, we don't factor such expectations into our guidance. What we do know is that rates remain elevated, affordability is stretched, and our delivery mix will be less favorable in the back half of the year. As we discussed on our Q1 earnings call, in the third and fourth quarters, we will be closing more homes in our West region, where homes carry a lower relative margin profile than we did in the first half of the year. These factors, combined with our need to be price competitive to turn assets point to an expected gross margin of approximately 29% in the third quarter and 28.5% to 29% in the fourth quarter. As stated previously, we still have homes to sell and close to meet our full-year delivery guide of 31,000 units. So, demand conditions over the next few months can have an impact on the results built. In the second quarter, our reported SG&A expense was $361 million, or 8.1% of home sale revenues. Reported SG&A includes a $52 million pre-tax insurance benefit recorded in the period. In Q2 of last year, our reported SG&A expense was $315 million, or 7.8% of home sale revenue, which includes a $65 billion pre-tax insurance benefit. Excluding the impact of the insurance benefits recorded in the first two quarters of this year, 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. Turning to our financial services operations. We reported pre-tax income of $63 million in the second quarter, which is up from $46 million in the same period last year. The 36% increase in pre-tax income reflects strong financial performance across all business lines, including mortgage, title and insurance. Our performance also benefited from an increase in capture rates across all business lines, including a mortgage capture rate of 86% in the quarter, up from 80% last year. In total, reported pre-tax income for the second quarter was $1 billion, which represents an increase of 10% over last year. Our tax expense in the second quarter was $239 million, with an effective tax rate of 22.8%. Our effective tax rate for the quarter includes the benefit of energy tax credits and a $13 million benefit related to the favorable resolution of certain state tax matters. For the remaining quarters this year, we continue to expect our tax rate to be in the range of 24% to 24.5%. Taken altogether, we reported net income of $809 million or $3.83 per share. This compares to prior year reported net income of $720 million, or $3.21 per share. On a per share basis, we continue to benefit from our ongoing share repurchase program, which on a year-over-year basis reduced shares outstanding by 5% from last year. Capitalizing on our strong cash flows, we continue to support the future growth of our business as we invested approximately $1.2 billion in land acquisition and development in the second quarter. This brings our year-to-date land spend to just over $2.3 billion, keeping us on track to invest approximately $5 billion in land acquisition and development for the full year. For both the quarter and the first six months of 2024, the allocation of land spend was 60% development and 40% acquisition. At the end of the second quarter, we had approximately 225,000 lots under control, of which 53% were held via option. Given the strength of our land pipeline, we continue to forecast community count growth of 3% to 5% in the third and fourth quarters of this year over the comparable prior periods last year. Consistent with our capital allocation priorities, we are also continuing to return capital to shareholders. In the second quarter, we repurchased 2.8 million common shares at a cost of $314 million, or an average price of $113.79 per share. This brings our year-to-date share repurchase activity to a total of 5.1 million shares repurchased at a cost of $560 million or $110.58 per share. In addition to repurchasing stock, we also completed a tender offer for $300 million of our senior notes in the second quarter. As a result, our debt-to-capital ratio is now just 12.8% and our notes payable have decreased to $1.7 billion, which represents the lowest level since before we acquired Del Webb in 2001. After spending more than $1.8 billion during the quarter on land investment and the purchase of our equity and debt, we ended the quarter with more than $1.4 billion of cash. Adjusting for our cash position, our net debt-to-capital ratio at the quarter end was 1.8%. I'm also pleased to report that in acknowledgement of our improved operations, strong cash flow generation and outstanding balance sheet, Fitch recently upgraded our debt to BBB+, while Moody's upgraded its outlook to positive. Now, let me turn the call back to Ryan for some final comments.

James Zeumer:

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. Thank you. And I'll ask Rob to again explain the process and we'll open the call for questions.

Stephen Kim:

Yeah. Thanks very much guys. Congrats on the results and congrats to Jim and Bob. I'm glad to hear that we got a great transition going. So, congrats to everybody. Wanted to ask a couple of questions. If I could start off just by talking about your gross margin outlook. You indicated that you're going to be doing more in the West, I think, which is a little bit lower margin. And you also talked about, on a longer-term basis, increasing your land banking initiative. I was wondering if you could give us a sense. If you were to isolate the land banking, the increased use of land bankers, I know that this is going to take a little time to kind of flow through all your results. But once that has happened and you reach the targeted level that you think land banking is going to represent in your mix, how much of a margin impact overall do you think that, that alone would represent relative to where you are today?

Stephen Kim:

Absolutely. That's very helpful. That 20% increase in the 200 basis points to 300 basis points, which is also pretty standard across the industry. So, that's helpful. Wanted to talk about cycle times because also when you talk about returns being able to build more quickly and therefore more efficiently also helps you in your return goals. Can you update us on where your cycle times sit today relative to, let's say, a pre-pandemic kind of a situation? And if you think there's additional opportunities there and wrapped up in that, can you give us an update on ICG? It's been a while since we've kind of heard you talk about it. You've had it now for over about four years, I think. Just give us a sense for sort of where that fits into the overall cycle time progression?

Ryan Marshall:

Stephen, it's Ryan again. I'll take the ICG question. We're pleased with how ICG is performing. We've got two active plants, both located in the Southeast part of the US. They do a mix of our business, along with other single-family homebuilder business. And we have a decent amount of commercial business that runs through those plants as well, predominantly in the frame package for apartments. If there was a part of the ICG business that's lagging, it would be that commercial business with the slowdown in new apartment development or new apartment projects starting. We do have a physical location secured and owned. Actually, more than secured. We own a location for our third ICG plant. We have not started construction on that yet. We're just finalizing some of the design parameters for that new location. So as we have more details on that, we'll be sure to share it. We're pleased with not only the cycle time benefits that we get out of ICG, the quality pickups, better safety. We also think we get better cost just in the way that we're able to buy, particularly lumber as it flows into the ICG plant. So happy with how that business is performing.

Operator:

Your next question comes from the line of John Lovallo from UBS. Your line is open.

Ryan Marshall:

Yeah, John, it's a good question. Probably the one market that's higher than what we'd ideally like to see would be Southwest Florida. There we've seen inventory -- resale inventory levels approach about nine months, with the benchmark or the kind of equilibrium rate being six months. So, we're a tad elevated. I wouldn't consider it concerning. That's been a very strong market for a long time. I think it continues to be a really desirable place for retirees and second homeowners. So, I think that market had unprecedented price appreciation. Part of the reason that I think we're seeing some of the elevated inventory levels. The market will go through a bit of an adjustment. It will find a clearing price and I'd expect inventory levels to come back to kind of a more normal range. There are a few markets in Texas that I think are in similar situation. Austin, Dallas would be the two that I would probably highlight. That I have also seen unprecedented growth in population, jobs, and resulting home price increases. But other than the nine months of inventory in Southwest Florida, there's probably nothing that I'd characterize as concerning.

John Lovallo:

Okay. That's helpful. And then just on the cash flow, is $1.8 billion still the cash flow guide for the full year? You guys did, I think, $246 million of buybacks in the first quarter, another $314 million in the second quarter. How are you kind of thinking about that cash flow in the back half and the ability to repurchase more shares?

John Lovallo:

Okay. Thank you, guys.

Anthony Pettinari:

Good morning and congratulations to Bob and Jim. You indicated your guidance doesn't anticipate lower rates. And I'm just wondering, if benchmark mortgage rates were to fall 50 bps or 100 bps, is it possible to quantify what that would do to gross margin holding all else equal? And then maybe kind of a harder question to answer, do you get a sense that there's meaningful group of prospective buyers that are kind of on the sidelines until we get a move in rates?

Anthony Pettinari:

Okay. That's helpful. And then sorry if I missed this, but in terms of stick and brick costs in the quarter and then what your maybe second half gross margin guidance assume or contemplates, can you just give us kind of color on those trends?

James Ossowski:

And that's incorporated into the guide that we've provided.

Anthony Pettinari:

Okay. That's very helpful. I'll turn it over.

Michael Rehaut:

Thanks. Good morning, everyone, and I also want to offer my congrats to Bob and Jim. First, I wanted to circle back to the comments around the shift of the business over time to more lot optioning and just wanted to kind of clarify the comments earlier, you said that when you kind of move from a regular perhaps owned land position to a lot bank land position. I just want to make sure we understood that right, that it kind of shifts 200 to 300 basis points of gross margin, take that out of gross margin, but shifts it into return on equity, if we heard that right. And if we're talking about a 20% shift of the business, effectively 200 to 300 bps times 20%, we're talking about 40 to 60 bps impact of moving from gross margin to ROE. Just want to make sure that we're understanding that correctly. And if there's any other factors that we should consider in that longer-term move to more lot optioning and land banking?

Robert O'Shaughnessy:

Yes. Maybe just one point of clarification. I'd rather we're speaking to the IRR on the transaction as opposed to our return on equity. Like our equity gets influenced by lots of other things ultimately when you kind of get to the parent level. But on a deal-by-deal basis, banks versus nonbank, it is roughly a 200 to 300 basis point cost and margin and then a roughly 200 to 300 basis point benefit to the return on that transaction.

Ryan Marshall:

Yes, Mike, the way that I'd ask you to think about capital allocation is we look at the needs of the business first and foremost. And that starts with how much investment do we want to put into land? How much investment do we want to put into dividends? How much investment do we want to put into share repo and as evidenced in over the last couple of years, we've even been retiring debt. So we look at the collective needs of the business and then we think about how are we going to finance that. The business is performing incredibly well, and we've been generating great cash flow and that cash flow put us in a very favorable position where we haven't needed the levels of debt that we've historically used in the business. So I think we can all agree that having an appropriate amount of leverage in a business is advantageous and efficient from a return standpoint. That's part of the reason that we set kind of our target rate at 20% to 30%. But we're not going to let the tail wag the dog here. We look at how we want to run the business, think about the capital that we need for that and then we look at how we're going to finance it. And in the position that we're in, we're in a great position to have lower leverage, lower debt and still do all of the things that we want to do strategically from an investment standpoint. So I take the position that we're in from an overall debt level any day of the week and twice on Sunday. Could the business absorb or handle more debt certainly but again, the number one priority is how do we want to run the business and then we go figure out how to finance it. Bob, anything else do you want to add to that?

Michael Rehaut:

Great. Thank you.

Rafe Jadrosich:

Hi. Good morning. Thanks for taking my questions. I just want to follow-up on some of the comments on Florida and Texas. Can you talk about what you would sort of attribute the slowdown and the higher inventory in those markets too? Like what's driving that? And then the comments on the price discovery process, where are we in that process? Have you seen prices correct already? Or is that something you would expect going forward?

Rafe Jadrosich:

Thank you. That's really helpful. And then just on the gross margin guidance for the second half of the year, I think you were previously expecting sort of consistent 29% and through the back half, the expectation for the change in the outlook for the fourth quarter for sort of the exit rate, is that driven entirely by mix? Or are there other factors that are changing that expectation for the fourth quarter?

Rafe Jadrosich:

Thanks for all the color.

Operator:

Your next question comes from the line of Alan Ratner from Zelman & Associates. Your line is open.

Ryan Marshall:

Yes, Alan, I think Bob's prior answer to Ray's question help to address that. Now I'd combine that with the comment that I made that we're not going to be margin proud. It's important for us to turn our assets, the demand environment and specifically, consumer confidence and affordability has been a little bit choppier. So the combination of a little bit more West Coast mix with a few markets where we think we're going to have to add in a few incremental incentives. We've given kind of some incremental or some more kind of finite range and where we think margins fall in Q4. The guide for Q3, we left unchanged at approximately 29%, and we just put a range around the fourth quarter to accommodate for some of the things that I just described.

Robert O'Shaughnessy:

Well, Alan, maybe just one other point, I mean, we've got 13,000 units of backlog, the vast majority of which are going to deliver over the next six months. So we could see a lot of that. And to your point about forward incentive load, we already know what the incentives are on those homes. So it's really just --

Ryan Marshall:

Yes, Alan. I think the thing that I would probably reorient the focus would be around how difficult it is to have entitled land in this country. We're in an environment that is largely not in my backyard anti-growth environment both municipalities. So the land that we have entitled and we're able to develop become somewhat of a precious commodity, and we're treating it as such. And we're treating it as such and balancing pace and price to drive the best returns that we can because we fundamentally believe that's what creates shareholder value. And I think the last decade of performance from this company demonstrates just that. Growth is a very important part of our story. And it's part of the reason that in our last quarter, we laid out a multiyear growth target of 5% to 10% over a multiyear period. So for 2024, we're going to be at the higher end of that range for the business that we'll deliver in 2024. And then in my prepared remarks, I highlighted that for 2025, we'd expect to be kind of within that range. So the way we've been investing capital, the way that we've been thinking about kind of community level absorption and total volume deliveries out of the business are very much aligned with that 5% to 10% multi-year growth target. And I'd probably leave it there as opposed to going into by community absorption rates.

Ryan Marshall:

Thanks, Alan.

Sam Reid:

Awesome. Thanks so much, guys. One more question on Florida here. Just wanted to maybe hear your perspective or your latest perspective, I guess, I should say, on the insurance market. You generally build houses that are further inland obviously, to the latest building codes. But are you finding that higher insurance rates across the state are also potentially a driver behind some of the buyer trepidation there? Just wanted your perspective on that.

Sam Reid:

No, that helps. And then just maybe switching gears and touching on land really quickly here. And this is more of a clarification question. It sounds like you're talking to more of a high single-digit increase in land costs this year. At least that's what's hitting your P&L and flowing through the gross margin. First of all, I just want to make sure I'm hearing that correctly. And then does that represent any change from your earlier your commentary? Because I believe the original expectation was for that to be closer to, let's call it, mid to high single-digits. Just want to make sure we're thinking of that correctly. Thanks.

Sam Reid:

Got you. That helps. Thanks so much. I'll pass it on.

Michael Dahl:

Good morning. Thanks and congrats, Bob and Jim. Bob, I guess you're not free of us all quite yet.

Michael Dahl:

Sometimes. A couple of quick ones from my end. You characterized the July traffic as solid. Obviously, some moving pieces around rates over the past month and then normal seasonality, you would flow. I think your absorption would typically be down kind of mid-teens quarter-on-quarter in the third quarter. Just given all the kind of attention from investors and analysts like can you give a little more clarity on kind of how the beginning of 3Q has looked? And are you trying to characterize this as kind of against what was choppy, solid is consistent with what you'd expect that are worth. How would you further clarify that?

Michael Dahl:

Yes. Okay. Understood and fair. And then just sorry to keep going on kind of the Florida and Texas stuff, but just as kind of a level setting exercise. If we look at the orders, your Florida orders were down 9%, your Texas down 8% in the quarter. Is there any way you could give us some additional perspective on in those challenged markets in Southwest Florida and Austin, Dallas? How was the order performance in those markets, specifically in the quarter?

Michael Dahl:

Okay. Got it. Thank you.

Susan Maklari:

Good morning, everyone. Thanks for squeezing me in. My first question is, you mentioned in your comments that the consumer is a bit more unsure, a bit more cautious. How would you generally characterize the health of them as you come into the third quarter and think about the back half? And what do you think is causing that increased caution? Is there anything that you're hearing from your salespeople on the ground that seems to be a more motivating factor in there for them?

Susan Maklari:

Okay. That's helpful. And then you also mentioned that you recently reentered Utah. As you think about the -- your current geographic footprint and hitting that 5% to 10% growth target over time, how do you think about the current markets that you're in, are there more markets that perhaps could fit your profile for some of the products that you offer? And anything else that's interesting to you out there from a market or geographic perspective?

Susan Maklari:

Okay. Thanks for the color and good luck with everything.

Operator:

And that concludes our question-and-answer session. I will now turn the call back over to Jim Zeumer for closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

James Zeumer:

Great, thanks Jeannie. Good morning. Let me welcome everyone to today’s call. We look forward to discussing PulteGroup’s outstanding Q1 operating and financial results for 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; and Jim Ossowski, Senior VP, Finance. A copy of our earnings release and this morning’s presentation slides has been posted to our corporate website at pultegroup.com. We’ll post an audio replay of this call later today. We 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?

Robert O’Shaughnessy:

Thanks Ryan, and 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 price of $538,000. The lower closing price compared to 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 this 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. Cancellations as a 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%. The resulting absorption pace of approximately three homes per 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 7,000 or 41% spec homes, of which 1,337 are completed. We are operating just above our target of one finished spec per community but believe carrying a few more finished specs was 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 of production, we expect to close between 7,800 and 8,200 homes in the second quarter. With the 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 the 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 ’23 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 are achieving higher returns by actively managing both pace and price, mix had an impacted on our reported Q1 margins. Higher demand increased as the quarter advanced, which allowed us to sell and close more homes in the period than forecast. On a relative basis, more of these closings occurred in our higher margin markets in the southeast and Florida, resulting in a meaningful increase in reported gross margins for the quarter. Based on Q1 sign-ups and the composition of our backlog, we 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 to 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 backlog, we would expect gross margins for our 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 in the geographic mix of 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 ’23 to achieve appropriate sales pace. Looking at our costs, reported SG&A in the first quarter was $358 million or 9.4% of home sale revenues. 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 of 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 through 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 period record of $869 million, an increase of 24% over last year. Against that, we reported 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 or $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 plans 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 combination with the decision 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 had pre-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 by buying via option. Looking at our community count, we continue to expect average community count for 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 investments 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.

James Zeumer:

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. Jeannie, if you would explain the process, we’ll get ready to--we can start with our Q&A.

Stephen Kim :

Yes, thanks very much, guys. Impressive results, and 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 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 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?

Stephen Kim:

Yes, thanks for that. As you progress in that manner, it will unlock some additional cash flow in addition to your net earnings, and so I wanted to turn to cash flow next. I think you gave a guide for cash flow from operations for the full year previously at about $1.8 billion. You’ve taken up--you had a great 1Q, 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 were pretty much equal to cash flow from operations, and your leverage has pretty much stabilized in low single digits, so is it right to think that maybe whatever you generate in cash flow from operations, with a little bit of flex quarter to quarter, but in general that’s about what you would deliver in terms of repayment--sorry, repurchases in dividends?

Stephen Kim:

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

Operator:

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

Ryan Marshall:

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. 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 rate commitments that allow us to offer 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 forward rate 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 quarter, closings was running at 6.5%, we’ve assumed that that stays flat going forward.

Robert O’Shaughnessy:

Matt, it’s Bob. That mid to high single-digit increase in our lot cost was in our Q1 and is expected to continue through the balance of the year. When we gave the margin guide, 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, it’s still competitive out there. I’ve said this before - land hasn’t gone on sale, and slight variations in market typically don’t result in prices declining. The market is super efficient on the way up, a little bit sticky on the way down, so for quality parcels it’s competitive.

Operator:

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

Ryan Marshall:

Good morning Carl, thanks for the question. We saw a couple of days of cycle time improvement in the most recent quarter, so we were at 128 days, down from 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, in many cases were multi-family and condo buildings that we think kept the overall number that I just shared with you of 128 days a little bit higher than what we think is our actual run rate at this point. When we look at a lot of our markets, we’re already back to pre-COVID cycle times of even sub-100 days, so we’ve made a lot of progress 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.

Ryan Marshall:

Yes, outside 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 buy another home somewhere else, so we think it’s largely neutral on the overall supply side.

Operator:

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

Ryan Marshall:

Yes 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 will 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. Realtors are an important part of our business and probably over 60% of the sales that we have include a buy-side realtor involved, so we certainly support the realtor community, they’ve been an important part of our company for a long time, but we are watching the way that the landscape there will certainly change.

Ryan Marshall:

Yes, 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. That combined with, I think, a general improvement in buyer sentiment contributed to the lights coming back on in the western markets. Some of the markets that we’d highlighted pretty consistently last year - Seattle, northern California, southern California, Las Vegas, Phoenix, 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. Look - we’re pleased that those markets are contributing. We’ve got a lot of capital invested there, they’re big housing markets. People want to live there for a number of reasons - climate, jobs, etc., so we’re pleased that they’re doing well.

Operator:

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

Ryan Marshall:

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

Robert O’Shaughnessy:

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 and 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 and materials to be pretty manageable with low single digit increases, and we’ve factored that into our guide.

Ryan Marshall:

Thank you.

John Lovallo:

Good morning guys. Thank you for taking my questions as well. The revised full-year gross margin outlook is about flat year-over-year, and I think previously you had talked about pricing being flat year-over-year - that was a little bit better in the first quarter, for sure, mid to high single digit land cost appreciation, 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.

John Lovallo:

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

John Lovallo:

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

John Lovallo:

Understood, thank you guys.

Sam Reid:

Awesome. Thanks so much, guys, for taking my questions, and thanks for the incremental color on April, especially the traffic detail. It definitely makes sense that the Centex 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 adult and move-up, and what you’re seeing from that buyer cohort, if anything, as rates move.

John Lovallo:

That’s helpful. 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.

John Lovallo:

That’s helpful. I’ll pass it along, guys.

Rafe Jadrosich:

Hi, good morning. Thanks for taking my questions. 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.

Rafe Jadrosich:

Got it, that’s helpful. Then just looking at the first quarter gross margin, can you just talk about the drivers of the quarter, the 70 basis point quarter-over-quarter step-up, and then what were the upsides to your initial guidance?

Rafe Jadrosich:

Sequentially.

Rafe Jadrosich:

Great, thank you.

Mike Dahl:

Hi, thanks for taking my questions. I’m going to stick with margins. Bob, you kind of alluded to this - it’s a tricky time when you’ve just had this rate 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. Maybe just talk through the assumption for flat incentives against this move in rates. Just talk about why that is the baseline assumption, or if it just felt like the right placeholders and matches 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.

Mike Dahl:

I guess as my follow-up, more specifically, that kind of implies that you’ll get your advertised rate flow 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 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 active adult, but in your Centex brand, what’s the sensitivity to a 40, 50 basis point move in rates that you’ve seen or thought about?

Mike Dahl:

Thanks Bob, appreciate that.

Alan Ratner:

Hey guys, good morning. Thanks for squeezing me in here. Nice quarter. Would love to get your updated thoughts on specs versus build to order. I know you and others ramped the spec production as cycle times re-elongated and there was a premium, or at least 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. It sounds like maybe the Centex offering, which is predominantly spec, I would think, is maybe seeing more of that impact than the move-up rate, 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 business?

Alan Ratner:

Great, appreciate your thoughts there, Ryan. Then pivoting to 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 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 getting past the peak of the selling season and you’re sitting on more inventory than you’d like? What’s the decision process there look like?

Alan Ratner:

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

Ken Zener:

Good morning everybody.

Ken Zener:

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 versus your move-up brand, realizing Orlando is different than coastal markets? It’s such a big market for you guys profitability-wise. If you could maybe give a little color related to the margin swings you’re kind of seeing with those trade-up buyers’ entry within markets that are seeing the pick-up in inventory specific to Florida, thank you.

Ken Zener:

That was sufficient, thank you very much.

James Zeumer:

Great, appreciate everybody’s time today. We’re around the remainder of the day for ay 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.

Jim Zeumer:

Thanks, Mandeep. Good morning, and let me welcome participants to today’s call. We look forward to discussing PulteGroup’s strong fourth quarter and full-year financial results, the period ended December 31, 2203. I’m joined on today’s call by Ryan Marshall, President and CEO, Bob O’Shaughnessy, Executive Vice President and CFO, and Jim Ossowski, Senior Vice President, 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. . Please note that consistent with this morning's earnings release, we'll be discussing our debt ratio on both a gross and net basis. A reconciliation of our adjusted results to our reported financials is included in this morning's release and within today's webcast slides. And finally, 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?

Bob O’Shaughnessy:

Thanks, Ryan. Good morning. As Ryan mentioned in his comments, market conditions changed meaningfully as the fourth quarter progressed and as mortgage rates began to fall. Our reported financial results for the period were influenced by these evolving market dynamics, so I'll note any important areas of impact in my prepared remarks. Wholesale revenues in the fourth quarter were $4.2 billion, compared with $5 billion in the prior year. Our lower home sale revenues for the period primarily reflect a 14% decrease in closings to 7,615 homes, along with a 2% decrease in our average sales price to $547,000. I would highlight that our fourth quarter closings came in about 5% below our previous guide, as sales early in the quarter were negatively impacted by higher mortgage rates and the general softening in overall buyer demand. As Ryan noted, homebuying demand accelerated in the back half of the quarter, but sales, particularly sales of finished spec homes that would close in the quarter, finished below our assumptions. We could have captured incremental sales and closing value by offering higher incentives, but we didn't see that as a worthwhile tradeoff. Given that buyer trends have remained positive in January, I think we made the right choices as we have inventory available to meet the stronger demand. Our mix of closings in the quarter were comprised 40% first time, 36% move-up, and 24% active adult, which is in alignment with our stated goal for the buyer mix for our business. In the fourth quarter of 2022, closings were 36% first time, 39% move-up, and 25% active adult. Our average community count for the fourth quarter was 919, which represents an 8% increase over last year's fourth quarter average of 850 communities, and was in line with our prior guidance. Looking at order activity in the quarter, our net new orders increased 57% over last year to 6,214 homes. The large increase over last year reflects both improved demand in 2023, as well as the extremely difficult operating environment in the fourth quarter of 2022. As discussed previously, demand conditions grew increasingly difficult early in the fourth quarter this year as mortgage rates climbed to 8%, but we experienced a notable improvement in buying activity as rates decreased over the back half of the quarter. On a sequential basis, our absorption pace improved from November to December, and we would attribute much of this improvement to the decline in interest rates. Along with stronger demand conditions, the year-over-year increase in fourth quarter net new orders benefited from a decrease in cancellation rates. In the most recent quarter, cancellations as a percentage of beginning period backlog fell to 9%, down from 11% in the comparable prior year period. Looking at our order activity by buyer group, fourth quarter net new orders increased 70% for first time buyers, 78% for move-up buyers, and 15% for active adult buyers. Our order numbers indicate that demand improved across all buyer groups, which is a very positive dynamic when assessing potential housing demand in 2024. As a result of our sales and closing activity, our quarter end backlog was 12,146 homes, which is effectively flat with last year. Reflective of the increased mix of first-time buyers and their lower average sales prices, our ending backlog value declined slightly to $7.3 billion. Inclusive of the 7,128 homes we started in the fourth quarter, we ended the year with 16,889 homes in production. 44% of our production is spec, including 1,263 finished specs, which puts us in a strong position to meet buyer demand as we head into the spring selling season. By the end of the fourth quarter, our construction cycle time was down to 130 days, which is a sequential improvement of about two weeks from the end of the third quarter. Going forward, we continue to target getting our cycle time down to 100 days or below by the end of the year. Based on our production pipeline, we expect closings in the first quarter of 2024 to be between 6,200 and 6,600 homes. And given our units under production, we expect full-year deliveries to grow by 5% to 30,000 homes. We currently expect the average sales price of closings to remain in the range of $540 million to $550,000 for the first quarter and the full year of 2024, which is consistent with our fourth quarter pricing. At the midpoint, this would imply price stability over the course of the year. Our fourth quarter gross margin was 28.9%, which is down approximately 50 basis points from both the fourth quarter of last year and the third quarter of this year, but likely remains the industry leader among the big builders. As with the entire year, our fourth quarter margins reflect higher incentive and input costs. Incentives, which primarily impact revenues, increased 50 basis points sequentially from the third quarter to 6.5%. On the cost side, lower lumber prices offset inflation and other material and labor, but higher land and land development costs impacted margins in the period. Given my prior comments that we expect pricing to be flat in 2024, we anticipate that land and house cost inflation will result in gross margins to be in the range of 28% to 28.5% for each quarter during the year. We reported fourth quarter SG&A expense of $308 billion, or 7.4% of home sale revenues, compared with prior year SG&A expense of $351 million, or 7.1%. The 30-basis point drop in overhead leverage can be attributed to the lower closings and revenues realized in the quarter versus the prior year. It should be noted that we recorded $65 billion of pre-tax insurance benefit in the fourth quarters of both 2023 and 2022. Based on anticipated closing volumes, we expect SG&A expense for the full year of 2024 to be in the range of 9.2% to 9.5% of home sale revenues. Given our typical seasonality of closings, we expect SG&A expense in the first quarter to be approximately 10% of home sale revenues, with overhead leverage improving as we move through the remaining quarters of the year. For the fourth quarter, our financial services operations reported pre-tax income of $44 million, which is up from $24 million last year. The improvement in pre-tax income reflects more favorable market conditions across our financial services platform, coupled with higher capture rates, including an increase to 85%, up from 75% last year in our mortgage operations. Our reported pre-tax income for the most recent quarter was $947, million compared with prior year pre-tax income of $1.2 billion. In the period, we recorded tax expense of $236 million for an effective tax rate of 24.9%. Projecting ahead to 2024, we expect our full-year tax rate to be in the range of 24% to 24.5%. Looking at the bottom line, our reported fourth quarter results showed net income of $711 million or $3.28 per share. In the comparable prior year period, we reported net income of $882 million, or $3.85 per share. For the full year of 2023, we reported net income of $2.6 billion and a record earnings of $11.72 per share. Reflective of our strong operating results, in 2023 we generated cash flows from operations of $2.2 billion. Given our current expectations for operating and financial results, along with our plans to increase land investment to $5 billion in the coming year, we expect 2024 cash flows from operations to be approximately $1.8 billion. Turning to our investment and capital allocation activities, we invested $1.3 billion in land acquisition and development in the fourth quarter, of which 59% was for development of our existing land assets. For the year, our land investment totaled $4.3 billion, of which 59% was for development. Given our constructive views on near and longer term housing dynamics, as noted, our plan is to increase our land spend to approximately $5 billion in 2024. We would again anticipate a roughly 60/40 split between development and land acquisition. This increase in investment is consistent with Ryan's earlier comments regarding positioning the business to routinely grow future delivery volumes by 5% to 10% per year. Inclusive of our fourth quarter investments, we ended 2023 with 223,000 lots under control, which is an increase of 5% over the prior year. I would highlight that on a year-over-year basis, we lowered our owned lot count by 4,000 lots, while increasing our lots under option by roughly 16,000 lots. As a result, our percentage of lots under option increased to 53%, up from 48% last year. There's still a lot of runway ahead of us to achieve our goal of 70% option lots, but we're moving in the right direction. Based on the investments we've made and our anticipated community openings and closings in 2024, we expect our average community count in 2024 to be up 3% to 5% in each quarter as compared to the comparable prior year period. Consistent with our stated capital allocation priorities, we continue to return capital to shareholders in 2023. To that end, we paid out $142 million in dividends, and have increased our dividend per share by 25%, starting in the first quarter of 2024. We also repurchased 13.8 billion common shares at a cost of $1 billion for an average price of $72.50 per share, which included $300 million of repurchases at an average price of $83.03 per share in the fourth quarter. With the 13.8 billion shares acquired in 2023, we have repurchased approximately half of the shares outstanding at the time we initiated the program back in 2013. Having repurchased these shares at an average cost of $32.16 per share, we believe it's been a great investment for our shareholders. In addition to buying our stock, in the fourth quarter we took advantage of market conditions by using $35 billion of cash on hand to pay down a portion of our debt. For all of 2023, we retired $101 million of our 2026 and 2027 senior notes through open market transactions, helping to lower our quarter end debt to capital ratio to 15.9%, down 280 basis points from last year. Adjusting for the $1.8 billion of cash on our balance sheet, we ended the year with a net debt to capital ratio of 1.1%. Now, let me turn the call back to Ryan for some final comments.

Jim Zeumer:

Great. Thanks, Ryan. We're now prepared to open the call for questions. So, Mandeep, if you would explain the process, we'll get started.

Carl Reichardt:

Thanks. Morning, guys. Hope you're doing well. Ryan, I wanted to ask a little bit more about January. Could you maybe expand on how business has been, and what I'm really interested in is, have you seen enough traffic or sales rates to start to think about more broadly pulling incentives down or even starting to raise base across the footprint?

Carl Reichardt:

All right. Thanks for that, Ryan. And then I'm going to ask a couple of questions just on move-up. Obviously, the entry level business has been strong for volumes. Move-up, a number of your peers have kind of shifted some of their investments more towards the low end. That's been going on for quite some time. Can you talk a little bit about how that - how you look at that business this year? Is there any alteration in mix in terms of communities and whether or not maybe your CAN rate in that business is improving faster than the other businesses? We're trying to see if the existing housing market's unlocking enough that you can start to see even more strength in that particular segment. Thanks.

Bob O’Shaughnessy:

Yes, just maybe another point of clarification that not only were the sales strong, it was our strongest absorptions on a same-store basis. So, that consumer actually has performed well, to Ryan's point, strong margins and absorptions.

Operator:

Our next question comes from the line of Matthew Bouley with Barclays. Please go ahead.

Ryan Marshall:

Yes. Matt, thanks for the question. We feel really good about how we position the land pipeline. We've been investing for growth for a number of years, and we've been trying to do it in a very responsible way specific to having less owned and more optioned land. The fact that over the last 15 months we've made significant headway with our land banking platform, has helped with that. So, we really like the number of lots that we have under control at 225,000 plus or minus. And we like the ownership structure, or the way that we or the way that we've controlled those lands. We think it's a really capital-efficient structure. Specific to your growth target number, yes, we’re going to be at the lower end for 2024. Beyond that, we feel that we've got the right structure to kind of be in that range for future periods.

Matthew Bouley:

Got it. Okay. That's super helpful. Thanks, guys. Second one, back to the gross margin question, I think you're guiding 2024 margins to be down at roughly 70 basis points from where you exited the fourth quarter. I think I heard you say, Bob, that it's kind of flat pricing and then you've got some headwinds in land, labor, and materials. I'm just curious if you kind of unpack that a little bit and maybe specifically focus on the land side, how are you kind of thinking about those headwinds to the margin, and how does that kind of play into that guide in 2024? Thank you.

Matthew Bouley:

Perfect. All right, thanks, Bob. Thanks, Ryan. Good luck, guys.

John Lovallo:

Hey guys, thank you for taking my questions. The first one, just maybe talking about January again, curious how orders looked versus normal seasonality, if you will. And I think first quarter absorptions typically rise, call it, 40% to 45% sequentially. Is there anything that would preclude that from happening in your opinion outside of rates maybe in the first quarter of this year?

John Lovallo:

Makes sense. And then on the share buyback, that was encouraging to see, and I think could be a good driver of returns as we move forward here, over the past few years, I think you guys have done about $1 billion per year. The authorization now is closer to $1.8 billion. How are you thinking about 2024 buybacks relative to the past few years? I mean, should we expect north of a billion?

John Lovallo:

Okay. Thank you, guys.

Stephen Kim:

Yes, thanks very much, guys. First question relates to your land on the balance sheet. I think that your cashflow guide seems to suggest, at least for my modeling, a modest rise in your own lot count, while you keep a year supply of owned lots fairly stable. I was wondering if that's right, and if there's any opportunity or desire to actually reduce your land holdings in years further.

Stephen Kim:

Well, I guess, Ryan, I mean, you gave most of that information in your opening remarks, so I appreciate that. But I guess the gist of my question, trying to incrementally understand what your plans are a little bit more is to try to understand the actual amount of owned lots. Are you looking to get to your 70% option versus owned mix by keeping your owned lot count kind of flat, or your supply flat with where you are, or are you actually looking to reduce that in addition to increasing your option lot exposure to kind of get to that 70% eventually?

Stephen Kim:

Okay, that helps. And then when you talked about land banking and continuing to increase that, could you describe for us the - when you think generally about what you're seeing in the market in terms of pricing, in terms of the way these negotiations are going with your land bankers, what kind of anticipated haircut to gross margin do you typically get when you go from just sort of buying versus doing a land option? And what's the benefit to your inventory turns that you typically think about? So, what's the tradeoff basically in your mind, some rules of thumb for us?

Stephen Kim:

Okay, that's fine. I appreciate it. That's fine. I appreciate it. Okay, thanks guys.

Joe Ahlersmeyer:

Yes, thanks very much. Good morning, everybody. Just a question on the assumption on the incentive load in the gross margin guidance. I'm wondering if that represents more just a state of conservatism right now, waiting to see what happens with rates further, or if it's more about your philosophy as rates fall that you might allow that to flow through to affordability and drive volume versus letting it be a big margin benefit. If you could just talk about that tradeoff.

Joe Ahlersmeyer:

Understood. Thanks a lot for that. And I appreciate your comments about the valuation. Sounds like you think that cashflow is a bigger part of that potentially even than just percentage of option lots or any metric on the land side about the cash flow. I tend to agree. And so, just wondering if you are internally starting to think about your leverage in the context of cash flow or profits, and not so much on what it makes up relative to your inventory balance. It's kind of thinking almost more like a manufacturer or distributor, because right now you're net debt is at about 13 days of operating profits. Just thinking about the potential for using more debt going forward. Thanks.

Joe Ahlersmeyer:

That's helpful, Bob. Thanks so much. Take care.

Michael Rehaut:

Thanks. Appreciate it. wanted to circle back just on incentives and where we are today and to the extent that there's the potential for those to decline, how we should think about the impact on 2024. So, when you talk about, I think assuming in 2024, 6.5% of a load rate for incentives, and I believe you said that was similar to the fourth quarter, if you could just remind us where you were in the fourth quarter versus the third and earlier in the year. And to the extent that perhaps incentives ticked down a little bit in the first quarter of 2024, should we be thinking that that would be a 3Q or a 4Q impact? Just trying to get the sense there of the lag.

Bob O’Shaughnessy:

Yes. It was about 6% in each of the first, second, and third quarters, and it was 4.3% in the fourth quarter of last year.

Ryan Marshall:

Yes, Mike, we've - I think we've always been thoughtful in how we spend SG&A dollars. We have historically made some extra investments in the quality of the homes that we build and deliver and the customer experience that we provide for our homeowners. And then we - and we invest incremental dollars in the culture of our workforce. So, we’ve tried to maintain balance within the SG&A structure as well. We're not trying to run kind of the leanest and the lean - on the lean end, we're also not trying to overspend. I think we're trying to be very balanced. In terms of the leverage for 2024 specifically, we've kind of given the guide, which will put us kind of in the low nines. And that's really reflective of kind of what Bob guided too on the average sales price, which we're expecting to be flat. And against that, you've still got wage inflation for kind of our internal employees running close to 3.5%, 4%. So, there's some pressure. There's pressure on the SG&A front that we're not necessarily getting the benefit of on the ASP increase side. So, in terms of kind of where it goes into the future, time will tell, but we’ve given the best visibility that we can for 2024. Bob, I don’t know if you - anything you'd add on SG&A. Bob keeps us honest, I'll tell you that. We're not overspending anywhere, at least not under Bob's watch.

Operator:

Our next question comes from the line of Sam Reid with Wells Fargo. Please go ahead.

Bob O’Shaughnessy:

Yes, I would tell you, if you look year-over-year, pricing at 422 to that buyer is down 6%. Year-over-year is down about 1% versus the trailing quarter, so the third quarter of this year. And I would tell you it is largely incentive-related. And so, we're not - we haven't in the last three months or the last 12 months, had a radical redesign of the product that we're offering to people. Communities, when they get entitled, you have product approvals. So, to a degree, you can see people saying, I want the smaller floor plan. I would tell you, that's not the driver of the price change. It is the incentive load that we've introduced. So, it's that 220 basis points, which for that buyer is about, call it, $8,000. That's the price decline.

Ryan Marshall:

Yes, in the fourth quarter, it was $105,000 per unit, so it's down about $4,000 versus the prior year. And so, I think that speaks to the sales team, and I give them a lot of credit. Where we've needed incentive has been less around options and lot premiums and more oriented towards financing. So, we didn't see a big change there, which I think is a real positive. It also is - interestingly, for that move-up in active adult buying, we've highlighted the relative strength from them in this quarter and the relative pricing strength there. So, just like our first time was down about 6%, our move-up pricing was actually flat quarter-over-quarter, and our active adult was actually tough 3%. And I think it's reflective of the way we go to market, the way we sell the lots that we've got, the options that people put in houses. So, our teams are still doing a really good job of providing value for that which people desire.

Operator:

Our next question comes from a line of Ken Zener with Seaport Research Partners. Please go ahead.

Ryan Marshall:

It's an interesting question. Certainly, the land banking would be finished lots. But for the optionality that we have with individual sellers, many of those were self-developing. And so, I don't - I don’t know, Jim, if you …

Ken Zener:

Right. I assume that's kind of reflecting your entry level exposure as well. Second question is, talk to options. Again, could you update us what percent of your ASP is coming from options? And then comment on the margin benefit you get from that, if you could, so we could discern your operating construction, operating construction costs versus your strategy of bringing in these options. Thank you.

Bob O’Shaughnessy:

The $4,000, the $105,000 you just gave.

Bob O’Shaughnessy:

No, I think …

Ryan Marshall:

Yes. So, of the $105,000 of option and lot premium, $80,000 is options, $25,000, that's lots premium. I could say for instance, lot premiums are pure margin. I'm not sure that that's fair, right? Pricing doesn't really work that way. But in terms of the option spend, typically it's going to have a relatively rich margin mix, call it, 50%. And so, it is accretive to the overall margin. And the way we try and go to market, Ken, and I don’t know if this answers it better, we put a base price house that we think is kind of market standard and what people can and should expect to pay for that house. Then we start talking about, okay, which lot do you want? What are you willing to pay for that lot? That's what generates the $25,000. And then, okay, now in the house, if we're offering optionality - and we don't for everyone, right? So, for the Centex buyer, we may have curated packages or no choices at all. But for the folks that can do structural options for fit and finish, that's what's driving that $80,000 in incremental revenue.

Operator:

Our next question comes from a line of Alan Ratner with Zelman & Associates. Please go ahead.

Ryan Marshall:

Yes, it’s a fair question. Based on the total amount of production that's happening, I don't see the industry stressing the labor availability. I'm not suggesting there's a whole bunch of excess labor running around out there, but at least for the big builders, I think we've got great trade relationships, and I think we'll continue to get, not only schedule performance, but the labor on our job sites. I think the pressure likely comes on dollars before - or more so than time. If we're running into labor pinches because of a volume increase, I think it's probably dollars more than time. A lot of the decreases that we'll take, it'll be because we're getting things on a predictable schedule like we used to pre-COVID. So, that's working better, which allows us to take some kind of dead days out of our schedule that we had - we built in for things to go wrong or for time when we were just literally waiting for material to show up. So, it’s a little bit of that, a little bit of, we're just getting back to the cycle times that we had pre-COVID. So, we trimmed out about 30 or so days in 2024, or in 2023, rather. We think we can get another 30 or so days by the end of 2024, and we'll be back largely in line with pre-COVID cycle times.

Ryan Marshall:

Yes, Alan, it continues to go well. We have two plants today. Both are focused in the southeast part of the US. Our growth plans are still largely on target. Still largely on target to have approximately eight factories. So, we haven't announced anything new. Similar to our share buybacks, we'll probably report the news on that as opposed to give forward-looking forecast.

Ryan Marshall:

Yes, Alan, so that's - we haven't given a bunch of guidance on that just because it is concentrated into a couple of markets, and we don't feel it's appropriate to extrapolate the entire enterprise yet. As we get further down the path, we'll share more. Conceptually, it's exactly what you highlighted. We're getting cycle time improvements. We're getting better quality, and there are some raw material cost savings that we believe we're getting as well.

Operator:

Our next question comes from the line of Susan Maklari with Goldman Sachs. Please go ahead.

Ryan Marshall:

Yes, Susan, I wouldn't anticipate a massive change from the percentage. We're probably on the higher end of the range that we'll have in spec right now. Specific to the fourth quarter, we put more spec starts in the ground than what we sold, and that was intentional. We wanted to have some additional inventory going into the spring selling season, which we have. So, as we move throughout the year, probably right in line with where we're at or a tad lower.

Ryan Marshall:

Yes, Susan, with the rate cuts that are forecasted, I don't see it being at a level that's going to unleash a tidal wave of resale inventory. So, is it better than where we're at today? Certainly. Will that start to free up some resale inventory? I think so. And I think that's probably helpful against the backdrop of, we continue to be under-supplied in the country. So, on balance, I don't think it has much impact at all on what we're projecting for our business in 2024.

Operator:

Our final question comes from the line of Rafe Jadrosich with Bank of America, where we've reached the time allotment for this morning's call. Please go ahead.

Ryan Marshall:

Yes, Rafe, it's a fair question. The homes that we're starting today will deliver in kind of late - so homes we’re starting today will deliver in Q2 basically. So, no, we're not at the 100 days yet. Now, that being said, there are some markets and some communities where we’re at the 100 days, and in fact, we were at the 100 days last year. When you blend it all together, we think it'll be Q4 before we're at the 100 days that we've highlighted as our goal.

Rafe Jadrosich:

Got. Thank you. That's helpful. And then you gave really helpful color in terms of the land inflation you're expecting in your gross margin for 2024, and you have the land you have the land that you need through 2025. On the land that you are contracting today, what are you seeing in terms of inflation? Is it at a similar level or are you actually seeing that come down? And then can you kind of help us understand the difference between development cost inflation relative to what you're seeing for raw land?

Rafe Jadrosich:

You spoke about the land inflation in the …

Rafe Jadrosich:

Great. Thank you. Appreciate all the color.

Jim Zeumer:

Appreciate everybody's time this morning. We'll certainly be available over the rest of the day if you have any additional questions. Otherwise, we'll look forward to speaking with you on our next earnings call.

James Zeumer:

Great, thank you Abbie. We appreciate everyone joining today’s call to discuss PulteGroup’s third quarter operating and financial results. As detailed in this morning’s earnings release, PulteGroup delivered another quarter of strong earnings as we continue to capitalize on our competitive strengths and balanced approach to the business. Joining me on today’s call to discuss our Q3 results are Ryan Marshall, President and CEO; Bob O’Shaughnessy, Executive Vice President and CFO, and Jim Ossowski, Senior Vice President, Finance. A copy of our earnings release and this morning’s presentation slides has been posted to our corporate website at pultegroup.com. We’ll post an audio replay of this call later today. We want to inform everyone that today’s discussion includes forward-looking statements about the company’s expected future performance. Actual results could differ materially from those suggested by our comments. 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?

Robert O’Shaughnessy:

Thanks Ryan. PulteGroup’s third quarter results add to what has been an exceptional year for the company as we have grown revenues and earnings, generating significant cash flow from operations, lowered our debt, and generally strengthened our entire operating platform. Specific to our third quarter, home sale revenues increased 3% over last year to $3.9 billion. Higher revenues for the quarter reflect a 2% increase in our average sales price to $549,000, in combination with a less than 1% increase in closings to 7,076 homes. The 2% gain in average sales price of homes closed in the quarter was driven by increases of 4% and 6% from move-up and active adult buyers respectively, partially offset by a 3% decrease among first-time buyers. The lower ASP among first-time buyer closings reflects our focus on remaining price competitive as interest rates have moved higher throughout the year. The mix of homes delivered in the third quarter changed just slightly from the prior year as we continue to operate within the range of our stated mix of business. For the quarter, closings among first-time buyers represented 38% of the business, move-up buyers totaled 37%, and active adult buyers represented 25% of the homes closed. In the third quarter of last year, 36% of homes delivered were first-time, 38% were move-up, and 26% were active adult. Net new orders for the third quarter increased 43% over last year to 7.065 homes as we realized year-over-year gains in both units and absorption pace across all buyer groups. Orders among first-time buyers in the third quarter increased 53% over last year to 2,979 homes. The gain among move-up buyers was even greater as net new orders increased 56% to 2,524 homes, and finally on a comparable community count, we realized a double-digit gain in sales among active adult buyers as net new orders for the quarter increased to 1,562 homes. In the third quarter, we operated from an average of 923 communities, which is up 12% over last year. Adjusting for community count, the monthly absorption pace in the third quarter averaged 2.5 homes, which is up from 2.0 homes per month in the third quarter of last year. As a percentage of beginning backload, our cancellation rate in the third quarter was 9% compared with 8% in the prior year. To be clear, on a unit basis cancellations in the third quarter were down more than 20% from last year, but the relative size of our backlog in each period results in the cancellation rate staying comparable. Our unit backlog at the end of the quarter was 13,547 homes compared with 17,053 homes at the end of last year’s third quarter. On a dollar basis, the value of our ending backlog was $8.1 billion, down from $10.6 billion in the third quarter of last year. At the end of the third quarter, we had a total of 17,376 homes under construction. This is down 24% from the same period last year as we strategically manage starts and realize the benefits of faster cycle times. Of the homes under construction, 61% were sold and 39% were spec units. As we have stated previously, we are comfortable putting spec units into production, but we are thoughtful about aligning the pace of starts with the pace of sales to help reduce the risk of putting too much inventory on the ground. Consistent with this measured approach to production, of the 6,700 spec homes currently under construction, fewer than 1,000 were finished. Given our Q3 community count of 923, we continue to carry approximately one finished spec per community, which is in line with our operating targets. Based on the homes we have in production and, as importantly, current sales trends, we expect closings in the fourth quarter to be approximately 8,000 homes. Delivering 8,000 homes in the fourth quarter would put us at 29,000 for the full year, which is down slightly from our previous guide for full-year closings to be 29,500 homes. The change in our guide reflects the more challenging affordability conditions resulting from higher rates as well as the slight shift in our mix toward build-to-order homes which won’t deliver until 2024. Given the mix of homes we currently expect to deliver in the fourth quarter, we expect our average sales price on closing to be in the range of $540,000 to $550,000 in the period. Our third quarter home sale gross margin of 29.5% continues to lead the industry as we successfully our turned our assets while still achieving high levels of profitability and driving higher returns on investment. PulteGroup’s reported results benefited from strong margin performance across all buyer groups - first time, move-up, and active adult. Further, as we have talked about on prior calls, our diversified product portfolio is allowing us to capture higher gross margins that are typically available within our move-up and active adult communities. As I would remind everyone, our primary focus is always on driving higher returns on invested capital, but we appreciate margins are an important contributor to achieving such returns. This is why we remain disciplined in where we locate and how we underwrite our communities and how we design and build our houses, and in how we strategically price our homes in the marketplace. Given the ongoing strength of our margins, we continue to get questions regarding relative margin performance among the larger public builders. I want to quickly address the line of thought that our margins benefit from land positions within our older Del Webb legacy communities. The reality is that the margins for these communities are comparable to the rest of our active adult business, but they are [indiscernible] our aggregate numbers. That being said, I’m pleased to say that we expect to continue delivering high margins as we continue to expect home sale gross margins to be in the range of 29% to 29.5% in the fourth quarter. Given current interest rates, demand and cost dynamics, we would expect to be toward the lower end of this range. SG&A expenses in the third quarter totaled $353 million or 9.1% of home sale of revenues. This compares with prior year SG&A expense of $350 million or 9.2% of home sale revenues. Based on anticipated closing volumes for the fourth quarter, we expect SG&A in the fourth quarter to be approximately 8.8%. In the third quarter, pre-tax income from financial services was $29 million, up from $27.5 million last year. While market conditions remain highly competitive for our financial services operations, the business benefited from a higher capture rate of 84% compared with 77% last year. The large increase in capture rate relates to the expanded use of rate-based incentives, which are executed through our mortgage operations. Looking at our taxes, consistent with our prior guide, our third quarter tax expense was $209 million or an effective tax rate of 24.6%. For the fourth quarter, we continue to guide to a tax rate of 24.5%. PulteGroup’s bottom line results show net income for the quarter of $639 million or $2.90 per share, which is up from prior year net income of $628 million or $2.69 per share. Given the ongoing financial strength and cash flow generation of our business, we repurchased 3.8 million shares for $300 million in the quarter. This was up from $180 million last year and $250 million in the second quarter of this year. In the third quarter, we also elected to allocate capital towards paying down a portion of our debt. In total, we retired $65 million of our 2026 and 2027 senior notes through open market transactions at prices slightly below par. Inclusive of these transactions, we’ve lowered our debt-to-capital ratio to 16.5%, which is down 220 basis points from the start of ’23 and down 600 basis points from the third quarter of ’22. Adjusting for the $1.9 billion of cash on our balance sheet at quarter end, our net debt to capital ratio was less than 1%. Beyond buying back our equity and debt in the third quarter, we also invested $1.2 billion in the business through land acquisition and development, which keeps us on track to invest upwards of $4 billion for 2023. Almost two-thirds of our investment in the third quarter was for the development of our existing land assets. Inclusive of our Q3 spend, we ended the quarter with approximately 223,000 lots under control, of which 53% are held via option. We continue to systematically rebuild the optionality of our land pipeline after having walked away from selective land positions in the back half of 2022. As part of this rebuilding process and consistent with our stated strategy of getting more land light, we are expanding our use of different land banking structures. To date, we have completed land banking transactions for approximately 5,000 lots. Going forward, we will look to use such land banking facilities in order to create optionality in situations where the underlying seller requires a bulk sale. It’s a disciplined process as we work to balance land costs, returns and risk, but we are gaining momentum in our efforts. We are also getting more questions on our land pipeline, so let me add that about one-third of the lots we have under control are developed and we continue to develop most of the lots that we acquire. As a large homebuilder, assuming you’re confident in the third party’s ability to consistently deliver developed lots on time, the decision to purchase finished lots versus raw dirt comes down to return. Finished lots cost more but can turn faster, whereas the lower cost of undeveloped lots can drive higher margins, but the land is on balance sheet for a little longer. In all of our land transactions, we assess how best to drive higher risk-adjusted returns and to find opportunities and deals for finished and/or undeveloped lots. Now let me turn the call back to Ryan.

James Zeumer:

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. Abbie, we’re ready to open for Q&A.

