Meritage Homes MTH Q1 2026 Earnings Transcript

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Date

Thursday, April 23, 2026 at 11 a.m. ET

Call participants

• Executive Chairman — Steven J. Hilton
• Chief Executive Officer — Phillippe Lord
• Executive Vice President & