PulteGroup PHM Q1 2026 Earnings Call Transcript

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Date

Thursday, Apr. 23, 2026 at 8:30 a.m. ET

Call participants

• President and Chief Executive Officer — Ryan Marshall
• Executive Vice President and Chief Financial Officer — James Ossowski
• Senior Vice President, Investor Relations — James Zeumer

Takeaways

• Home Sale Revenues -- $3.3 billion, reflecting a 7% decline in closings and a 5% decrease in average sales price to $542,000.
• Net New Orders -- 8,034 homes, up 3%, with 18% order growth in Florida driven by expanded community count and favorable land positions.
• Gross Margin -- 24.4%, a decrease from 27.5%, attributed primarily to incentives equal to 10.9% of gross sales price, which increased 290 basis points year over year and 100 basis points sequentially.
• Spec Inventory Reduction -- Total spec inventory down by almost 900 homes; finished spec homes decreased by nearly 500 units, or 24%, over the past 90 days to 1,515, achieving the company’s targeted range of one to 1.5 finished specs per community.
• Build-to-Order Mix -- 43% of net new orders, rising from 40%, with a stated objective to return to a 60% build-to-order, 40% spec mix over the coming quarters.
• Home Closings by Buyer Group -- 38% first-time, 39% move-up, and 23% active adult; compared to 38% first-time, 41% move-up, and 21% active adult in the prior year.
• Orders by Buyer Segment -- Move-up and active adult net new orders rose by 3% and 14%, respectively; first-time buyer orders were down less than 1%.
• SG&A Expense -- $380 million, representing 11.5% of home sale revenues; dollar value decreased by $13 million, but leverage was lost due to fewer closings.
• Financial Services Pretax Income -- $13 million, down from $36 million, affected by lower homebuilding volumes, reduced capture rate, and lower net gains from mortgage sales; mortgage capture rate was 85%.
• EPS and Share Count -- Earnings per share at $1.79, down from $2.57; outstanding diluted shares declined 5% to 193 million following 2.4 million shares repurchased in the quarter for $308 million.
• Authorization of Share Repurchase -- Additional $1.5 billion authorized, increasing total available repurchase capacity to $2.1 billion.
• Land Investment -- $1.3 billion allocated evenly between acquisition and development; controlled lots totaled 229,000, with about 8% of controlled lots (18,000) held with land bankers.
• Guidance Updates -- Q2 closings expected between 6,700 and 7,100; full year 2026 closing guidance remains at 28,500 to 29,000 homes, with community count projected to grow 3%-5% year over year for the remainder of the year; full-year average sales price guidance reaffirmed at $550,000 to $560,000.
• Gross Margin Expectations -- Q2 margin guide of 24.1%-24.4% cited as 2026 low point; full-year margin maintained at 24.5%-25%, likely at the lower end of the range due to a higher mix of build-to-order and active adult closings in the second half.
• Net Debt Position -- Ended the quarter with $1.8 billion of cash, and net debt-to-capital ratio reported as effectively zero after adjusting for cash holdings, despite a debt-to-capital ratio of 12.3%.
• Land Price Observations -- Land inflation has eased, with prices stabilizing nationally and lower prices negotiated in select markets; land cost benefits are expected to flow through financials in 18-24 months.
• Customer Net Promoter Score -- Improved to 65, measured one year after home delivery, reportedly placing PulteGroup (NYSE:PHM) “among such well-known service leaders as Apple, Google, and Chick-fil-A.”

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Risks

• Gross Margin Decline -- Gross margin fell from 27.5% to 24.4%, driven “primarily” by higher incentives, which reached 10.9% of gross sales price, and included 20 basis points of land impairment charges.
• Financial Services Income Pressure -- Financial Services pretax income dropped from $36 million to $13 million, with management attributing performance to “lower homebuilding volumes and reduced capture rate along with lower net gains from the sale of mortgages.”
• Declines in Closings and ASP -- Home closings fell 7% and average sales price dropped 5% across all buyer segments, influenced by what management identified as a “generally competitive” market and “elevated incentives.”
• Incentive Load Remains Elevated -- Management expects “competitive market conditions” and “elevated” incentive levels to persist, which may continue to weigh on margins, particularly in the next quarter.

Summary

PulteGroup (NYSE:PHM) reported a 3% rise in net new orders and an 18% surge in Florida orders, despite a decrease in revenue, gross margin, and average sales price resulting from increased incentives and fewer closings. The company reaffirmed full-year guidance for home closings, revenue mix, and gross margin, projecting a sequential margin recovery in the second half as more build-to-order and active adult homes close. A newly authorized $1.5 billion share repurchase program demonstrates continued capital returns, while disciplined land investment and a reduced spec inventory position support the company’s longer-term strategic shift to a higher build-to-order mix. Ongoing market headwinds—namely high incentives, persistent affordability challenges for first-time buyers, and earnings pressure in Financial Services—were referenced as near-term constraints.

• Ryan Marshall stated, Q2 is going to be a low point for a couple of reasons. One of the big reasons is that a lot of the spec inventory that we sold in Q1 at a higher incentive load are closing—some closed in Q1, and you have got a bunch more that are closing in Q2.
• James Ossowski disclosed, of the 229,000 lots that we control, we have about 18,000 with land bankers, so it is about 8% of the book of business.
• The company invested $1.3 billion in land acquisition and development during the quarter, guided toward $5.4 billion in land spend for 2026, and projected 2026 cash flow generation to be approximately $1 billion.
• A Net Promoter Score of 65, measured one year after initial delivery, was highlighted as evidence of the company’s commitment to post-sale customer satisfaction.