Carl Reichardt :

Thanks, good morning guys. I wanted to first just ask about the cycle time numbers - you talked about 140, trying to get down below 100 next year, so that’s more than a month off. What specifically, Ryan, needs to happen for those numbers to go down? Where are the best and most obvious lever points?

Carl Reichardt:

Right, thanks Ryan. Then you mentioned the choppiness in October, and I wonder if you could expand a little on that and talk a little bit, maybe about performance among the three segments in the month so far or particular markets, and then also from a cancellation perspective, if that’s beginning to sort of impact you in October too. Thanks.

Carl Reichardt:

Great, I appreciate the color. Thanks, fellows.

Matthew Bouley:

Hey, good morning guys. Thank you for taking the questions. Just a question around some of the comments you made at the top, Ryan, around addressing affordability and some of the challenges you’re seeing, particularly with the first-time buyer. Any additional elaboration on what you’re doing with incentives and rate buy-downs, and what’s working and not working as we get into September and October, and sort of the margin implications of all that? Thank you.

Matthew Bouley:

Got it, okay. That’s really helpful. Then secondly, just one on stick and brick costs - you know, just as you’re addressing these issues and presumably there is margin pressure out of that, and the housing market has evolved here, what are you guys doing around construction costs, labor, sort of ability to push back on all that? How should we think about that over these next few months? Thank you.

Matthew Bouley:

Got it, thanks Ryan. Good luck, guys.

Michael Rehaut:

Thanks. Good morning everyone. Just wanted to kind of take a step back and understand some of the dynamics. You talk about October being choppy, but at the same time it sounds like more in line with seasonality pre-COVID, and you also--you know, the flipside of that is with volume, you’re putting out a gross margin guidance for the fourth quarter maybe a touch down from 3Q. Can you just give us a sense of the level of incentives, if through your own offerings in October or maybe even more broadly in the marketplace, do you feel like incentives have started to come up over the last couple of months because certainly, I guess in the near term, you’re looking for a similar gross margin, and maybe just more broadly how you feel the market is reacting to September and October?

Robert O’Shaughnessy:

Yes Mike, you know, you can see in our data we’ve got about a 6% incentive load - that’s $35,000 a unit, rough math. That actually is down 10 basis points from Q2 of this year. It is certainly up - it was 2.2% last year, but the sales environment that led to the closings in Q3 of last year was dramatically different, so you can see kind of a normalization here at 6%. I think you can take from our margin guidance for Q3 what we see closing in the fourth quarter, and we’ve got pretty good visibility into that at this moment, will not be significantly impactful. I would highlight that we’ve given a continuation of that same guide at 29.5% on margins. We have told you we’re going to be at the lower end of that, so there is some cost to this interest rate environment.

Ryan Marshall:

Yes Mike, our crystal ball at this point, a couple of years out, we’re not there yet. We’re still kind of focused on Q4. We’ve given a guide for that quarter, when we get to kind of the end of Q4, we’ll certainly give a full year guide for the balance of 2024, but maybe the thing I do want to address is the incentive load that we currently have, that is allowing us to offer incentives on the interest rate, that’s been in our margin guide and our results for the entire year. You’re seeing the impact of offering below-market interest rates as an incentive. It’s been in Q2 results, it was in our Q3 results and it’s in our Q4 guide, so no guidance about what margins direction will be beyond Q4 of this year, but that’s all embedded in our--you know, to this point, everything that we’ve been doing, that’s embedded in the results that we’ve delivered and the guide that we’ve given.

Operator:

We will take our next question from Joe Ahlersmeyer from Deutsche Bank. Your line is open.

Ryan Marshall:

In fact it is, Joe.

Ryan Marshall:

Yes Joe, thanks for the question, and I’ll do my best to give you an answer. For the last decade, maybe even going on 12 years, the way that we’ve operated the business has been with a singular focus on delivering the best possible return on invested capital that we can. Given the capital intensive nature of this business, for us we think that’s the best way to make decisions and to operationalize our platform in a way that delivers high return on assets, high return on equity, whatever metric you want to look at. I think we’ve clearly done that. I highlighted in my prepared remarks that for the trailing 12 months, we delivered return on equity over 30%, and part of that derived from running a good business but also a very thoughtful and disciplined way in allocating capital, which includes things beyond just buying land and building homes. We are paying a dividend, we’ve bought back near 45% of the company over the last 10 to 12 years that we’ve had our share buyback program in place, and we just highlighted this quarter we opportunistically took advantage of the opportunity to buy some debt in, near term debt in that was trading below par. You know, I think maybe the best way I can describe it, Joe, we’re going to continue to focus on buying assets in great spots, turning those in a way that delivers high return on invested capital, and one of the other things that I think can also continue to give us flexibility and return-enhancing leverage is moving our land options to 70%, so. We sit at 53% today, we’ve given you kind of a long term target of 70%. We’ve got things in place and work underway that will help us get there.

Ryan Marshall:

Yes, fourth quarter starts will be more reflective of order trends that we’re seeing in the fourth quarter. We’re starting more spec than we historically have. We’ve highlighted that we’ve completely moved our first-time business to a spec business, so some of that’s predetermined based on what we saw in the third quarter and what we would anticipate. But we’re just not going to get into kind of a position where we’ve got a build-up of spec inventory that creates pressure to do things that are unnatural on the pricing, but we are going to put some units in the ground to have those ready for Q1. You saw us do that last year, in the back half of last year that set us up for a really strong Q1 of 2023, so. You know, I’d want you to hear balanced approach, inventories going into the ground, we’re going to have it ready for Q1, but we are going to be responsive to some of the headwinds that we’ve acknowledged are out there in this current rate environment.

Operator:

We will take our next question from Stephen Kim with Evercore ISI. Your line is open.

Robert O’Shaughnessy:

Yes, hey Stephen, it’s Bob. It’s an evergreen process, honestly. We are buying contracts typically weekly, actually, and they are market-based. We set the pricing on that, and that determines the price to us to offer that value to the consumer, so the rate that Ryan talked about is a negotiated price and essentially we fill the cost of being able to provide that contract rate to our consumer. There is an upfront fee for purchasing the contract and then there is the rate buy-down as part of that, and so it’s a--you know, it’s not like we’re buying now for three and six months from now. These are contracts that we enter into that we expect to build, candidly, within 30 days, and typically we’re filling them within a week, so it’s a--you know, it’s very market responsive. As rates go up, it’s why you’ve seen what we’ve offered has moved up a little bit. We’ve increased our cost as part of that to a degree, so it’s a process we’ve been working through for, gosh, 10 or 11 months now since we put it in place, and we’ve found it works pretty well.

Robert O’Shaughnessy:

These are 30-year rate buy-downs for the consumer.

Robert O’Shaughnessy:

Maybe to put a finer point on that, as Ryan said, 80% to 85% of the people have an incentive program, only 25% of the business in the quarter was through that national campaign that you asked about, so. Those are targeted to specific inventory units typically, but we offer incentives to all of our consumers - we always have, and as Ryan has stated already today, the vast majority of those incentives now across all of our buyers is financing-oriented.

Ryan Marshall:

Yes Stephen, we are at a very--we’re at a lower leverage rate than what we’ve historically run at. I think that really more than anything, it’s a testament to the strength of the business. We’ve been operating really well and we have been generating a lot of cash. We’ve really been touching kind of all the critical parts of our capital allocation philosophy. We’ve invested a lot of money into land and land development, we’ve been paying our dividend, we’ve bought back the highest single quarter spend in shares this year in the third quarter at $300 million, and we bought back some debt, and with that, we still grew the cash balance, so I think it really demonstrates how strong the business is operating. In terms of your question on pricing and discounts and elasticity or inelasticity, we’re going to continue to price and set incentives at a level that we think is appropriate for the market. We’re going to be responsive, we’re not going to be margin proud. At the same time, I think we’ve got a good understanding of what value is, and you shouldn’t expect to see kind of the national year-end blowout, red tag kind of screaming baby sale from us - I don’t think that helps the consumer. But I think you’re seeing us put the appropriate incentive load such that we’re turning the asset, we’re turning the inventory, we’re making sure that we’re getting a minimum of two sales per active community, which is kind of the level that I think you need to be at in production homebuilding to deliver the types of return on assets, return on inventory, return on invested capital that we want.

Operator:

We will take our next question from Ken Zener from Seaport Research Partners. Your line is open.

Ryan Marshall:

Morning Ken.

Robert O’Shaughnessy:

We’ve talked about our options and lot premiums being a consistent driver of value. It’s part of the way we go to market. We think it’s one of the strengths of our sales process. In the most recent quarter, that was $107,000, it’s up $3,000 sequentially and year-over-year, so that is still part of our sales operation. It’s how we go to market, and yes, 20% is roughly where we are. I wouldn’t expect that to change as long as market dynamics stay where they are.

Robert O’Shaughnessy:

Ken, there’s a lot there. Let me start with--I had highlighted this before, our incentive load is about 6%, $35,000, so that would tell you 6.3%, something like that, and again I think we’ve highlighted the majority of that incentive is rate buy-down for financing support, so I think that’s the answer to your first question. I apologize -your second question was, I think what percentage of our--

Ryan Marshall:

Ken, it’s Ryan, I’ll jump in on that. We haven’t sliced the bologna quite that thin, and I won’t attempt to do it on this call. We are a return-focused company. There is no change there. I think we’ve been the purveyors of the message, we don’t focus on margin, it’s a component of the overall operating model. We’re focused on return, and depending on the number of units we sell in a particular community and how quickly you turn the asset, if you do that fast enough, then it can offset and you can allow for lower gross margins. If you’re getting a lot just in time and somebody else is developing it and carrying it, and we can build in the hundred days that we’re talking about, it allows us to run a high returning business at a lower margin. That’s not a new concept, that’s exactly what we do, and it’s exactly what we’ll continue to do.

John Lovallo:

Good morning guys. Thank you for taking my questions. The first one, so rates at 8% today, you guys are buying down to 5.75%. Can you just remind us, last quarter when rates were closer to 7%, what level you were buying down to?

John Lovallo:

Okay, and you would anticipate probably taking that same strategy as we move forward, if rates were to move up?

John Lovallo:

Makes sense, and then the second question is just on community count, how you’re thinking about that through the remainder of this year, and maybe any initial thoughts as we move into next year.

Ryan Marshall:

And then we haven’t given anything for ’24 yet, John, but as we’ve said in the past, you can see the capital that we’ve spent, for the land that we’ve spent this year, a pretty good indicator of what community count will be in the future, or you can use as a proxy for what community count can turn into in the future.

Operator:

We will take our next question from Mike Dahl with RBC Capital Markets. Your line is open.

Ryan Marshall:

Yes, so I don’t want to give away all of our trade secrets on that, but suffice it to say there are different rules based on who is--depending on which government agency rules you’re using for that mortgage program. For the upfront fees that we’re paying on a forward commitment, because those are done prior to having a home under contract, those fees do not count toward seller contribution; but there are additional incentives that have to be applied to the deal--that do have to be applied to the deal once the home’s under contract, those do certainly count towards the seller contribution, so to get to 5.75%, you’ve got some fees on the front end, you’ve got some fees on the back end. We do look at them in the aggregate, and those are the numbers that you’re hearing Bob talk about.

Ryan Marshall:

No, we haven’t run that analysis, no. I would highlight that no matter the rate that we’re offering, we qualify the buyer on the 30-year, so a lot of the incentives that we’ve been doing have been 30-year fixed rate, so that is the rate we’re qualifying, but in the case that you do a temporary buy-down, the buyer is qualified at what the permanent 30-year rate will be. I think everybody knows that, but I think it’s worth highlighting because we don’t--none of us wants to see the industry back in a situation that we were in, in 2008.

Operator:

We’ll take our next question from Alan Ratner of Zelman and Associates. Your line is open.

Ryan Marshall:

Yes Alan, I think we’re hearing the same things that you are, particularly on maybe availability of capital or the cost of capital on the land development side. There’s definitely, I think, some strain or tightness in that arena. I think that certainly might continue to create an opportunity the longer that we stay in a high rate environment. I think it’s also a great opportunity for us to take market share. With our mortgage company, the size of our balance sheet, the ability to be active in the capital markets, I think it gives us an opportunity to do things that smaller local builders and maybe private builders can’t, so I think there is certainly a market share opportunity there as well. We’ve made build-to-rent a small piece of our business. We’ve got good relationships with national partners that we’re building some percentage of our annual deliveries for those operators, and I think we’ve talked extensively about that, that it will continue to be an arrow in our operational quiver. Look - I’m really, really confident and pleased with the way we’re operating. The health of the business, the volume that we’re selling in kind of the core operations, and then when you go to the balance sheet, I think we’re set up to do a lot of great things that will continue to set us up for success down the road.

Ryan Marshall:

Yes Alan, it’s a good question. The thing that I talk about with our operators, and I spend a lot of time in the field in our communities, in our division offices talking about exactly this, the mantra that we have inside the company is a minimum of two sales in every community. Now, certainly we have certain price points in communities that sell way more than two per community, but as a production homebuilder, it’s hard to have an active store that does less than two, you just--you know, you can’t make the returns work to the level of our expectations. Below two per active community, that’s where we start looking at, hey, we are positioned right, do we have the right incentives, do we have the right pricing, do we have the right product, are we going after the right consumer? There’s a number of those levers that we pull, but it nets out to for this quarter, we were 2.5, but that two per community is kind of the level that we look at.

Truman Patterson:

Hey, good morning everyone, and Ryan, the screaming baby sale got me - I think that kid’s probably in high school or college by now.

Truman Patterson:

Exactly, exactly. You all--I’m trying to understand, your orders for entry level were performing well in the third quarter - I think you said up, like, 53% year-over-year, but then you mentioned some more cautious commentary about that buyer. I’m just hoping maybe big picture, if you could help us think through the monthly incentives needed for that buyer cohort versus you mentioned active adult, maybe move-up, more affluent, not needing quite as much. I’m just hoping you can help us just kind of understand these bigger trends that you’re seeing near term.

Truman Patterson:

Okay, perfect. Then Ryan, you mentioned adjusting product given the higher rates. I’m hoping you could elaborate on what all that entails for Pulte specifically. Then if I’m reading between the lines, spec sales were about 49% of your overall bucket this quarter - that’s a pretty good run rate that you all expect going forward?

Truman Patterson:

Your spec strategy, should we kind of assume that it’s pretty much stable from here, that you’re targeting about half the business perhaps as spec?

Operator:

Ladies and gentlemen, that is all the time we have for questions. I will now turn the call back to Mr. Jim Zeumer for closing remarks.

Operator:

Ladies and gentlemen, this concludes today’s conference call, and we thank you for your participation. You may now disconnect.

Jim Zeumer:

Good morning. And thank you for joining today’s call, to discuss PulteGroup’s exceptional second quarter operating and financial results. Along with affirming the ongoing desire for home ownership and the strength of overall buyer demand, our second quarter numbers demonstrate the strategic value of PulteGroup's balanced and disciplined approach to the business. Joining me on today's call to discuss our Q2 results, are Ryan Marshall, President and CEO; Pablo Shaughnessy, Executive Vice President and CFO; Jim Ossowski, Senior VP of Finance. A copy of our earnings release and this morning’s presentation slides have been posted to our corporate website at pultegroup.com. We will post an audio replay of this call later today. I want to inform everyone on today's call that today's discussion includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments. The most significant risk factors that could affect future results are summarized as part of today's earnings release within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Let me turn the call over to Ryan Marshall. Ryan?