Industry glossary

• Spec Home: A house constructed by a builder without a specific buyer in place before construction begins, typically sold as a quick move-in property and often requiring higher purchase incentives.
• Build-to-Order (BTO): Homes started upon receipt of a customer order, offering greater customization for the buyer and usually commanding a higher margin with fewer incentives.
• Land Banker: Financial intermediary that acquires residential lots on behalf of a builder, often providing off-balance sheet land inventory, typically with risk-transfer features and periodic or back-end payments.
• Absorption Pace: The rate at which new homes are sold within a defined time period per community; used to assess market demand and inventory turnover.
• Mortgage Capture Rate: Percentage of homebuyers selecting the builder’s in-house mortgage services, impacting the profitability of the Financial Services segment.
• Net Promoter Score (NPS): Customer loyalty metric calculated from survey responses to gauge satisfaction and likelihood to recommend; a higher score denotes a stronger brand reputation and customer retention.

Full Conference Call Transcript

Ryan Marshall: I made the following statement to the senior leaders of PulteGroup, Inc.'s homebuilding and financial services operations. In a quarter that grew increasingly more complicated, you delivered exceptional results both operationally and financially. I offer the same thoughts to open this call. In a period that saw every aspect of our consumers' lives impacted by domestic and global events, our discipline, focus, and proven business platform allowed us to deliver another quarter of strong business performance. Financially, our $3.3 billion in home sale revenues, 24.4% gross margins, and lower share count all contributed to driving earnings of $1.79 per share.

Supported by the ongoing strength of our operations, we positioned the company for future growth by investing $1.3 billion in land acquisition and development, while returning $360 million to shareholders through share repurchases and dividends. After having allocated $1.7 billion to these activities, we ended the quarter with $1.8 billion of cash and a net debt to capital ratio of effectively zero. Operationally, we were successful in growing our community count, which was an important driver of our 3% increase in net new orders. And as shown in this morning's release, our results benefited from 18% order growth in Florida, as our diversified business platform and exceptional land positions continue to deliver strong results.

As pleased as I am with the growth in orders, I am even more encouraged with the fact that many of these homes are build-to-order homes. In the first quarter, build-to-order homes accounted for 43% of net new orders, up from 40% in Q1 of last year. On our last earnings call, we outlined our plans to shift our business back toward our historic mix of 60% build-to-order and 40% spec. This quarter was just the first step in a process that will take several quarters to complete, but I am encouraged by such early success. And finally, I would highlight the progress we continue to make on lowering our spec inventory, particularly our finished inventory.

Reflecting actions taken by our field teams, we ended the quarter with an average of 1.4 finished specs per community, which is inside our target range of one to 1.5 finished specs per community. This level of spec inventory allows us to effectively serve those homebuyers needing quick move-in homes, while supporting our strategic shift back to selling more build-to-order homes. Overall, I would say that the first quarter developed as a typical spring selling season, with orders increasing sequentially as we moved through the months. It is difficult to determine what impact global events may have had, but we appreciate consumers were facing higher rates and costs in March.

Through the first few weeks of April, demand conditions have remained on track with typical seasonal trends. Still, in the quarter, we experienced strong buyer traffic to our communities, and sold more than 8,000 homes, which says consumers remain actively engaged in home buying. And once again, our diversified business platform allowed us to capture the strongest segments of the business, namely the move-up and active adult buyers. Economic reports talk to the K-shaped economy and how lower- and middle-income families are struggling much more than those in upper incomes. Housing demand over the past two years has been consistent with these dynamics.

We saw this play out again in our first quarter results, with both relative demand strength in our move-up and active adult businesses, and option and lot premium spend that continues to average over $100,000 per home. However, on the lower leg of the K, first-time buyers continue to struggle with the challenges of stretched affordability and fear of job loss. Our ability to offer low fixed-rate mortgages and other incentives is certainly helping solve the affordability riddle for some. But this comes at a price, as incentives in the quarter reached 10.9% of gross sales price.

Even at this level, I think we have done an excellent job of balancing the need to sell homes, particularly finished spec homes, and turn our inventory, while maintaining higher margins in support of delivering strong returns on invested capital. A critical support to this balance has been our ongoing willingness to adjust our starts pace in alignment with core demand. We again demonstrated such discipline as we started approximately 6,500 homes against orders of 8,000 homes in the quarter. This approach helped us to clear excess inventory, and allowed our communities to more easily sell from a position of strength while still providing sufficient production to achieve expected closing volumes for the full year.

While there is uncertainty about how events will develop over the next few quarters, I remain optimistic about long-term housing demand and confident about the strength of our business model. I could draft a long list of our strengths, but would highlight the following three key points. We control approximately 230,000 lots, including 35,000 owned and finished lots, so we have a land pipeline that we believe can meet current sales and accelerate as buyer demand improves going forward. We have a strong market presence across the major markets, and an unmatched ability to serve all buyer groups.

We are benefiting currently from having 60% of our business among more affluent Pulte and Del Webb buyers, but we fully appreciate the importance of maintaining the presence of our Sentex brand among first-time buyers. And finally, we have a culture that is committed to delivering superior build quality and buyer experience and to raising that bar every day. Thank you. And let me turn the call over to Jim Ossowski for a review of our first quarter results. Jim?

James Ossowski: Thank you, Ryan, and good morning. I look forward to providing a detailed review of PulteGroup, Inc.'s solid first quarter operating and financial results. On a year-over-year basis, first quarter net new orders increased 3% to 8,034 homes with a value of $4.6 billion. Higher net new orders in the period benefited from a 9% increase in average community count to 1,043, while absorption paces decreased by 5% to 2.6 homes per month. I would highlight that the growth in our net new orders was driven by the ongoing strength of our Florida operations. I am pleased to report that orders increased in every Florida market and were up 18% statewide.

In addition to gradual improvements in Florida's new and existing home inventories, our strong performance reflects PulteGroup, Inc.'s superior land positions, our ability to serve all buyer groups, and our outstanding leadership teams. Our cancellation rate as a percentage of starting backlog in the quarter was 13% compared with 11% last year. The percentage increase in our cancellation rate reflects the smaller starting backlog we had entering the period, as unit cancellations are actually slightly down in the quarter relative to last year. In the first quarter, net new orders among move-up and active adult buyers were higher by 3% and 14%, respectively, over the first quarter of last year.

Net new orders among first-time buyers decreased by less than 1% from Q1 of last year. By buyer group, net new orders in the first quarter consisted of 38% first-time, 39% move-up, and 23% active adult. In 2025, net new orders were 39% first-time, 40% move-up, and 21% active adult. Net new orders benefited from land investments made in prior years as we grew community count across all buyer groups. Home sale revenues in the first quarter were $3.3 billion compared with $3.7 billion last year. Lower home sale revenues for the period were the result of a 7% decrease in closings to 6,102 homes in combination with a 5% decrease in average sales price to $542,000.

ASP was down mid-single digits across each buyer group and reflects the generally competitive conditions and elevated incentives that exist in many markets across the country. By buyer group, closings in the first quarter break down as follows: 38% first-time, 39% move-up, and 23% active adult. This compares with a prior-year closing mix of 38% first-time, 41% move-up, and 21% active adult. Based on sales and closings in the period, at the end of Q1, our backlog was 10,427 homes with a value of $6.5 billion. We ended the first quarter with 14,090 homes in production, of which 6,349 were spec homes.

As Ryan highlighted, and consistent with our stated objective, we lowered total spec inventory by almost 900 homes from 2025. At quarter end, specs accounted for 45% of homes under construction. Of the specs under production, there were 1,515 finished spec homes, which is a decrease of nearly 500 homes, or 24%, in just the past 90 days. At this level, we are in our target range of having an average of one to 1.5 finished specs per community. Based on the homes under construction and their stage of production, we expect to close between 6,700 and 7,100 homes in Q2 2026.

This keeps us on track with our previous guidance on closings, in the range of 28,500 to 29,000 homes for full year 2026. Consistent with the guide we provided on our last earnings call, given land investments made in prior years, we expect year-over-year community count growth of 3% to 5% in each of the remaining months of 2026. Given competitive market conditions and our belief that incentives will remain elevated, we expect the average sales price of second quarter closings to be in the range of $540,000 to $550,000. For full year 2026, we reaffirm our previous guidance of ASP of $550,000 to $560,000 as we expect a higher mix of build-to-order closings in the third and fourth quarters.

For the first quarter, we reported gross margin of 24.4%, which is down from 27.5% in 2025. The year-over-year decline in gross margin primarily reflects higher incentives, which were 10.9% of gross sales price in Q1 2026. This is an increase of 290 basis points from last year and is up 100 basis points sequentially from Q4 2025. As we are getting the question more frequently of late, I would note that within our Q1 home sale cost of revenues is approximately $6 million, or 20 basis points, associated with land impairments.

Based on quarterly testing, impairments were triggered in two communities and are reflective of today's competitive market dynamics in combination with our ongoing efforts to clear excess spec inventory, particularly finished specs. I am pleased to report that, thanks to a lot of outstanding work by our construction and procurement teams, Q1 house costs were down 5% from the first quarter of last year, to $75 per square foot. Savings were led by lower lumber costs, but we have also achieved savings across a wide array of building products and services. Based on anticipated closing mix and current selling conditions, we expect second quarter gross margin to be in the range of 24.1% to 24.4%.

I would note that we expect Q2 gross margins to be the low point for 2026. We are forecasting gross margins to recover in the back half of the year as we benefit from increased closings of higher margin active adult and build-to-order homes. As such, we maintain our guide for full year 2026 gross margin to be in the range of 24.5% to 25%, although likely toward the lower end of the range. First quarter homebuilding SG&A expense of $380 million, or 11.5% of home sale revenues, compared with $393 million, or 10.5%, in Q1 of last year.

On a dollar basis, SG&A expense in the quarter was down $13 million from last year, though we lost leverage given fewer home closings and revenues in the period. First quarter SG&A expense was in line with prior guidance, so we are maintaining our guidance for full year 2026 expense to be in the range of 9.5% to 9.7% of home sale revenues. Our Financial Services operations reported first quarter pretax income of $13 million, which is down from pretax income of $36 million in the first quarter of 2025. Financial Services pretax income in the first quarter was impacted by lower homebuilding volumes and reduced capture rate along with lower net gains from the sale of mortgages.

Mortgage capture rate in the period was 85%, compared with 86% last year. First quarter pretax income for the Group was $449 million. In the period, we recorded a tax expense of $102 million, or an effective tax rate of 22.8%. Our Q1 tax rate reflects the benefits of stock-based compensation and federal tax credits. Looking out to the remainder of the year, we continue to expect our tax rate to be approximately 24.5%. Our expected tax rate does not take into consideration any discrete period-specific tax events that might occur. PulteGroup, Inc.'s net income for the first quarter was $347 million, or $1.79 per share.