Pablo Shaughnessy:

Thanks, Ryan and good morning. Our second quarter numbers speak for themselves in terms of demonstrating the strength of our operations, and in turn overall housing demand, so I'll just dive right in. Our second quarter wholesale revenues totaled $4.1 billion, an increase of 8% over last year. Higher revenues for the quarter were driven by a 5% increase in closings to 7,518 homes, in combination with a 3% increase in average sales price to $540,000. Our ability to meet stronger demand in the period with available spec inventory allowed us to slightly exceed our prior closing guidance. For the quarter our mix of closings was comprised of 41% first time buyers, 34% move-up buyers and 25% active adult buyers. The breakdown of our business remains in line with our stated targets of 40% first time, 35% move-up and 25% active adult. In the second quarter of last year, our closing mix was 36% first time, 38% move-up and 26% active adult. Our net new orders in the second quarter increased 24% over last year to 7,947 homes. The double-digit increase in our orders benefited from the overall strength of market demand in the period along with our ability to capture this demand through a 14% increase in our average community count to 903 neighborhoods. The strength of consumer demand is also evident in our cancellation rate. Cancellations as a percentage of beginning period backlog was 9% in this quarter, which is down almost 350 basis points on a sequential basis from the first quarter. The 24% increase in our second quarter net new orders reflects an increase in our absorption pace of 2.9 homes per month, up from 2.7 homes per month last year and resulted in higher net new orders across all buyer groups. In the period net new orders from first time buyers increased 28% over the prior year to 3,150 home. Orders for move-up buyers increased 33% to 2,897 homes and orders from active adult buyers increased 7% to 1900 homes. The year-over-year increase in first time buyer orders shows that our homes continue to offer a compelling value and meet the affordability requirements of this buyer group. At the same time, our higher net new orders in move-up and active adult buyers is a positive development and test to the broad mix strength of housing demand. Consistent with our prior guidance, we expect year-over-year community count growth of 5% to 10% in the third and fourth quarters, each month compared to the comparable prior year period. Our backlog at the end of the second quarter was 13,588 homes with a value of $8.2 billion. In the second quarter of last year, our backlog stood at 19,176 homes, valued at a record peak of $11.6 billion. We ended the second quarter with a total of 16,740 homes under construction, of which approximately 6000 or 36% were spec. We continue to closely manage spec production as total specs under construction at quarter end were down 11% from last year. Finished specs are also consistent with our historical carry rate as we ended the quarter with about one finished spec per community. In the second quarter, we started approximately 7,400 homes, which is up 41% compared to the first quarter of this year. Given the strength of PulteGroup's year intake orders and deliveries coupled with the status of our backlog and production universe, we're establishing a full year 2023 delivery target of 29,500 homes. Of this total we would expect to deliver between 7000 and 7,400 homes in the third quarter. Our third quarter and full year delivery targets are benefiting from improved home construction cycle times, as our operations are realizing meaningful improvements in cycle times of homes they are starting today. Based on the mix of backlog homes we expect to deliver in the third and fourth quarters coupled with anticipated spec closings we are projecting in those periods, we expect the average sales price on third and fourth quarter closing to be approximately $540,000. Turning to margins, our reported gross margin in the second quarter was 29.6%. The improvement in our margins as compared to our previous guide was due to improve pricing on spec sales and increased closings from our higher margin markets, features compared to our prior estimates. In addition, as we discussed in our prior earnings call, our aggregate gross margins are benefiting from our move-up and active adult business, where profitability is holding up better. Based on current market dynamics, we expect to maintain the strong margin position throughout the remainder of '23. And expect our gross margin to be in the range of 29.0% to 29.5%, in both the third and fourth quarter of this year. As we experienced for the second quarter the actual mix of deliveries, both in terms of geography and buyer groups may impact our reported numbers. Our reported SG&A expense in the second quarter was $315 million, or 7.8% of home sale revenues, and included a $65 million pretax insurance benefit recorded in the period. In the second quarter of last year, our SG&A expense was $351 million, or 9.3% of home sale revenues. Based on our delivery targets for the remainder of the year, we expect SG&A expense to be in the range of 9.0% to 9.5% of home sale revenues in the third quarter in the range of 8% to 8.5% of home sale revenues in the fourth quarter. Second quarter pretax income generated by our financial services operations increased 16% over last year to $46 million. Pricing conditions remain highly competitive in the mortgage industry, but quarterly earnings benefited from improved profitability within our title and insurance operations. Capture rate in the second quarter improved to 80% compared with 78% last year. Our reported tax expense in the second quarter was $233 million for an effective tax rate of 24.4%. We expect our tax rate for the remainder of '23 to be 24.5%. On the bottom line, our reported second quarter net income was a record $740 million or $3.21 per share. This was up from last year's reported net income of $652 million or $2.73 per share. Capitalizing on our outstanding financial results and resulting cash flows, we’ve repurchased 3.7 million common shares in the quarter at a cost of $250 million, at an average price of $68.31 per share. Through the first six months of '23, we have used $400 million to repurchase 6.4 million shares or 2.8% of our common shares outstanding. We also invested $370 million in land acquisition and $523 million in related development during the quarter. In total, our land sale in the period was $893 million, which is down from $1.1 billion through the second quarter of last year. On a year-to-date basis, this year, we have invested $1.8 billion in land acquisition development, which keeps us on track to invest between $3.5 billion and $4 billion for the full year. At the end of the second quarter, we had 214,000 lots under control, of which 51% were held via option. The total number of lots we control and the percentage of lots we controlled via option both increased from Q1 of this year as we are working to rebuild our option lot supply after exiting positions in the back half of 2022. We also ended the second quarter with $1.8 billion of cash and a gross debt-to-capital ratio of 17.3%. Given our large cash position, our net debt to capital ratio is now below 3%. Looking briefly at our full year results, on a year-to-date basis, we have generated net income of $1.3 billion, drove the book value of our stock by 12% and returned $472 million to shareholders. At the same time, our financial performance has permitted us to reduce our financial leverage to historic lows, and we have generated a return on equity for the trailing 12 months of 32%. Thank you, and I'll turn the call back to Ryan for some final comments.

Jim Zeumer:

Thanks, Ryan. We're now prepared to open the call for questions. So we can get to as many questions as possible during the time remaining. We ask that you limit yourself to one question and one follow-up. Thank you. And I'll now ask Abby to explain the process and open the call for questions.

John Lovallo :

Good morning, guys. Thank you for taking my questions. The first one is the 29% to 29.5% gross margins that you're expecting in the third quarter and the fourth quarter are clearly well above what we were forecasting. Just curious, are there any unusual items in there that we should think about? It sounds like mix is going to be a benefit. And what I'm really trying to get at is, what do you view as sort of the sustainable rate of margin? Is -- are we there? Is this sustainable? And if not, how quickly would you expect a reversion towards that more normalized rate?

John Lovallo:

Okay. That's helpful. And maybe just one more question on margin. I think last quarter, you guys talked about the spread between active adult, move-up an entry level sort of reverting back to historical norms and I think that was a quick move-in portion kind of going back a little bit on the lower end. Given where housing demand is today and the desire for many folks to move in quickly, are you expecting that sort of quick move-in portion to actually trend higher again?

John Lovallo:

Got it. Thank you, guys.

Michael Rehaut :

Great. Thanks so much. I guess, first question, just kind of asking the gross margins from a different perspective, and then I have a question on demand. When you think about the more challenged backdrop that the industry faced in the back half of '22, for builders that were more spec oriented, you saw the more immediate impact of that higher promotional, not promotional, but incentives and pricing adjustments that many builders made. You saw that run through the income statement much more immediately. We were estimating for build-to-order builders that, that would have a more of a lag effect. So, can you kind of walk through the dynamics of how you've been able to maintain since the fourth quarter? You had some pullback from 2Q '22, but nothing to the extent of the more spec-oriented, perhaps first-time heavy builders. Perhaps the product mix is a factor, but how that higher promotional environment has impacted the financials and if there's offsets to that, that have allowed a much more modest decline as well as for a build-to-order builder, a pretty nice element of stability going into the back half. So sorry for the long-winded, but just trying to understand perhaps what are the offsets to the higher incentive backdrop in the back half and the pluses and minuses there?

Michael Rehaut:

And if, Bob, you can kind of weigh in on any of the pluses and minuses there, it would seem that to the extent that you had any impact from the higher discounting or price adjustment, it would be in the back half of full year guide. And so just making sure there's no other “shoe to drop here” or we've kind of worked through some of the more challenging backdrop there. I guess yes...

Operator:

We'll take our next question from Carl Reichardt with BTIG. Your line is open.

Ryan Marshall:

Yes, Carl. Two things there. We did see price increases in some of our communities in two-thirds of the division. So it wasn't every division, it wasn't every single community. But we are seeing pockets of strength where we're able to, to your question, I'll answer the affirmative, it is a net increase in net pricing and it's coming through all of the options that you listed. So there are modest increases. And those are -- I would note that those are off of what we would consider adjusted kind of current cycle floor pricing. So we feel like we've seen a bit of strengthening in the overall sales environment, which allowed us to modestly increase pricing.

Ryan Marshall:

Yes, Carl. I don't have a specific number for you on backlog conversion of that specific buyer group. We could follow up with you offline on that. The things that we're really monitoring there, we're running a -- with that spec business, specifically, we're running a predictable and consistent monthly with start rate. And we've worked to match that start rate to what we believe our monthly sales rate has been, is and will be. And so it's part of what you heard me talk about in my prepared remarks around getting our start rate matched to the sales rate, which we think we've effectively done. And then the second question cycle times, Carl, yes, we're starting to see those come down very much in line with our anticipated improvements throughout the year. It's not been easy, it's been a lot of hard work by our procurement teams, our construction managers and certainly our trade partners that have helped us to reduce those cycle times. So we're seeing at least a couple of weeks come out of the cycle times and certainly starts that are going in the ground today. We'd expect to maybe even get a little bit more by the time that those deliver. That's been a big contributor to our success, not only in Q2, but to the updated and increased guide for full year closings that we've provided today.

Operator:

We will take our next question from Stephen Kim with Evercore ISI. Your line is open.

Ryan Marshall:

Yes, Stephen. I'm reluctant to answer your first question because we haven't provided any view beyond the third and fourth quarters. And so I'm going to pass on that. And then in terms of the absorption paces, we haven't provided that level of detail. What I can tell you is that in the current operating environment, the quickest-growing part of the business is move-up right now, interestingly enough. So absorptions there grew faster. We had absorption growth across all three demographics. And so we had highlighted 28% growth in the first time, 33% in the move-up and 7% in the active adult. But on a per store basis, all of them were up. The richest contributor to that actually was the move-up space.

Matthew Bouley :

Good morning, everyone. Thank you for taking the questions. I guess I'll just go back to the gross margin side. Maybe just to put a finer point on it. I think I heard you say that the, I guess, mix of sort of incentivized build-to-order product from end of '22 sales has largely worked through at this point. So what exactly would be, I guess, a worse headwind in the gross margin in the third quarter relative to the second quarter? Is it entirely mix of entry level -- or excuse me, first-time buyer spec? Or what exactly is the greater headwind to cause that sequential step down in margins? Thank you.

Matthew Bouley:

Got it. Okay. That's helpful. Thank you for that Bob. And then, I guess, secondly, just back on that last point around the improvement in move-up, obviously, looking at the second quarter of last year, I mean, the comp is a little bit easier, but clearly, a nice step-up there. Any finer detail? I mean you gave a lot of color at the top around just what's kind of locking in existing home sellers at this point, but you are seeing this nice tick up in your move-up business. So kind of what do you think is sort of driving that? And do you expect it to continue relative to entry level? Thank you.

Matthew Bouley:

Got it. Thanks, Ryan. Thanks, Bob. Good luck, guys.

Alan Ratner:

Good morning. Thanks for taking the questions. First, I'd love to drill in a little bit on the topic from Steve's question about land spend. If you look at your closing guide, it's gone up about 20% for this year since the start of the year. And your land spend guide hasn't really changed, still kind of in that $3.5 billion to $4 billion range. And I know that's a big range, so maybe the answer is you're coming in closer to the high end versus the low end. But I'm just curious, as you think about the next few years, I mean, $3.5 billion to $4 billion, probably is pretty close to a replacement level of land, maybe a bit below, but as you think about the land market today and what you're seeing there, is that an area where you feel like at some point, you're going to have to put pedal to the metal and get more aggressive on land spend to drive future growth? And I guess, alternatively, is there a risk of a similar dynamic unfolding from a few years ago, where if demand stays at these levels and you don't see the opportunities in the land market, do you start to limit sales again and do things to kind of keep a lid on that to prevent gap-outs?

Alan Ratner:

Got it. I really appreciate that. That's helpful. Second, I do have a question about Florida. You guys are pretty as large in Florida, and there's been a lot written of late about the issues with property insurance in the state and some pretty staggering increases there. And I know some of that can be certainly sensationalized. But I'm curious, A, are you seeing that become more of a concern among homeowners or potential home buyers today in the state? And B, are you aware of anything that the industry might be doing to kind of deal with this issue, because it seems like it could have some long-term ramifications?

Alan Ratner:

Thanks for the time. Appreciated.

Michael Dahl:

Good morning. Thanks for taking my questions. One more follow-up on the land side. Ryan, you mentioned you're not necessarily seeing like liquidation opportunities. The market is competitive. There were some thoughts or hopes that some of the regional banking fallout might shake some land to lose. Maybe you can comment on that. But then also in terms of classes that your land teams are having, given the competition out there, has it been more that you're getting to your underwriting box because your current pace and price has improved? Or has it been a buyer as have also adjusted downward? I'm sure there's some blend, but kind of on average, what do you think is helping more at this point? Is it that buyers-- that sellers have actually adjusted? Or is it more that at current pace and price, more things hit the box?

Michael Dahl:

Okay. That makes sense, Bob. And then just as a follow-up, maybe I'll broaden that out. Slightly when we think about some of these dynamics, could you just touch on more specifically your sticks and bricks cost, both in the quarter? How we should be thinking about that in the second half? I know you alluded to lumber -- some lumber increases maybe creeping in, but maybe any more quantification of sticks and bricks? And then on the lot side, how should we be thinking about inflationary dynamics in your way at cost here over the next, say, four quarters?

Michael Dahl:

Very helpful. Thanks, Bob.

Truman Patterson :

Good morning, everyone. Thanks for taking my questions. First, you all generated almost $1.5 billion in operating cash flow in the first half of the year. Clearly, you've been rebuilding your spec pipeline, you're kind of cutting back on some land investment, but you should still generate some pretty healthy net income in the back half of the year. I'm just really hoping you can run us through some of the pluses and minuses on your full year '23 operating cash flow potential.

Truman Patterson:

Fair enough. Fair enough. And then just wanted to follow up on a prior question. Given the healthy demand rebound so far, it looks like your absorption levels are at pretty healthy levels, a little bit above what we'll just call kind of historical 2Q averages over the past decade, if you will. Could you just run through whether there were any geographies or consumer segment where you're actually perhaps curbing absorptions again as of the second quarter?

Truman Patterson:

Right. Alright. Thank you.

Unidentified Analyst :

This is Ashu Soni [ph] on for Anthony. Thanks for taking my question. I just wanted to ask relative to sort of the sequential price growth on ASP in net orders you saw in the quarter. Was that pretty much like-for-like? Or maybe there might have been some mix impact? And then sort of more broadly, would you say pricing power has gotten stronger at all versus where you were seeing it on your last call in April?

Unidentified Analyst :

Great. Thanks. And then what are your thoughts on kind of the sustainability of progress you've made on cycle times and costs kind of heading into '24 as housing activity is heating back up. Are you -- do you anticipate maybe pressure on cycle times?

Unidentified Analyst:

Great. Thank you. I’ll turn it over.

Susan Maklari :

Thank you. Good morning, everyone. My first question is thinking a bit about the supply chain and the rise that we're seeing generally in starts within single family, how do you think about the industry's ability to continue to improve and perhaps sustain some of this as overall demand continues to move higher? And are there any areas specifically that you're more focused on or where we could perhaps see some issues bubble up again?

Susan Maklari:

Okay. And then thinking about the business longer term, as you’re early starts to come off the peak that we've seen more recently, but you think about the longer-term operating dynamics on the ground today and perhaps how they've changed relative to where we were coming into the pandemic? Are there things that you think you can hold on to so that the ROE can perhaps stabilize a touch higher than that 20% or low 20% range that you were in before COVID?

Susan Maklari:

Okay. Thank you for the color.

Joe Ahlersmeyer :

Thanks. Good morning, everybody. Just a follow-up on that last question. Perhaps if you could just talk if you've got in your mind, an upper limit on the idle cash that you might carry on your balance sheet, going forward? And then also just maybe talk about your appetite for increasing leverage just given the facility in your business?

Joe Ahlersmeyer:

Got it. Thanks, Bob. And then just maybe if you could talk about the improvement relative to pre-pandemic in your gross margins and your returns on inventory, if there's a number you could quantify around production improvements and even more specifically, if the actions you've taken getting back into the off-site construction space, if there's anything to call out there? And maybe just an update on how ICG is doing?

Pablo Shaughnessy:

It's interesting. I would tell you, we're -- you're asking if there are productivity gains. If I understood the question correctly, you're asking if there are productivity gains that we've gained by virtue of the pandemic that we might be able to save post pandemic. I would tell you exactly the opposite is true. We have a less efficient business, and it shows up in our cycle times, right? And the supply chain dynamics caused us to lose production efficiency. And you heard Ryan say it a minute ago, we think we've got opportunity to improve from here on that.

Operator:

We will take our next question from Alex Barron with Housing Research Center. Your line is open.

Ryan Marshall:

Yes, Alex, when we made our first acquisition around our off-site our off-site manufacturing efforts. We said we believe we can have up to about eight plants that will impact about 70% of our overall production volume. That's still the path that we're on. We're -- we haven't announced any new openings, but the strategic direction of eight plants over time and 70% of the business still holds firm.

Ryan Marshall:

I gave the total control, but I give you the owned is 14,000 lots. The option is 110,000 lots for a total control of 214,000 lots.

Ryan Marshall:

Yes, Alex, we gave -- we kind of gave our updated land guide, which is at $4 billion, which is a lot of money. It's not an insignificant investment in our overall land portfolio. Roughly half of that is new acquisition. The other half of that spend is on development on lots that we already own. 214,000 lots gives us certainly ample runway and supply for our go-forward business and going back to some of the answers that I gave on similar questions earlier, we're really confident in our land acquisitions team to continue to find good spots, negotiate what we believe are fair in market prices that will continue to help us generate industry-leading returns and gross margins and help us continue to grow the business.

Rafe Jadrosich :

Hi, good morning. Thanks for taking my questions. Can you just talk about the sort of specific drivers of the quarter-over-quarter step-up in gross margin in the second quarter? And then what drove upside relative to your guidance from a quarter ago?

Rafe Jadrosich:

Correct.

Rafe Jadrosich:

Got it. Okay. That's helpful. And then you've spoken a little bit about the underwriting strategy going forward. How should we think about your option mix going forward? And like what's the longer-term target relative to the current 51%?

Rafe Jadrosich:

Great. Thank you.

Jim Zeumer:

I appreciate everybody joining us on the call today. We're around and available to the remainder of the day if you've got any questions. Otherwise, we'll look forward to speaking with you on our next quarterly call. Thank you.

Jim Zeumer:

Great. Thank you, Audra. Good morning. I want to thank everyone for joining today’s call. As you read in this morning’s press release, PulteGroup had an exceptional first quarter and we are excited to discuss our operating and financial results. Participating on today’s call are Ryan Marshall, President and CEO; and Pablo Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior Vice President, Finance. A copy of our earnings release and this morning’s presentation slides have been posted to our corporate website at pultegroup.com. We will post an audio replay of this call later today. As noted in this morning’s earnings release, to be more consistent with industry reporting practices, effective with our first quarter 2023 reporting, the company has reclassified closing cost incentives and cost of sales to net revenues for all periods presented. This reclassification impacted the company’s reported home sale revenues and associated average sales price as well as home sale gross margin and SG&A percentages, but had no impact on reported earnings. An analysis of the impacts on the current quarter in comparable prior year period is included in this morning’s press release and can be found in our webcast slides associated with today’s call. Our comments today reflect these changes for all periods referenced. Also, I want to inform everyone that today’s discussion includes forward-looking statements about the company’s expected future performance. Actual results could differ materially from those suggested by our comments today. The most significant risk factors that could affect future results are summarized as part of today’s earnings release 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?

Pablo Shaughnessy:

Thanks, Ryan and good morning. As Jim noted at the beginning of the call, we have reclassified closing cost incentives from cost of sales to net revenues for all periods presented. The total incentive reclassified amounts is $81 million in the first quarter of this year and $38 million in the first quarter of last year. This reclassification impacted our reported home sales revenue and associated average sales prices as well as our reported home sale gross margin and SG&A percentages. An analysis of the impact of this reclassification in the current quarter and prior year periods is included in today’s webcast slides. Where appropriate, any numbers referenced in my comments, current, past or future are inclusive of this reclass. Let me now get started with a review of our first quarter results. Home sale revenues in the first quarter increased 15% over the prior year to a first quarter record of $3.5 billion. Higher revenues for the period reflect a 6% increase in closings to 6,394 homes and a 9% increase in average sales price to $545,000. On a year-over-year basis, we realized higher average sales prices across all buyer groups, led by double-digit gains in both move-up and active adult. In the quarter, we reported 6,394 closings, which represents a 6% increase over the comparable prior year period. Our closings for the quarter came in above our guide as we capitalized on stronger demand for spec homes, an improvement in select areas of our supply chain that allowed us to close additional homes in the period. I’d like to take a moment to thank our procurement and construction teams working in partnership with our trades and suppliers for their contributions over the last several quarters. Their efforts during a time of extraordinary market volatility were instrumental to the operating success we have achieved. Looking at the mix of our closings in the quarter, our results included 39% from first-time buyers, 35% for move-up buyers and 26% from active adult. In the first quarter of last year, the closing mix was 34% first-time, 40% move-up and 26% active adult. The higher percentage of closings from first-time buyers reflects our increased investment in that part of our business over the last several years as well as an increase in the availability of spec homes in our first-time communities, resulting from our decision to increase spec production to the back half of 2022. Looking at our orders in the quarter, our net new orders totaled 7,354 homes, which is down 8% from the prior year. Our cancellation rate as a percentage of beginning backlog was 13% in the first quarter, which is up from 4% last year. On a sequential basis, the 13% cancellation rate is up less than 200 basis points from the fourth quarter. So cancellations are beginning to stabilize. In fact, on a unit basis, cancellations in this quarter amounted to 1,544 homes, which is down sequentially from 1,871 homes in the fourth quarter. By buyer group, net new orders to first-time buyers increased 18% over the prior year to 3,177 homes, while move-up orders decreased by 20% to 2,645 homes, and active adult orders were lower by 22% to 1,532 homes. Our average community count in the first quarter increased 13% over last year to $879. Based on the communities opened in the period, our absorption pace of 2.8 homes per month was down from the prior year, but in line with our pre-pandemic sales rate, which averaged 2.7 for the 5-year period from 2016 to 2020. Based on land investments we made in prior years, we expect to operate out of approximately 900 communities in the second quarter, which would represent an increase of 14% over the second quarter of last year. Looking over the balance of the year, we continue to expect community count growth of 5% to 10% over the comparable prior year quarter. Given our expanding community count, PulteGroup is well positioned to increase its market share within the improving demand environment. We ended the first quarter with a backlog of 13,129 homes with a value of $8 billion. This compares with last year’s Q1 record backlog of 19,935 homes valued at $11.5 billion. At the end of the first quarter, we had a total of 16,872 homes under construction, of which 15% were finished. Spec units represented 38% of our production, which is up from last year and consistent with our strategy to have specs available to meet buyer demand for homes that can close sooner. Over the course of the first quarter, we started production on approximately 5,200 homes. This start rate was down about 40% from the first quarter of last year, but up on a sequential basis from the fourth quarter of 2022 as we continue to drive an appropriate start cadence as we focus on turning our assets. Based on the roughly 17,000 homes we have under construction and their stage of production, we expect to deliver between 7,000 and 7,400 homes in the second quarter. Given the ongoing improvement in the overall operating environment, we are pleased by the level of production we have been able to realize, thanks to the efforts of our outstanding operating teams. In addition to these higher unit volumes, we are also seeing the beginning stages of a shortening in our production cycle. At this point, depending upon the market, the gains range from just a few days to a few weeks, but the trends are generally positive. Based on our strong Q1 results and the potential for cycle times to gradually improve, the production potential of homes will have available to close in 2023 has increased to 27,000, 28,000 homes. This is up from our initial guide of 25,000 loans. Obviously, the strength of sign-ups in the second quarter will go a long way in determining how much of this production universe actually converts into 2023 closings. While the average sales price in our backlog is $608,000, we currently expect the average sales price to our second quarter closings to be in the range of $525,000 to $535,000. That estimate reflects both the mix of homes scheduled to close as well as the impact of anticipated spec closings, which are primarily first-time homes that have a lower average sales price. We reported first quarter gross margins of 29.1% which was 20 basis points below last year. Please note that our reported gross margins in the first quarter benefited by approximately 70 basis points from the reclass of closing incentives and cost of sales to net revenue. The benefit to our first quarter 2022 gross margin was 40 basis points. I would highlight that in the current quarter, our margins benefited from our move-up and active adult business where pressures on our selling prices have been relatively less impactful compared with entry level homes. After several years of gross margin parity across buyer groups, we are seeing a reversion to the historic trend of higher margins in our move-up and active adult business. Based on the mix of homes we plan to close in the second quarter, we expect gross margins to be in the range of 27.5% to 28%. As with our closings and reported margins in the first quarter, deliveries in the second quarter will reflect the benefit of lower lumber costs that are flowing through our operations. In the first quarter, we reported SG&A expense of $337 million or 9.6% of home sale revenues. In the comparable prior year period, our SG&A expense was $329 million or 10.9% of home sale revenues. Higher closings and associated revenues in this year’s first quarter drove the improved overhead leverage relative to last year and our guide. With expected 2023 production volumes moving higher, we are carefully adding sales and construction staff, but still expect to maintain overhead leverage. As such, we expect second quarter SG&A to be in the range of 9.0% to 9.5%. In the first quarter, our financial services operations reported pre-tax income of $14 million, which is down from $41 million in the prior year. Pre-tax income in the period was impacted by lower loan volumes, competitive pricing dynamics and higher mortgage incentives being used throughout the industry. In Q1, our capture rate was 78% compared with 81% last year. Market conditions have clearly improved, but as we do under all market conditions, we continue to routinely reassess our own planned positions and pending land transactions. Based on this review process, in the first quarter, we walked away from 5,300 lots that were previously held under option and wrote off approximately $6 million in associated deposits and pre-acquisition costs. In the first quarter, our reported tax expense was $170 million or an effective tax rate of 24.2%. We expect our tax rate in the second quarter to be 24.5%. Our net income for the first quarter was $532 million or $2.35 per share, which is up from prior year net income of $455 million or $1.83 per share. In addition to significantly higher net income, our earnings per share benefited from the company’s share repurchase program. In the first quarter, we repurchased 2.8 billion common shares at a cost of $150 million or an average price of $54.30 per share. Consistent with our plans to continue returning excess funds to our shareholders, our Board has approved an additional $1 billion of share repurchase authorization, bringing the total available under the program to $1.2 billion. Along with returning funds to our shareholders, we continue to strategically invest in our business. In the first quarter, we invested $906 million of land acquisition and development, down from $1.1 billion in Q1 of last year. Given the stronger demand environment and the increase in our overall construction activities, we now expect to invest between $3.5 billion and $4 billion in land acquisition development in 2023. We ended the period with 210,000 lots under control. This is consistent with year-end and down 10% from last year. Based on our activity over the past several quarters, 61% of those lots are owned and 49% are options. We will continue to seek increased optionality of our land bank with a target of up to 70% of our lots being controlled via option. Reflecting the strength of our first quarter financial results and associated cash flows, we ended the quarter with $1.3 billion of cash, which lowered our net debt to capital ratio of 7.2%. On a gross basis, our debt-to-capital ratio was 18.1%, down from 21.5% at the end of the first quarter last year. Now let me turn the call back to Ryan for some final comments.

Jim Zeumer:

Thanks, Ryan. We’re now prepared to open the call for questions so that we can get to as many questions as possible during the remaining time of the call. [Operator Instructions] Andre, do you want to get the process started. We’re prepared for Q&A.

John Lovallo:

Good morning, guys. Thank you for taking my questions. The first one is you guys talked about some of the pressure on selling prices easing and the ability to pull back on incentives or even maybe raise prices in some markets. I think 50% of the markets you said – can you just help us maybe frame which markets you’re seeing the greatest opportunity to kind of pull back on the incentives and maybe the markets where it’s a little bit more challenging at this point?

John Lovallo:

Got it. That’s helpful. And then recognizing that you guys are not a spec builder, I mean, the move-in effort has been – it’s been helpful, and it’s been meaningful. Maybe could you just help us outline sort of your thoughts on that today? Where do you see this going? And will this be perhaps a slightly bigger piece of the Pulte business than it has historically?

John Lovallo:

Great. Thanks, Ryan.

Alan Ratner:

Hey, guys. Good morning. Nice quarter and thanks for the time. Following on that last question, I guess, obviously, it seems like you saw a strong demand for the spec inventory you have on the ground. Would you say the momentum you saw in the market overall was similar in your BTO business as well and the skew towards more spec was just a function of where you had the inventory or do you still see kind of currently more of a desire for those quick moving homes versus build-to-order?

Alan Ratner:

Got it. That makes a lot of sense. And I guess on that note, if we think about the price point segmentation and entry level seemingly a bit stronger in the near-term. You kind of alluded to this when you talked about the margin differential reverting back to more historical norms where end level is a bit of a lower margin but higher turn business for you. How should we think about the margin going forward, assuming the mix of the business kind of continues on this current trajectory? You guided for margins to be down about 100 bps sequentially, which probably is some of that mix impact there. But can you quantify exactly what that mix looks like today and what it would look like if this mix holds steady here overall for the business?

Alan Ratner:

Understood. Appreciate that. Thanks a lot, guys.

Operator:

We will go next to Stephen Kim at Evercore ISI.

Ryan Marshall:

So Stephen, let me start with absorptions per community. Going back over the last several quarters, you’ve heard me talk about, we’re not going to be margin proud and that we are going to work and take market share and turn our assets. And I think you’ve seen us do that. I highlighted in my prepared remarks today, that we’re very pleased with the absorptions that we turned out – the absorbent for a community that we turned out of the first quarter. And we were able to do it at outstanding margins as well. So I think we were successful on both fronts there. Going forward, we are going to continue to follow that same approach. We think it’s really important to continue to turn the assets and to continue to have high – reasonably high absorptions per community. And we will combine that with what has been historically best-in-class margin profile. And so we think we’ve got a lot of the elements of our playbook and our strategy working well. In terms of the second part of your question, remind – cycle times. So Stephen, for our total year delivery, what we’ve highlighted is that we’ve got a production universe in process with – what’s in process and what we expect to start, it will give us a universe that will allow us to potentially close up to 27,000 to 28,000 homes. We have assumed the cycle times that we are currently seeing. So we have not incorporated any improvement. We have seen improvement, and we’ve incorporated that. We haven’t incorporated further improvement. And certainly, we’ve got lofty goals that we’re endeavoring to claw back even more cycle time, but that’s going to take a lot of hard work by our teams and our trades and suppliers.

Ryan Marshall:

Yes, Stephen, it’s a multi-month kind of program that we look at in terms of the – our starts cadence and what we put into the ground I think it’s widely well known that the first 3 months of the quarter tend to be more difficult on the weather side, especially for our businesses in the Midwest and the Northeast. So probably a little bit of an impact on the number being a tad lower, but our forward plans in terms of our starts cadence, that’s all wrapped up into the 27,000 to 28,000 unit range kind of production guide. So I’d probably look at everything in its entirety, not just what we started in Q1, but what was in backlog, what was in production, what we started in Q1, plus the kind of implied Q2 start rate. I think that all that all works into the way that we’re running the business.

Ryan Marshall:

That’s not a number we provided, Stephen.

Operator:

We will go next to Anthony Pettinari at Citi.

Pablo Shaughnessy:

Yes. There wasn’t – it wasn’t a cliff. It was a pretty consistent cadence. And I think your point is a good one. The consumer has I think, largely now oriented themselves around the stability and rates that Brian talked about, they are moving, but they are not moving anywhere near as much as they were in the back half of last year. Couple that with the fact that most of the backlog and folks that signed contracts back when rates were much lower and got to a much higher rate at the closing table and the kind of the shock and cancellation impact from that has largely worked through the system. So I think the combination of those two things has the current contracted customer base and people signing contracts today are less sensitive to those rate movements than we saw in the back half of this year. And I think that’s why you’ve seen the can rates. And candidly, the reason we provided it, we had less total cancellations in the first quarter than we did in the fourth, I think for all those reasons.

Pablo Shaughnessy:

Yes, I’d like to tell you it’s cost, but it really wasn’t. I mean that was for the stuff that we closed in the quarter, those costs were baked in. We’re working with our trades to find efficiencies going forward. Lumber was obviously a benefit, but we knew that. So that was in our guide. I think it really – and we highlighted this in our remarks, it was reflective of the sales environment. It was the relatively strong demand. It was our ability to manage our incentive load. So we’ve had a national mortgage rate buydown program in effect since the beginning of the year. And what we’ve been able to do is use that as another selling tool. And so for some people, it’s, hey, get my rate as low as you can get it. For others, I want my rate down a little bit, and I want you to help you with closing costs. The nice part is that, that incentive replaced the incentives that we were offering before as opposed to added to it. And then you couple that with the fact that we highlighted that we were able to stop reducing prices and actually started to increase prices in more than half of our communities. Now these aren’t massive increases, but it’s the psychology of sales that relative strength was better than we had forecast in our guide for the quarter and showed up in the margin for the quarter.

Pablo Shaughnessy:

Thanks, Anthony.

Michael Rehaut:

Thanks. Good morning, everyone. First question, I just wanted to zero in a little bit, if possible, on the pricing trends. As you mentioned before, you said that you had increased prices maybe in about 50% of your markets. Just wanted to get a sense between the reduction or moderation in incentives that you’ve seen so far year-to-date as well as maybe between that and some of the base price increases. If you could give us a sense of how much pricing – net pricing has improved from 4Q end to 1Q end?

Michael Rehaut:

Great. I appreciate that, Ryan. I guess secondly, looking at the gross margins for the second quarter, you’re expecting about 100 to 150 bps of potential contraction, just wanted to get a sense of if that is just due to the lagged impact of higher incentives from the back half of last year. And if that – because I believe you also mentioned that – if I heard right, and apologies, if I didn’t, but that you are also going to see the benefit of lower lumber costs in the second quarter. But if the driver is that lagged impact of higher incentives from back half of ‘22, do you feel that that’s mostly – will have mostly played itself out by the second quarter, or could there be incremental negative impact in the back half of ‘23?

Michael Rehaut:

Okay. Great. Thank you.

Operator:

Our next question comes from Matthew Bouley at Barclays.

Ryan Marshall:

Yes. Matt, what we saw in the quarter was a strengthening of sales pace as we move January to February, February to March. Sequentially, sales paces got stronger. And then we have seen April continue to the first 3.5 weeks, three weeks of April continue to perform at a really strong level. So, we are pleased with what we are seeing. To your point, I think in certain markets, particularly on the West Coast during the banking, regional banking crisis, I think certain buyer groups in certain cities were probably more impacted psychologically than others. I think most of the things that we were seeing resulting from that have dissipated and we are continuing to see good momentum on the sales force.

Ryan Marshall:

Yes. Nothing necessarily on the ground yet, Matt. I think we are more being responsive to some of the things that have been widely written about and talked about that the smaller banks that provide operating lines and project-specific financing, that credit has gotten tighter. We are not in a position where we use project-specific financing. We are self-funded for almost everything that we do, and we have the ability to given our size to tap into the public capital markets, if so needed. So, I think when it comes to land development, land acquisition, the desire or the decision to put more spec into the ground, we have got tremendous flexibility because of the way that we are capitalized. And I do think that could potentially give us the opportunity to take advantage of any kind of dislocation that might appear. It’s an always-on mindset, which we have always had, not trying to send any kind of a message there other than there was a banking crisis, credit has gotten tighter, and we have got our ears open to any opportunities that that might create for us.

Operator:

And we will move next to Mike Dahl at RBC Capital Markets.

Pablo Shaughnessy:

Yes. Fair question. That is just our projection of what we see on the ground. And so the increase in absorptions that we have seen, the relative stability in pricing gives us a little bit more confidence as we are looking at some of the deal flow that we – for land transactions, it does not anticipate or incorporate any M&A or anything of that sort that would happen separate from that, and we would evaluate it. But we haven’t projected that in the overall increase.

Pablo Shaughnessy:

We haven’t given that level of detail in a while. I think from a community count perspective, you have heard us say, we are investing in the entry level. So, our – a lot of the growth that you saw, we had growth across all three buyer segments in our community count. It was more oriented towards the first time. And interestingly, then next to the move-up and the active adult is those are bigger positions, so they don’t – we don’t have quite as much flexibility in those over time. But the 13% was spread across all, but it was largely in the first time.

Ryan Marshall:

Thanks Mike.

Susan Maklari:

Thank you. Good morning everyone. First question is talking a bit about the SG&A. You mentioned that you are cautiously adding some headcount there. Can you just give some sense of how that’s trending? And where do you expect that, that can go over time as you think about the level of deliveries you are targeting?

Susan Maklari:

Okay. And you increased the authorization on the buybacks this quarter as well. Can you talk a bit about your appetite to buyback the stock here? And any thoughts on how you are thinking of the cadence of that going forward?

Susan Maklari:

Okay. Thank you and good luck.

Dan Oppenheim:

Hi. Thanks very much. I was wondering if you can just talk about the West where you talked about some of the tougher conditions, how are you thinking about spec at higher price points and where it’s more challenging? Are you doing – do you have much less in terms of spec per community in the West than you have in other regions? I am just curious how you are handling that?

Dan Oppenheim:

Sure. It makes sense. And I guess you talked about cycle times coming down. How much – if we think about the conversion, how much would you say is driven by some improvement in cycle times versus just the specs and the shorter time from contract to closing on those specs?