In the comparable prior-year period, the company reported net income of $523 million, or $2.57 per share. Earnings per share for the first quarter were calculated based on 193 million diluted shares outstanding, which is down 5% from the prior year. In the first quarter, we repurchased 2.4 million common shares for $308 million, which brings total repurchases for the trailing 12 months to 10.3 million common shares for $1.2 billion. In a separate press release we issued this morning, we announced that our board authorized an additional $1.5 billion for share repurchases, which brings total availability to $2.1 billion. Along with returning capital to shareholders, we continue to prioritize investing in the growth of our operations.

In the first quarter, we invested $1.3 billion in land acquisition and development, which was evenly split between the two activities. We ended the first quarter with 229,000 lots under control, which is down approximately 5,000 lots from 2025. We remain focused and disciplined in our land activities, as we look for opportunities to grow our business while achieving acceptable risk-adjusted returns and managing overall portfolio risk. After 24 months of variable housing demand and limited opportunities for price appreciation, land inflation has started to ease. We are seeing land prices stabilize in many parts of the country, and even move lower in individual deals in a handful of markets.

Every land deal is different, and A locations are still in demand, but we are finding more opportunities to negotiate improved land terms, be it the price, the timing, or both. In the first quarter, we issued $800 million of senior notes split equally in tranches of five and ten years. We used approximately $600 million of the proceeds to repay existing notes with the remaining $200 million to be used for general corporate purposes. Inclusive of these transactions, we ended the first quarter with a debt to capital ratio of 12.3%. Adjusting for the $1.8 billion of cash we held at quarter end, our net debt to capital ratio was effectively zero.

Given current market dynamics, and our expected 3% to 5% growth in community count, we are projecting land acquisition and development spend of $5.4 billion in 2026. Assuming this level of land spend and the expectation that house inventory will increase commensurate with an increasing level of build-to-order home sales, we would expect 2026 cash flow generation to be approximately $1 billion. Overall, it was another very productive quarter for the company. Now let me turn the call back to Ryan. Thanks, Jim.

Ryan Marshall: Before opening the call to questions, I will offer a few additional comments on demand conditions in the quarter. Given everything that is happening in the world, demand has actually held up better than might be expected and could certainly improve if global tensions eased and interest rates came back toward 6%. This would be highly consistent with the increased buyer activity we saw developing early in the first quarter when mortgage rates dipped below 6%. Consistent with trends we experienced in 2025, the pockets of home buying demand strength and softness did not change dramatically. Home buying demand in our Northeast, Southeast, and Florida markets generally remained positive.

First quarter demand in the Midwest was more variable across the markets than we had been experiencing. That being said, the weather conditions were a bit more extreme, so we will have to see how the trends progress over the next couple of quarters. As I highlighted earlier, our Florida teams continue to operate at a high level as we benefit from a strong land pipeline and experienced leadership teams. Looking out to our Texas and West markets, overall demand trends remain slower relative to the rest of the country, but I would suggest they may be finding more stable footing. Between ongoing pricing actions and incentives, the markets are finding clearing prices where transactions can happen.

We still have work to do in clearing some final spec inventory in California and Washington, but I am hopeful we are getting to the end of this tunnel. One final comment I would share on buyer demand: well-positioned communities that offer the right product and a compelling value equation to the consumer are selling homes. From Boston to Naples, and Raleigh to San Jose, consumers are looking for the opportunity to buy homes that work for their state of life and their financial capabilities. Our job is to make sure PulteGroup, Inc. communities meet the requirements. Let me close by thanking the entire PulteGroup, Inc. organization for the great first quarter operating and financial results the company delivered.

I also want to recognize our team for their tireless efforts to deliver a superior home buying experience. I am proud to report that our customer surveys are now showing PulteGroup, Inc.'s Net Promoter Score, as measured one full year after the initial delivery of the home, has risen to a score of 65. To put this in perspective, these results place PulteGroup, Inc. among such well-known service leaders as Apple, Google, and Chick-fil-A. It is this type of commitment to our customers and to each other that has PulteGroup, Inc. again ranked among the Fortune 100 Best Companies to Work For. This marks Pulte's sixth year on this prestigious list.

Our ranking on this list has never been a goal, but rather an outcome of the tremendous culture we work hard to maintain inside of our organization. Now let me turn the call over to Jim Zeumer.

James Zeumer: Great. Thanks, Ryan. We will now 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. Kelvin, please open the call to questions.

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. As we enter Q&A, we ask that you please limit your input to one question and one follow-up. As a reminder, to ask a question, please press the star button followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 1 again. Your first question comes from the line of John Lovallo of UBS. Please go ahead.

John Lovallo: Good morning, guys. Thanks for taking my questions. The first one is, can you just help us with some of the moving pieces in the gross margin walk from roughly 24.4% in the first half to 24.5% to 25% for the full year? I mean, it certainly seems like closing mix is going to be a good guy; sticks and bricks could be a good guy; land may be a little bit better than it had been. Then the incentive load, are you still assuming sort of 10.9% carries throughout the year?

Ryan Marshall: Yeah, John. I think you have got all the right pieces there. We are assuming a higher incentive load, but we would expect it to likely come down driven by a couple of factors. One would be more build-to-order and more move-up and active adult business, where we tend to incentivize less. We have also cleared a lot of the finished spec inventory, which we were carrying with a higher incentive load.