Dan Oppenheim:

Great. Yes. I was thinking about in terms of the backlog conversion from those two issues. Great. Thanks very much.

Truman Patterson:

Thanks for taking my questions. First on the entry-level orders, I believe you all said were up like 18% year-over-year. That’s quite a bit stronger than where we think underlying entry-level spec demand is. Could you help us understand that a little bit? Is it easier comps, community location? Have you all early in 1Q – did you bring incentives more in line with the market, etcetera, just trying to understand that result a little bit better. And then could you help us understand just where overall absorption stood exiting the quarter in March?

Ryan Marshall:

The one thing Truman, that I think I would probably highlight is that our entry-level product tends to be on the higher side of the price – the entry level price band, the locations are excellent. And so I think we have got a well-located product that’s still within the affordable range that appeals to a first-time entry level buyer. And so if our performance exceeds maybe kind of what you are expecting, my guess is on a relative basis, that’s probably some of the strength as we have got excellent locations for those entry-level communities. And then as far as kind of the exit rate for the quarter, that’s not a number that we have quoted. I did highlight though on one of the previous questions, we saw absorption strength progress as we move through the quarter. So, March was our highest sales and the highest absorption rate of the quarter. We have seen strength continue as we have moved into April.

Ryan Marshall:

Yes. We are very happy with the relationship that we have with Invitation. And I would probably answer the question more broadly about single-family rental. We have made it a small part of our overall production environment. We are looking at opportunities where we can provide a very, very small number of our total deliveries to the build-for-rent operators, Invitation being a big part of that. So, we are happy with how it’s performing. We talked about it being something in the range once we get to full capacity of about 5% of our annual deliveries. We are still on track as we get this ramped up that that’s about what it will be, and we are pretty comfortable with that.

Operator:

We will take our final question from Rafe Jadrosich at Bank of America.

Pablo Shaughnessy:

Yes. Candidly, no, most of the folks that we work with are pretty well capitalized. They are big developers in their market. And the truth is that we self-develop a great deal of the land that we control anyway. We are not – the vast majority of our business is actually self-funded. So – but for those deals where we have got partners, they are typically pretty well capitalized.

Ryan Marshall:

Yes. Traffic, I think was pretty consistent with what we expected. Conversion was better and the incentives that we had to provide to get that conversion were better than our expectations, which is what really contributed to the margin outperformance.

Operator:

And that does conclude today’s question-and-answer session. I will turn the conference back over to Jim for any closing remarks.

Operator:

And that does conclude today’s conference call. Thank you for your participation. You may now disconnect.

Jim Zeumer:

Great. Good morning, Devin. Good morning and thank you, Devin. Look forward to discussing PulteGroup's outstanding fourth quarter earnings for the period ended December 31, 2022. I’m Joined on today's call by Ryan Marshall, President and CEO; Bob O’Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, 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 will post an audio replay of this call later today. Please note, that consistent with this morning's earnings release, we will be discussing our reported fourth quarter numbers as well as our financial results adjusted to exclude the benefit of certain insurance reserve adjustments and JV income as well as the write-off of deposits and pre-acquisition spend and a tax charge recorded in the period. A reconciliation of our adjusted results to our reported financials is 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. And finally, 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 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 Marshall. Ryan?

Bob O’Shaughnessy:

Thanks, Ryan, and good morning. PulteGroup completed the year by delivering a strong fourth quarter results, the benefits of which can be seen throughout our financial statements. In my analysis of the company's operating and financial performance, I will review our reported numbers as well as our financials adjusted for the specific items Jim noted at the start of this call. PulteGroup's fourth quarter home sale revenues increased 20% over last year to $5.1 billion. Higher revenues for the period were driven by a 3% increase in closings to 8,848 homes in combination with a 17% increase in average sales price to $571,000. The increase in average sales price in the quarter was driven by double-digit gains in pricing across all buyer groups. Our closings for the quarter came in above our Q4 guide as we benefited from higher spec sales that closed in the quarter and a faster-than-anticipated recovery in our Florida operations following the impact of Hurricane Ian. The mix of closings in the fourth quarter was 36% first-time buyers, 39% move-up buyers and 25% active adult. This compares with last year's closings, which were comprised of 33% first time, 42% move-up and 25% active adult. The increase in first-time closings is consistent with changes in our mix of communities and the greater availability of spec homes in our first-time buyer neighborhoods. Our spec strategy emphasizes production within our Centex brand as almost 60% of spec units are in communities targeting first-time buyers. In the quarter, we recorded net new orders of 3,964 homes, which is a decrease of 41% from the same period last year. The decline in orders for the period reflects the ongoing softness in buyer demand caused by the significant increase in interest rates realized in '22 in combination with higher cancellations experienced in the period. As a percentage of sign-ups, the cancellation rate in the fourth quarter was 32% compared with 11% last year. Cancellations as a percentage of backlog at the beginning of the quarter totaled 11% in the fourth quarter this year compared with 4% in the fourth quarter last year. I would note that in the 4 years prior to the pandemic, quarterly cancellations as a percentage of beginning period backlog averaged 10%, so Q4 cancellations in relation to backlog were in line with historic norms. In the fourth quarter, our average community count was 850, which is up 8% from an average of 785 last year. Community count growth reflects new community openings as well as the slower closeout of certain neighborhoods. Based on planned community openings and closings, we expect our average community count in the first quarter of '23 to be flat sequentially or approximately 850 communities. For the remainder of '23, we expect quarterly community count to be up 5% to 10% over the comparable prior year quarter. By buyer group, fourth quarter orders to first-time buyers decreased 28% to 1,574, while move-up demand was lower by 56% to 1,241 homes and active adult declined 36% to 1,149 homes. As has been widely discussed, housing demand remains under pressure as higher interest rates and years of price appreciation have stretched affordability for buyers. We ended the quarter with a backlog of 12,169 homes with a value of $7.7 billion. This compares to the prior year backlog of 18,003 homes with a value of $9.9 billion. As Ryan discussed, our objective is to keep turning -- keep inventory turning, which requires that we start an appropriate number of homes. In the fourth quarter, we started approximately 4,000 homes, which is down 50% from the fourth quarter of last year, and, on a sequential basis, down about 40% from the third quarter. We ended the fourth quarter with a total of 18,103 homes in production, of which 10% were finished. Of our total homes under construction, 43% were spec. This is slightly above our target of having specs comprised approximately 35% of our work in process, but given buyer preference for a quicker close, we are comfortable having a few more homes in production. Based on our production pipeline, we currently expect to deliver between 5,400 and 5,700 homes in the first quarter of the year. As Ryan indicated, for the full year, we will have the production potential to close approximately 25,000 homes. These production numbers assume a continuation of current construction cycle times. Given the price of homes in backlog, the mix of homes we expect to close and the anticipated level of spec closings in Q1, we expect the average sales price for Q1 closings to be between $565,000 to $575,000. At the midpoint, this would be an increase of 12% over the first quarter of '22. In the period, we reported gross margins of 28.8%, which remain near historic highs for the company. This represents an increase of 200 basis points over the comparable prior year period, although down sequentially from the 30.1% gross margin we delivered in the third quarter. Looking ahead, we expect to deliver another strong quarter with Q1 gross margins of 27%, which includes the benefit of lower lumber costs due to the fall in lumber prices in the back half of '22. Any savings from ongoing renegotiation of labor and material contracts will be realized in future quarters, and we will have to see how much of this work benefits our '23 versus our '24 closings. Our reported fourth quarter SG&A expense of $351 million, or 6.9% of home sale revenues, includes a net pre-tax benefit of $65 million from adjustments to insurance-related reserves recorded in the period. Exclusive of this benefit, our adjusted SG&A expense was $415 million or 8.2% of home sale revenues. In Q4 of last year, our reported SG&A expense of $344 million or 8.2% of home sale revenues included a net pre-tax benefit of $23million from insurance-related reserve adjustments [ph]. Exclusive of that benefit, our adjusted SG&A expense was $367 million or 8.7% of home sale revenues. With the pullback in overall housing demand, we’ve worked hard to ensure our overheads are properly aligned with today's tougher operating conditions. As such, we expect SG&A expense in Q1 to be in the range of 10.5%to 11% compared with 10.7% last year. In other words, even with lower closing volumes, we are in a position to realize overhead leverage that is comparable to '22. Reported fourth quarter pre-tax income from our financial services operations was $24 million, down from $55million last year. The decline in pre-tax income reflects both lower profitability per loan and an overall decrease in loan origination volumes as mortgage capture rate declined by 10 percentage points to 75%. In the fourth quarter, we walked away from 21,000 option lots and an associated $900 million in future land acquisition spend. As a result of these actions, we incurred a pre-tax charge of $31 million for the write-off of related pre-acquisition costs and deposits. This charge was offset by a pretax gain of $49 million in JV income associated with the sale of commercial property completed in the quarter. Our reported tax expense for the fourth quarter was $282 million, which represents an effective tax rate of24.2%. Our Q4 taxes included a $12 million charge associated with deferred tax valuation allowance adjustments recorded in the period. We expect our tax rate in the first quarter and for the full year in '23 to be 25%. On the bottom line, our reported net income for the fourth quarter was $882 million or $3.85 per share. On an adjusted basis, the company's net income was $832 million or $3.63 per share. These results compared with prior year reported net income of $663 million or $2.61 per share, and adjusted net income of $637 million or$2.51 per share. Moving past the income statement, we invested $1.1 billion in land acquisition and development in the fourth quarter, with almost 65% of this spend for development of existing land assets. For the full year, we invested a total of $4.5 billion in land, including $1.9 billion of acquisition and $2.6 billion of development spend. Given recent decisions to exit certain option land positions, we ended the year with 211,000 lots under control, which is down 8% from last year and down 13% from the recent Q2 peak of 243,000 lots. With the decision to drop option lot deals over the past two quarters, owned lots currently represent 52% of lots under control. As we’ve discussed on prior earnings calls, given the slowdown in overall housing activity, we plan to dramatically lower our land spend in 2023. At this time, we expect our total land investment to be approximately$3.3 billion, with an estimated 65% of these dollars going toward development of owned land positions. Along with investing in the business, we continue to allocate capital back to our shareholders. In the fourth quarter, we repurchased 2.4 million common shares at a cost of $100 million for an average price of $41.81 per share. PulteGroup continues to maintain one of the most active share repurchase programs in the industry, having repurchased 24.2 million shares of common stock in 2022, or almost 10% of our shares outstanding, for $1.1billion at an average cost of $44.48 per share. In 2022, we returned over $1.2 billion to shareholders through share repurchases and dividends. After allocating capital to the business and our shareholders, we ended the quarter with $1.1 billion of cash and a net debt to capital ratio of 9.6%. On a gross basis, our debt to capital ratio was 18.7%, which is down from 21.3% last year. Now let me turn the call back to Ryan for some final comments.

Jim Zeumer:

Thanks, Ryan. We are now prepared to open the call for questions so we can get through as many questions as possible during the time remaining. We ask that you limit yourself to one question and one follow-up. Devin, if you will open it up for questions, we are all set.

John Lovallo:

Good morning, guys. Thank you for taking my questions. The first one is, can you just give us an idea of the margin on quick move-in homes compared to the company average?

John Lovallo:

Got you. Okay. And then it was the commentary on demand getting better through the quarter and into January was interesting and encouraging. Can you just give us an idea of how broad based that demand was? I mean, was it limited to certain markets? Or was it pretty much across your footprint?

John Lovallo:

Great. Thanks a lot guys.

Operator:

Our next question comes from Truman Patterson with Wolfe Research.

Ryan Marshall:

Truman, I think you've highlighted the variables that are out there. And at this point in time, we've given a guide for Q1. And as I mentioned in my comments, that's the extent of kind of what we are going to provide at this point.

Ryan Marshall:

Well, Truman, I think, as we've talked about with our land acquisition strategy over the years, we've attempted to stay closer into the core, closer to the job market in some of the retail sectors. We certainly have a sizable first time entry-level buyer business and affordability there matters. So we do have communities that are more in the growth rings and on the -- in the tertiary areas, but I don't believe that our land footprint goes out quite as far as maybe some of our competitors. So what I'd tell you is it kind of depends on -- it's a community-by-community situation that is, as much as anything, from a margin standpoint, dependent on the structure of the land deal. And like, I think, you've heard from us in a lot of situations, we don't underwrite the gross margin, we really focus on underwriting to return. But going back to the question that John asked, we've seen relative strength and improvement in kind of sales across the board, that's not just geographically speaking, but that's community by community as well.

Jim Zeumer:

Thanks, Truman.

Alan Ratner:

Hey, guys. Good morning. Nice execution, and thanks for the time here. Ryan, just on the margin, I know you're not guiding beyond 1Q, but I'm just curious if you could talk through a little bit. When I compare you guys to some of your larger competitors, your margins right now are outperforming by a pretty wide level 400, 500 basis points. And while I understand there might be a little bit of a lag there given they're maybe more spec focused than you are, it's still a little bit surprising to see the outperformance. So could you talk a little bit about my understanding you're not going to give guidance, is that just a timing issue? Or is there something you guys are doing that is resulting in that outperformance, in your opinion?

Alan Ratner:

Great. I appreciate all the thoughts there. Second question on the cost side. I think, over the last few months, we've heard a lot of optimism from homebuilders about their ability to renegotiate costs lower, especially as starts have pulled back as much as they have and what was shaping up to be a pretty volume outlook in '23. And your comments are similar to what we've heard from others that the market seems to be showing some improvement here. I can't help but look at lumber costs up 40% year-to-date and imagining that perhaps that might be filtering through to some other inputs as well. So what's your current thinking on the cost side? Are you feeling a little bit less bullish about your ability to kind of push back on costs now given what seems to be a strengthening marketplace? Or do you still feel like you can find some relief there as the year goes on?

Alan Ratner:

Got it. Just if I could squeeze in one last one there. So on the lumber side, I just want to make sure I understand the timing of this. You mentioned that you're benefiting now on 1Q deliveries from the pullback we saw last year. Assuming this 40% increase kind of holds here or maybe even goes a little bit higher, when would that eventually be a headwind to your margins? Would that be kind of a second half of this year type impact?

Alan Ratner:

Thank you, Bob. Appreciate it.

Operator:

Our next question comes from Michael Rehaut with JPMorgan.

Ryan Marshall:

Hi, Mike.

Bob O’Shaughnessy:

Yes, Mike, I think I understand your question. Hopefully, you appreciate, when we provide commentary on our results, if there are unusual things happening, we tell you about them, whether it's in the form of an adjustment or when we present adjusted data. And to answer your question as directly as I can, there's nothing unusual happening in our margin in the fourth quarter. We are not projecting anything unusual to happen in our margin in the first quarter other than the homes that we are closing. I think if you reflect on the answer that Ryan gave, and I can't comment on the relativity to other people's margins, what they're doing pricing lines, what we're doing pricing wise. We can only comment on what we are doing, which is trying to run a thoughtful business, get to a point where we can offer affordability to the consumer where we can earn a return. So I don't know if that gets where you need to be, but there's nothing unusual happening in our margins.

Michael Rehaut:

Yes. No, I appreciate that. I mean, I guess, I was trying to get to something you don't want to give, which is second quarter guidance, and we understand that. But I think people would kind of think, okay, you have a significant positive gap here as there were [indiscernible] drop maybe in the backlog that might allow that gap to revert to normal, but it doesn't sound like that's the case. I guess secondly, the SG&A guidance was pretty encouraging as well given the decline in closings yet the midpoint being similar to a year ago. So just wanted to delve into that a little bit. If you could kind of talk about what you're doing on the cost side there in terms of either headcount or other cost management? And if we were to expect a similar type of percentage decline in the coming quarters, given what you've been able to do in the first quarter, is that something where we could see a similar SG&A in spite of a 5%, 10% or, let's say, 10%-ish decline in closings?

Michael Rehaut:

Right. Just one last quick one, if I could. It's actually kind of also in response to clarification on a prior sneaking question. When you talk about the lumber costs being up year-to-date and that impacting maybe the back half of the year, just wanted to get a sense from you. I mean, on a dollar basis, it's significantly lower than it -- the percentage is kind of obfuscates the dollar amount, which is somewhat lower on an absolute basis when you think about where lumber was. And secondly, I would presume there's also some amount of potential labor savings that might come through in the back half just given where the market has gone over the last 6 months and a 40% increase in lumber, all else equal sounds one way, but, to me, there's potential offsets to that. Just wanted to know what you thought if that makes to you?

Michael Rehaut:

Perfect. Thank you so much

Carl Reichardt:

Thanks. Good morning, everybody. [Indiscernible] you mentioned, Ryan or Bob, the mix of deliveries 36% first time, 39% move up, 25 active adult. Is your expectation for '25 -- or '23 on that 25,000 unit guide to be much different than that mix or shift in any meaningful way?

Carl Reichardt:

Okay. Thanks for confirming that, Bob. And then just on active adult, I'm curious how that business has trended. Has it been over the course of the last four months or so given that customer is more likely to pay cash, less worried about rates? We had a thin existing home sales environment, but the stock market has been tough. Could you just maybe chat a little bit about how that customer seems to be faring in an environment like this and contrast them with what you're seeing in the first time in the move-up market just attitudinally? Thanks.

Operator:

Our next question comes from Anthony Pettinari with Citi.

Ryan Marshall:

Anthony, we haven't provided that, and so we're not going to reluctantly.

Ryan Marshall:

Yes. Anthony, I think what I would tell you is that it's fluid. And sometimes things that start as kind of discounts off of a price or adjustments to lot premiums, sometimes those are rolled into kind of base price changes or base price reductions. And so the discount gets embedded over time into kind of what the new market price is. So, to Bob's point, we are not going to probably break it out at this point. But you can see, based on the incentive load that I talked about as well as the kind of reduction of base price, we are finding what we think is the market-clearing price to continue to sell homes.