So, while we would expect the overall environment to remain competitive and the elevated incentive load to stay, the mix of product and consumers that we have coming through could potentially bring the overall number down, which is why we are guiding to the full year staying within our range. You will note that Q2 is going to be a low point for a couple of reasons. One of the big reasons is that a lot of the spec inventory that we sold in Q1 at a higher incentive load are closing—some closed in Q1, and you have got a bunch more that are closing in Q2.

John Lovallo: Okay. Yeah. That is really helpful. And, maybe just kind of echoing what you said, Ryan, before. It seems like the spring has actually been reasonably good considering a lot of factors in the market. Most builders have reported orders that are up year over year, indicating a little bit of a better spring despite this background of geopolitical headwinds.

The question is, if we do, in fact, get some kind of resolution here to the conflict in the Middle East, do you think we could still have a really good spring selling season and, on top of that, is there a chance that it could get extended a bit maybe into June just given shorter cycle times for many of the builders?

Ryan Marshall: Hard to know whether it gets extended or not, John. I think ultimately the consumer will have to decide that. But as I tried to highlight in my prepared remarks, when rates came down to 6%, maybe even a touch below 6%, things were moving along really well. Despite the things that are going on globally, it is still, I think, a very good spring selling season, and we are pretty pleased with what we have delivered and how it has set us up for the full year.

I can promise you that we did not have any of the current geopolitical disruption on our bingo card as we laid out our full-year guide and set expectations for how the year would play out. But as we look at the actual numbers for Q1, we are in line with where we wanted to be and where we thought we were going to be, which is the big reason that we are reaffirming our full year. So, all things considered, I am incredibly pleased with how we performed. I am really pleased with how the consumer is behaving. And I think there is bias to the upside.

If things can get resolved and rates were to come down a little bit, I think things could get even a little bit better.

John Lovallo: That is encouraging. Thank you.

Operator: Your next question comes from the line of Alan Ratner of Zelman. Please go ahead.

Alan Ratner: Hey, guys. Good morning. Thanks for all the detail, and nice job in a tough market. You know, Ryan, you alluded to this several times, but I was hoping to dig in a little bit deeper on the incentive trends. Specifically, can you talk through the difference in incentives you offer both across price points as well as BTO versus spec? I see they were up sequentially and year over year across the averages, but I am curious if there is any notable difference across those price points or BTO versus spec?

Ryan Marshall: Yeah, Alan. There is definitely more incentive on spec broadly. And then there is more incentive as a percentage on first-time spec. I tried to provide some nuance around that in my comments around the K economy. That first-time entry-level buyer is the most challenged by affordability, and that is where we have tried to lean in more in order to solve the affordability equation. I think we have done it pretty effectively. And then when you move into the move-up and the active adult buyers, we are incenting there as well; the types of incentives vary. There is still a fair number of incentives that are going into a forward commitment program that is specifically targeted to dirt sales.

So it is not as low as a 30-year fixed-rate mortgage that we would offer on a spec that is complete, but still in the low- to mid-5% range and materially below the current market. And it is locked in for the entire duration of the build cycle. So there is a lot of value that we think is being offered there, and there is a cost to that, but that is factored in the incentive load. So all things considered, we do still expect incentives to remain higher. But given the mix shift in buyers as well as spec to build-to-order, we think the overall incentive load for us as a company will come down.

Alan Ratner: Great. Second, I was hoping to ask about your land book. Land banking has become a bit of a hot button topic in the investment community over the last couple of months. You have seen a nice uptick in your share of lots held off-balance sheet, but I know that includes a lot of different things—traditional land options, land banking. Can you quantify for us your exposure to land banking and talk more broadly about how your land banking deals are generally structured? Are you making periodic interest payments? Are they more kind of on the back end in a PIK fashion? Any color you can give would be great. Thank you.

Ryan Marshall: Sure, Alan. Happy to go into it. I am going to ask Jim to give you some of the specific details. But before he does, philosophically, the way we have structured our land book for the better part of six or seven years is we want as many lots as we can possibly control with underlying land sellers. And today, that represents well over 50% of our controlled land, controlled with options with underlying land sellers. In our move to go from 50% controlled option to 70%, we knew we were going to need to incorporate some element of land bank, and we have done that.

We have maintained a diversified book of land banking partners, which I am very pleased with—the number of partners and the alignment that we have with those partners. And then our overriding focus has been we want risk transfer. So we are looking for the ability to walk away in the event that things go sideways on a single individual transaction. So this overarching belief or idea of risk transfer and risk mitigation is the entire foundation of our land banking portfolio. With that, I will have Jim share a few more details with you.

James Ossowski: Sure. Thanks, Ryan. Alan, I will fill you in on a couple of things. As it relates to land banking, of the 229,000 lots that we control, we have about 18,000 with land bankers, so it is about 8% of the book of business. To Ryan's point, what we really want to do is get underlying optionality with land sellers directly. Of the 127,000 lots that we have under option, over 85% of those are with underlying land sellers. So again, it is the vast majority. That is what we task our teams to do—let us go for that first and foremost.

If we can supplement it with banking, we will, but we would love to get a deal with people on the ground first.

Alan Ratner: Great. That is really helpful. And, Jim, if you have it, of those 18,000 lots with land bankers, can you give a little bit of detail on how those are structured either in terms of average deposit and what the kind of carry is?

James Ossowski: Most bankers that are out there today usually request about a 15% deposit on those. And then rates will be in the low double-digit range typically. To give you context, our deposits as a percentage of future purchases is only 7.5% for the whole company, and about $7,000 per unit for the whole company. So the vast majority are at very low deposits with underlying land sellers, but the bankers carry a little bit richer mix.

Alan Ratner: Great. Really appreciate the detail, guys. Thanks a lot.

Operator: Your next question comes from the line of Stephen Kim of Evercore ISI. Go ahead.

Stephen Kim: Thanks very much, guys. Appreciate all that color, particularly on the land side. I wanted to talk a little bit about your free cash flow guide. I believe you said about $1 billion. Now the way I am modeling things, it seems like your net earnings are going to be much higher than that. So I was wondering if you could talk about the free cash flow conversion and what you see as being offset to the net income this year. Is it that you anticipate ending with a meaningfully higher owned land supply than you currently have, or is there something else going on?

James Ossowski: Great question, Stephen. There is not an assumption that we have any significant increase in our owned land supply. We have certainly been working down our house inventory in recent quarters as we moved our spec down, but there is an anticipation there will be a little bit more build-to-order that is going to come in the back half of the year as we set ourselves up for 2027. So it is really on the house side, where we see a little bit of an incremental increase.

Stephen Kim: I will take that as a real positive, obviously, because it suggests that this is just kind of a temporary thing and the free cash flow conversion should improve once you get over this build of BTO. First, is that in fact the way you see things? And where do you see the BTO mix of, let us say, orders or maybe closings finally reaching your 60% level? Is that something that could be reached by the end of this year, or is this something that is going to take well into next year to accomplish?

Ryan Marshall: On the cash flow, the conversion of net income into cash flow is a big focus for us. We believe it is a very meaningful and powerful driver of value for shareholders. I think Jim provided some nice breadcrumbs in terms of where we are going and why it is at a billion. Hopefully there is a slight bias to the upside this year, but as we rebuild that inventory on build-to-order, I agree with you—this is a good thing. It means we are selling homes, and we are selling homes that are dirt. I do think it is a temporary situation. As we move into next year, you would see better, more normal conversion rates from us.

As it relates to build-to-order, the target mix is 60/40. We made great progress in Q1. I would expect that to continue as we move through the year. The fact that we were able to reduce so much spec inventory in Q1 is also a powerful driver in that journey. I think it might take a tad longer than the end of this year, but not much beyond Q1 of next year. We will keep you updated as we move. We are going to do this in a measured, balanced way, but we are also not going to drag it out forever.

Operator: Your next question comes from the line of Anthony Pettinari of Citi. Please go ahead.

Anthony Pettinari: Good morning. You talked about stick and brick costs—I think down 5%—and it sounds like lumber was a good guy there. Lumber has been coming up for the last month and a half. Can you just remind us of the lag in which you would see that? And then related question: with conflict in the Middle East, it seems like we are seeing metal prices and petchem-based building material price hikes out in the market. What would be the lag that you would see some of that in your stick and brick costs?

James Ossowski: Great question. First, as you noted, we had a really good first quarter. Our procurement teams have done a great job; house costs were down 5% year over year. As we look out over the balance of the year, we want to reaffirm that our house costs would be flat to slightly down. We still believe that, and that is baked into our guide. On your question on lumber, when will we see that? Usually two quarters out, because the way that we buy the lumber today, those are going to turn into closings two quarters out from now. It inflected higher in recent weeks. The other thing that we are keeping an eye on are fuel costs.

We are monitoring that. At this point in time, we have done a good job—when you hear of things like fuel surcharges, we have combated those so far—but in recent weeks, as the cost of fuel started to come down a bit from the highs, we are keeping an eye on it. Again, I will go back to what I said: Q1 was a really great one, and even with some of those headwinds for lumber, we still believe we can be flat to slightly down for the remaining quarters.

Ryan Marshall: And, Anthony, in terms of metal and some of the other related costs, we would see that being later in the year before we would see an impact. One of the things that our procurement teams have worked with our suppliers and trade partners on is: let us just take a mock-up of patience here. We are in a conflict. If it continues, there will be real cost increases. But we are not going to overreact to the whipsawing of markets up and markets down based on what is happening on a day-to-day basis from the conflict.

Anthony Pettinari: Okay. That is very helpful. Just one quick one on incentives. Without cutting it too finely, were incentive levels fairly steady for the three months of the quarter and maybe the exit rate into April? Or was there any kind of increase or decrease you would call out there?

James Ossowski: They were fairly steady across the quarter. It really got down to a community-by-community basis of what we had to offer to move specs, but again, pretty consistent through the quarter.

Anthony Pettinari: Okay. That is very helpful. I will turn it over.

Operator: Your next question comes from the line of Michael Rehaut of JPMorgan. Please go ahead.

Michael Rehaut: Thanks. Good morning, everyone. Thanks for taking my questions. Just a clarification on the incentive question. Jim, when you said kind of stable throughout the quarter, was that on closings or orders? And when we think about a slight dip down in 2Q gross margins, I believe you are saying that is from the fuller impact of the reduction of spec that was transacted three, four, five months ago. I am trying to get a sense of how incentives are still impacting 2Q gross margins from prior conditions and if the comments you just made were more on current market conditions on orders?

Ryan Marshall: Mike, no offense, but I think you mixed a few things there. What we talked about is, in Q1, there were spec sales that had elevated incentives. Some of those closed in Q1; some of those are going to close in Q2. It is part of the reason that we are saying that is the low point, which is impacting the guide that we are providing for Q2, and we would expect it to go back into the range that we have guided to for the full year. In terms of whether it was closings or sign-ups, it is probably slicing it a little too thinly.