Ryan Marshall:

Yes. So in answer to the first question, I think we, on average, been buying 3 to 4 years of land. When you add in development time lines, land is going to be hanging around 4 -- in the neighborhood of 4 years. And so if you think of that, pre-pandemic land would be kind of working its way through the system now. In response to the impairment question, obviously, we do impairment reviews every quarter. We are coming from a pretty strong margin position, but we always look and, for instance, in this most recent quarter, we actually looked at 16communities for impairments and impaired 4 of them for about -- it was about $2 million in costs that flow through the quarter, the other 12 did not. And so I think, absent some real structural shift in the market, I wouldn't anticipate a widespread kind of remark of our book. I think you will continue to see us as we look at this, evaluate communities one by one. And depending on the market conditions for that community, if we are in a position like we were with these four communities in the quarter, we'll adjust.

Mike Dahl:

Good morning. Thanks for taking my questions. Ryan, Bob, appreciate the color so far. A couple of follow-ups here. In terms of the incentives, I think -- and maybe I'm mistaken, but I think the incentives, given we are on closings, the increase to 4%. Can you just help us understand, you talked about the improvement in demand, but also making further adjustments on price incentives. What's your current incentive load on orders, if you can give us that?

Mike Dahl:

Got it. And then in terms of the improvement through the quarter, I appreciate, like to get into the specifics here, but since you gave the commentary about orders progressing through the quarter in January, can you just enlighten us on a year-on-year basis? Where did you -- where have you stood month-to-date in January? Help us understand the magnitude of improvement versus what you saw through the fourth quarter?

Operator:

Our next question comes from Stephen Kim with Evercore ISI.

Ryan Marshall:

So, Stephen, let me grab the first piece of that. I will let Bob take the mortgage side. I would tell you rate -- the first, your comment on rate, rate is part of it. What's really driving kind of the sales trajectory right now is affordability, and rate is part of that equation. We've also done things in the way we've repriced, the way we've created incentive loans that have helped so affordability as well. So I think that's a big part of it. I will skip to a couple of things that you said about production. Just to clarify so everybody is on the same page, we've got enough production based on what was already in production, plus what we intend to start that will deliver in this year such that our universe -- our production universe will be big enough such that we'd expect to have enough homes to close, approximately 25,000 homes. So -- and then from a rental -- your rental question, we've targeted -- if you go back to the announcement we made a few years ago that we want to do -- have roughly 7,500 homes over a 5-year period, kind of works out to be about 1,500 homes a year once we get fully kind of ramped up. So fairly small piece of our business, which is kind of how we strategically designed that. And I'll flip it to Bob, and he can talk about the mortgage piece.

Stephen Kim:

Yes. That's really -- that's interesting and encouraging. I guess, Ryan, you just mentioned you sort of were more specific about your comment about that 25,000 unit mark, and that's helpful. And what I gathered from your comment is that you may actually start fewer than 25,000, correct me if I'm wrong, and so you're addressing sort of your ability to sort of scale down your starts as you have because you actually, I think, peaked at like 35,000 starts in 2021, I think it was. And so I guess my question regarding how you're thinking about the size of your business when things sort of normalize whenever that happens. How quickly could you reattain that level of35,000 starts? What would it take? Is that something that you think that you could do relatively quickly if market conditions permitted it? And then along with that, your lot count, owned lot count declined again this quarter. And I'm curious, do you expect it to decline further into the first half of 2023?

Jim Zeumer:

[Indiscernible] lots and what we are going to see in Q1, if there would be further decline. I think it was the …

Bob O’Shaughnessy:

Well, like anything else, it depends on the demand environment, how many homes we close for lots, as an example, part of it will be things that are under option today. Are we able to negotiate? If we so desire a deferral of that. So it's hard to give you an answer on that, Stephen, because we are negotiating contracts all the time.

Ryan Marshall:

Yes. Stephen, that's what I was trying to address with my commentary around land. We have the land pipeline such that we can do it. So really to be dependent on how deep -- how deep is the consumer demand, and can we get the trades back on our job site? It's part of the reason that you've also heard us say that we are going to continue to maintain a level of production that allows us to retain those trades on our job sites. So I think they're linked. It's a hard question to answer because I don't know the answer on when demand is going to return to that level. But suffice it to say, I think we've got a production machine that's capable of delivering that if demand is there.

Unidentified Analyst:

Thank you. This is actually Charles [indiscernible] for Susan. I guess my first question is looking at the improvement in activity that you've seen through January, is it fair at this time to expect to sell space in Q1 to be in line with the pre-pandemic historical seasonality kind of a 30% to 40% improvement sequentially from 4Q to Q1?

Unidentified Analyst:

Okay. Okay. And second, you highlighted the potential to improve cycle times through the year. What are some of the key factors that could lead you to improvements in 2023, maybe between the material supply chain issues versus addressing labor availability challenges in the production?

Operator:

That concludes the Q&A of today's call. I now turn the call over to Mr. Zeumer for closing remarks.

Operator:

That concludes today's conference. Thank you for attending today's presentation. You may now disconnect.

Jim Zeumer:

Great. Thank you, Chris, and good morning. I want to welcome everyone to PulteGroup's earnings call for our third quarter ended September 30, 2022. Joining me to discuss PulteGroup's third quarter results are Ryan Marshall, President and CEO; Bob O’Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior Vice President, Finance. A copy of this morning's earnings release and the webcast slides that accompany this call have been posted to our corporate website at pultegroup.com. We will also post a replay of today's call later today. 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 the comments we make today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying webcast 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 Marshall. Ryan?

Bob O’Shaughnessy:

Thanks, Ryan, and good morning. There's a lot to review this quarter, so I'll dive right in. Home sale revenues for our third quarter totaled $3.8 billion, which represents an increase of 16% over the same period last year. Higher revenues for the quarter were driven primarily by a 15% increase in our average sales price to $545,000. The year-over-year increase in average sales price of $71,000 was driven by improved pricing across all buyer groups as first time was up 20%, move-up gained 16% and active adult was up 15%. Unit closings in the quarter increased by 1% over last year to 7,047 homes. It's worth noting that approximately 200 closings that were slated for the fourth -- the third quarter were delayed due to Hurricane Ian as we shut down or slowed operations across a number of our Florida and Carolina markets ahead of the storm. On a year-over-year basis, the mix of homes delivered in the third quarter changed slightly as 36% were first-time buyers, 38% were move-up buyers and 26% were active adult buyers. In the prior year, 31% of homes delivered were first-time, 44% were move-up and 25% were active adult. The shift in mix to more first time is in alignment with our strategy of having approximately one-third of our business in the first-time buyer space. Net new orders in the third quarter totaled 4,924 homes, which is a decrease of 28% from last year. The year-over-year decline in orders reflect softer demand, resulting primarily from higher interest rates as our absorption pace fell to 2.0 homes per month, down from three homes per month for the same period last year. Along with a slower pace of sales, our reported net new orders in the third quarter were impacted by a significant increase in cancellations. Our cancellation rate for the third quarter was 24%, which compares with 10% in the third quarter of last year and 15% in the second quarter of this year. In the quarter, orders among first-time buyers increased 3% over the prior year as sales benefited from a double-digit increase in community count and the availability of quick move-in homes as the majority of our spec production is in our Centex communities. Orders for move-up buyers were lower by 45% than the prior year, while active adult orders decreased by 31%. Changes in community accounts did not materially impact -- did not materially impact order rates among either of these buyer groups. During the quarter, we operated from an average of 823 communities, which is up 7% from last year. The increase in community count is consistent with our previous guidance and reflects both new store openings and the slower closeout of existing communities. Average community count for the fourth quarter should increase slightly to 840. At quarter end, our backlog totaled 17,053 homes, which is down 14% from the same period last year. While unit backlog is lower, the dollar value of our backlog increased 3% over the prior year to $10.6 billion due to the rise in our average sales prices. We ended the third quarter with a total of 23,010 homes under construction, which is up 22% over last year. Of the units under construction, 65% were sold and 35% were spec. Consistent with comments made on prior earnings calls; we've been working to increase our inventory of spec homes primarily in our Centex communities to better serve first-time buyers. We continued start expects in the third quarter as we have continued to see buyer preference for homes that can close in 30 to 90 days across all buyer groups. At quarter end, we were still well below our commonly used metric of one finished spec per community. However, with 8,000 specs in production, we believe we are well positioned to meet demand and to compete effectively in our markets. Having achieved our targeted level of spec within our production universe, we have now lowered our spec starts and we'll manage our production to maintain the balance of our spec and dirt inventories, with an emphasis on build-to-order production for move-up and active adult consumers. Based on the homes we have in production and current sales rates, we now expect closings in the fourth quarter to be approximately 8,000 homes. The decrease in expected deliveries relative to our prior guide reflects the challenging sales environment, higher cancellation rates and the ongoing impact of Hurricane Ian on our Florida operations. To the last point, while damaged to faulty communities in Florida and the Carolinas was limited, municipal resources are appropriately being diverted to the repair and restoration of services at the expense of getting power to new homes and communities. Based on the mix of homes we expect to deliver in the fourth quarter, we anticipate the average sales price on closings to be in the range of $560,000 to $570,000. At the midpoint of our range, this would be up 15% over last year. Please note that, all of the guidance we provide on this call, including ASP, reflects our current best estimate, but cancellation rates and pricing dynamics as we move through the quarter could impact our actual results. For the third quarter, our homebuilding gross margin was 30.1%, which represents an increase of 360 basis points over the third quarter last year. Referring back to Ryan's opening comments, our third quarter gross margins benefited from the strong demand and pricing conditions that existed at the end of 2021 and into the first half of 2022. These conditions supported the double-digit price increases we show in the quarter and allowed us to cover higher material and labor costs, including elevated lumber prices. The strength of demand in that period can also be seen in our sales discounts, which were only 1% for homes closed in the third quarter. By contrast, discounts on new orders taken in the quarter increased 180 basis points over last year to 2.5%. It's worth noting that, this increase in discounts is in addition to the higher financing incentives we've discussed during our Q2 earnings call. Financing incentives on new orders in the third quarter were 1.9%, which is approximately 80 basis points above last year and our historic average. Given the demand and pricing dynamics we are currently experiencing in the market, in addition to the increase in incentives needed to attract sales, we currently expect our fourth quarter homebuilding gross margin to be approximately 28%. This would represent an increase of 120 basis points over last year, but would be lower sequentially and is down from our previous guide. Given the changing market dynamics, our procurement teams are already having discussions with suppliers and trade partners in an effort to identify opportunities to reduce our land development and house construction costs. However, at this point, any savings we are able to realize would benefit our business in 2023. In the third quarter, our SG&A expense was $350 million or 9.1% of home sale revenues. This compares with prior year SG&A expense of $321 million or 9.6% of home sale revenues. The company remains on track for full year SG&A to be in the range of 9.2% to 9.5%. Given the pullback in buyer demand and expectations that market dynamics will remain challenging for summer all of 2023, we are taking needed actions to better align overheads with current demand. For the third quarter, higher gross margin and greater overhead leverage helped PulteGroup generate an operating margin of 21%, which represents an increase of 410 basis points over the prior year. Turning to financial services. Our operations continue to face extremely challenging market conditions. In the third quarter, our reported pre-tax income totaled $28 million, which is down from $49 million last year. In the quarter, lower loan origination volumes driven in part by a lower capture rate and decreased profitability per loan were the primary drivers of the decline in pre-tax income. Capture rate for the quarter was 77% compared with 85% last year as our mortgage business seeks to be competitive but not to chase unprofitable business. Our tax expense for the third quarter was $183 million, which represents an effective tax rate of 22.6%. Our taxes in the third quarter include federal energy-efficient home credits, which were extended as part of the Inflation Reduction Act that was enacted into law in August of this year. In total, PulteGroup's reported net income for the third quarter increased to $628 million or $2.69 per share. The company's prior year net income was $476 million or $1.82 per share. In the third quarter, we continued our share repurchase activity, buying 4.4 million shares or another 2% of our outstanding common shares for $180 million or an average price of $41.20 per share. Through the first nine months of the year, we have repurchased approximately 9% of the shares we had outstanding at the beginning of the year for $975 million. Along with buying back stock, we invested $1.3 billion in land acquisition and development in the quarter, of which 56% was for the development of existing land assets. As Ryan discussed, in response to changing market conditions, we are re-underwriting every land transaction based on current price, pace and cost dynamics. We ended the third quarter with approximately 232,000 lots under control, which is down 11,600 lots from the end of the second quarter of this year due in large part to the deals we elected to terminate. At quarter end, 50% of our total land pipeline was controlled via option and we continue to work toward our long-term goal of getting to 65% to 70%. While we have terminated a number of transactions, there are land positions that we have under control that we still project to achieve or exceed our required rates of return. As a result, we currently expect to close on such transactions and expect our result in full year land investment to be approximately $4.8 billion, which is in line with our prior guide. Given the change in buyer demand and the resulting impact on the turning of our own land inventory, we currently expect that our land spend will drop materially next year. While we are still in the planning process, our preliminary estimate is that land acquisition and development spend in 2023 will drop by $1.5 billion to approximately $3.3 billion. Of this spend, we expect that upwards of two-thirds will be for the development of existing land assets. We will provide more details on next year's planned land acquisition and development spend during our Q4 earnings call. We ended the quarter with $291 million in cash and had $319 million drawn on our revolving credit facility. Our drawings under the revolving credit facility were driven primarily by our land acquisition and development spend, an increase in our house inventories as we move homes through production and the delay in closings related to Hurricane Ian. Our debt-to-capital ratio at quarter end was 22.5%. Wrapping up the higher interest rates being orchestrated by the Federal Reserve are achieving the Fed's objective in terms of slowing demand and negatively impacting price appreciation in the market. While conditions have gotten tougher, I am confident in PulteGroup's competitive position and in our ability to successfully work through this phase of the housing cycle. Now let me turn the call back to Ryan.

Jim Zeumer:

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. Thank you. And now, Chris, if you will explain once again how to ask questions, we'll get started with Q&A.

Carl Reichardt:

Great. Thanks. Good morning everybody. Ryan, can you talk a little bit -- you mentioned October pricing and it's the -- in October, you saw some pricing and incentives in certain markets are starting to have some traction. Can you expand a little bit on that, sort of, where and what you're doing where you might be seeing at least a little bit of stabilization in absorptions?

Carl Reichardt:

All right. Thanks Ryan. And then can you talk a little bit about can rates by buyer segment and how those might compare currently to what your long-term averages are? Thanks.

Carl Reichardt:

Okay.

Carl Reichardt:

Great Ryan. Thanks a lot guys. Appreciate it.

Operator:

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

Ryan Marshall:

Well, Stephen, let me maybe just start with saying we've got – we've got a really outstanding sales and marketing team that has always focused on the basics of working our entire lead funnel. And that hasn't changed in good market times or even these more challenging market times. So our ability to get relevant and timely messages out to our sales funnel, I'm very confident in our ability to do that. So if we're so fortunate to see rates drop. I know that, we can get the right messaging out to let folks know are – we really emphasize and push with our local sales professionals as well to maintain the relationships with our lead banks and with our interested buyers at a very local and personal level. So I think there's multiple ways using kind of the big bullhorn of the corporate marketing platform, but you've also got the grassroots local relationships with our sales professionals. Maybe just the last thing is I think the market itself, if we were so fortunate to see rates come back I think we'll probably be the greatest marketing machine of any of them.

Ryan Marshall:

Stephen, Jim will give you the sticks and bricks, and then I'll take the second piece of the question.

Ryan Marshall:

And then, Stephen, as to your question on our level of spec inventory, we're – we've been talking for the better part of the last two to three quarters about our desire to have more spec inventory in the system. Over the last three to four months as the market has slowed we've seen a real preference for homes that are able to deliver in the next 30 to 90 days, and that continues to this very moment. In terms of the inventory we have in our system, 35% of our leap [ph] is spec, and that is right where we want to be. So we feel very comfortable with respect to that. Looking at the finished inventory, we continue to have less than one finished home per active community, which has always been our historical benchmark. So we also feel comfortable that we're not under any pressure with finished inventory. We continue to see good flow-through of our sales rate of specs that are being sold and that are delivering in the near term, which is a real positive for us. And then maybe just the last thing, Stephen, and you've seen this transition over the last couple of years, as we've moved more of our business to the first-time entry-level product, we've intentionally put more spec inventory into those first-time entry level communities. And certainly, that's where the higher percentage of our spec inventory resides. So we feel comfortable with that. The last thing and I highlighted in my prepared remarks, as it relates to forward starts of new inventory, we've significantly slowed that, and we're matching that to what our sales rate is. So we think we've done exactly what we said we were going to do and we've made additional adjustments based on how we see market conditions at the moment.

Operator:

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

Bob O’Shaughnessy:

Yeah. So in the most recently printed quarter today, third quarter, our incentive load was 1% on closing. And that is a little bit better than last year, 30 basis points better than closings during the third quarter of last year. What we did highlight was on the sales in this quarter, so not the closings, but the sales that rate ran up to about 2.5%. So running higher and also that financing incentives, and we talked about this in the second quarter, we're up over sales in the third quarter of last year, so that the total load of incentive is up on current sales, by a couple of hundred basis points versus the closings that we had in this quarter. So then that will influence our business over that couple of quarters as those homes close.

Michael Rehaut:

Right. That's -- I appreciate that. I mean that's exactly what I was trying to get at in terms of where you are today. You kind of mentioned that, as the quarter progressed, you took perhaps a little bit more of an aggressive posture and as I said, trying to meet the market with price reductions and I'm sure price adjustments. So just trying to get a sense, I guess, as you've taken those actions maybe over the last 30, 45 days, if you could give us any sense in terms of what percent of ASP, those price adjustments or reductions might have amounted to at this point? And I would assume that that's something that we wouldn't see in the gross margin until the first half of next year?

Ryan Marshall:

And then Mike, to your margin question, yes, a lot of that will certainly be next year for homes that are on a build-to-order model. If it was a spec home, then those will show up more likely than not in the fourth quarter, and that is incorporated into the margin guide that Bob gave for the fourth quarter. Depending on kind of the nature of the adjustments we've made, some of those incentives also have flown into backlog as we work to protect the backlog and get those homes closed as well. That's also incorporated into the guide for the fourth quarter.