We report the incentives on closings—that is the approach we have been taking, and we are going to stay consistent with that. The incentive load on future backlog and future closings is embedded into our guide. As I have said a couple of times, we are actually optimistic that while the overall environment will stay elevated, we can see incentives come down because of buyer mix and brand mix.

Michael Rehaut: Okay. That is great, Ryan. Shifting to the strength that you saw in Florida, I would love to dive into that a little bit. Obviously it was a bright spot for you this quarter. Can you help us understand what is going on in Florida from a broader market perspective in terms of inventory—both on new and existing homes—and how much you think that contributed to the stronger results that you saw this quarter?

Ryan Marshall: We are very happy with most of what we are seeing out of Florida, and this has been the third or fourth quarter in a row where we highlighted the strength of the Florida market. If you went back a year ago, I think we were an outlier, outperforming a market that was arguably a little tougher. Florida has continued to get better over the last 12 months, and it is at the best point that we have seen it in a while. In addition to that, the strength and positioning of our communities and the expertise of our teams there have allowed us to outperform what is a pretty healthy market right now. We are happy about Florida.

It is not without its challenges. Insurance costs are high. Affordability is stretched there, just like it is in a lot of other places. There have been some recent headlines about affordability in Florida, and I think that is because Florida historically was very affordable. There are some attributes of Florida that are not changing: it is a pro-growth, pro-business state that has a lot of great jobs, a more diversified economy than it has ever had, and no state income tax. So I think there are a lot of reasons why people still want to go to Florida, but I can also understand and appreciate why it is maybe not the best fit for others.

Maybe to sum it up: we love our Florida business, and I think this quarter's results are a good demonstration of that.

Michael Rehaut: And any comments on the inventory trends across the major markets? That would be very helpful.

James Ossowski: We have seen inventory come down in certain locations. Some of the more affordable parts of the state—North Port, Lakeland—are still a little bit elevated, but we have been really pleased that both new and existing have come down in the places where we do business.

Operator: Your next question comes from the line of Michael Dahl of RBC Capital Markets. Please go ahead.

Michael Dahl: Morning. Thanks for taking my questions. I wanted to first ask about the mix dynamics in the back half of the year. From an order standpoint, we see that mix evolving, with move-up and active adult outperforming first-time. In terms of what you are projecting on the margin in the back half, how much of that do you already have visibility on based on what you have sold over the past handful of months versus an assumption of what is left to sell in the next several months and what that mix is going to look like?

James Ossowski: I would tell you it is based on what we are seeing on the sales floors today and what we have out there. Ryan highlighted our Florida business has done really well. Our Northeast and our Southeast businesses, which carry a higher margin profile, as well. So we are looking at what we sold in Q1 and making predictions about what goes out over the balance of the year. There are a lot of parts and pieces that go into it, but the build-to-order mix and the active adult are the two biggest components that will drive the increase.

Michael Dahl: Relatedly, we look at starts versus sales and your comments about doing a pretty good job taking down finished spec in the quarter. It sounds like there is a little left to go. In the current environment, if you are within that one to 1.5 per community band on finished spec, are you trying to get down to the lower end right now given what you are seeing in the market and how you think about optimizing profitability? And how does that tie into how we should think about your prospective starts versus order pace?

Ryan Marshall: The way I would guide you on that is that we are inside the target range that we want for specs, and we are very comfortable operating at the lower end or the higher end of that range. We want to be inside that range. Beyond that, where we are at in the range will be driven by specific community-level decisions and the type of buyer we are going after and whether it is a true entry-level or more of a move-up type community. That is the reason we give a range on that. We have said we are not going to chase volume. We are going to get our company back to a build-to-order model, which we are doing.

We made excellent progress. We have reaffirmed the full-year number. And we are going to be matching starts to sales cadence. So the starts that you saw in Q1 were reflective of the sales that we had in Q4. You will see our starts in Q2 more closely match the sales that we just had in Q1. That is the kind of build that you want to see from us. We are very comfortable with where we are at on what we will start in Q2 and how that sets us up for the full year.

I will note a big reason why we have been able to do it this way this year is because we have gotten build times—cycle times—back down to pre-COVID cycle times of less than 100 days. There are a lot of things that are working exactly the way that we have designed our operating model to work.

Operator: Your next question comes from the line of Sam Reid of Wells Fargo. Please go ahead.

Sam Reid: Thanks, everyone. Wanted to drill down a little bit more on ASP. I believe in the prepared remarks it sounds like ASP was down mid-single digits across all buyer cohorts, which would include move-up and active adult. It also sounds like based on your answer earlier in the Q&A that you might have stepped up some forward rate commitments to those move-up and active adult buyers. Are you also making any surgical price cuts in move-up and active adult as well that we should be mindful of?

Ryan Marshall: We look at pricing all the time and make sure that we are competitively priced. Discounts, I think, are an important thing psychologically for buyers today, so we try to have the right relationship between headline price and what incentives are—they are tethered together. There are some communities where we have taken price cuts, and Jim highlighted in his remarks that has been a big driver in the communities where we have had to take impairments. It has typically been the price cuts. Fortunately, it is just two communities, and it was a fairly small number. Hopefully that is indicative that we have made very few top-line major price reductions.

Sam Reid: Switching gears to the Financial Services line item. I noticed Financial Services pretax was lower, and I believe one of the reasons you called out was lower gains on mortgage sales. Can you talk about the moving pieces behind that lower gain and whether it is also a function of perhaps a step up in adjustable-rate activity?

James Ossowski: Great question. Let me start by saying we are very pleased with the operating performance of our Financial Services organization. They do a great job supporting our homebuilding operations and supporting our customers. On ARMs, they were 9% of all closings in the first quarter versus 7% for all of last year—so a little bit higher, but nothing meaningful. Year over year, a couple of things to point out—and some of this is just timing, and we will expect improvement over the balance of the year. Homebuilding volumes were down. We noted lower net gains on the sale of mortgages as rates ticked up on us; we had lower value ascribed at the time that we do our rate locks.

We also had slightly higher expenses as we have invested in people and technology for the year. Again, I think they performed very well in the first quarter, and I would argue it is a little bit of timing, and we will continue to see improvement over the balance of the year.

Operator: Your next question comes from the line of Analyst. Please go ahead.

Analyst: Good morning, everyone. Thank you for taking the questions. Maybe just to pull on the thread of the build-to-order mix. I think you said from an order perspective, it was maybe 3% higher in Q1 relative to last year. My question is on gross margin. I think you are implying in the second half maybe the gross margin is up 75 basis points, give or take, relative to the first half. It seems the build-to-order closings mix would need to be fairly meaningfully higher if that is the main driver. What exactly is the build-to-order closings mix in the second half, and is there anything else that supports that level of sequential margin improvement?

James Ossowski: You will have both the richer mix of build-to-order and, as Ryan highlighted and I said in my prepared comments, as we have gotten more of that finished spec inventory off the books, that will be less influential as you get out to Q3 and Q4. So a little bit of both—build-to-order and then less of these finished specs that came through in Q1 and Q2 for us.

Ryan Marshall: It is not as if we have got a gigantic chasm to cross from where we are today to where we are going to be. Q1, we were at 24.4%. We are going to be in that same kind of zip code for Q2 with a heavy load of finished specs that came with heavy discounts. And then to go back to our full-year targeted range of 24.5% to 25%. It is not as if there have to be colossal shifts in margin performance in order to be in the guide that we have given.

Analyst: Understood. Thank you. And then secondly, you mentioned easing land prices. How do you think about the timing of what you are seeing in the land market today for when it actually flows through your P&L? And is there a rule of thumb or broad average for Pulte on land costs versus development costs as it pertains to the final lot cost that you ultimately see in your cost basis?

Ryan Marshall: The general rule of thumb is 50/50—some markets go 60/40—but a general rule of thumb at 50/50 is pretty good. In terms of timing from when we contract a piece of land to when you start seeing it flow through the P&L, it is typically in the 18- to 24-month range, depending on how lengthy the entitlement process is. So anything that we are contracting today at lower cost, you are well into 2027—late 2027 and beyond—before you are going to see the benefit of the lower land cost.

Operator: Due to our limited time, your last question will come from the line of Trevor Allinson of Wolfe Research. Please go ahead.

Trevor Allinson: Hi. Good morning. Thank you for taking my questions. First one is on your approach to share repo here. You have got the new authorization out. Your net leverage is close to zero. I think you mentioned earlier that the cash flow headwind from more BTO is somewhat temporary in nature. I want to gauge your appetite for accelerating share repo here, maybe ahead of your cash generation, and then your views overall on leverage versus the roughly 0% you are at currently?

Ryan Marshall: Trevor, I would reiterate that we have been incredibly disciplined on capital allocation. Our focus is on investing in our business. That is our number one priority. It is what our shareholders care about. It is what they have entrusted us to do, and that is how we are structuring the business. Then we are paying a dividend, and we are using the share buybacks as a way to return excess cash that is being generated by a really well-running business back to shareholders in a very tax-efficient way. Do we have the ability to do a levered buyback, which I think you are suggesting? Sure, we have got the leverage capacity; you could do it.

We do not think it is in the best interest long term of the company. As it relates to leverage—and we have talked about this for the better part of the year—a debt-to-cap ratio will be an outcome as opposed to a targeted goal. We are going to decide the cash needs of the business based on how we are going to grow it: how much land we are going to buy, how much land we are going to develop, how much inventory, etc. We will see how much cash we have, we will see how much debt we need to raise to do that.

That is going to be the driver of our debt-to-cap leverage ratios, as opposed to saying we want to be a set number.

Trevor Allinson: That makes sense. Thanks for all that color, Ryan. Very helpful. Second one, just on the Midwest. It has been a bright spot for you guys the last couple of years. You mentioned some weather impacts there, maybe also some comp dynamics just given it has been stronger. Are you starting to see any change in relative performance in the Midwest?

Ryan Marshall: We are still really happy with our Midwest performance. It has been great and continues to be very good. There were a couple of markets that maybe did not do quite as well as what they had been doing, but it was not widespread across the entire Midwest. For the couple of markets that are maybe a tad slower than what they had been, we are going to keep watching them. The Midwest—and the Northeast, for that matter—actually had a real winter for the first time in a long time. Boston, as an example, I think had snow four or five times. It has probably been at least four or five years since they have had a winter like that.

It was a tougher winter season than what we have historically seen. Our Midwest business also tends to be more move-up and active adult, which, as we have highlighted, continues to be one of the stronger consumer groups.

Trevor Allinson: Thank you for all the color, and good luck moving forward.

Operator: That concludes the Q&A session. With that, I will now turn the call over to James Zeumer for final closing comments. Please go ahead.

James Zeumer: Thank you. We appreciate everybody's time this morning. I am sorry we were unable to get through all the questions in the queue, but we will certainly be available for the remainder of the day, and we will look forward to talking to you on our next earnings call.

Operator: Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect your lines.

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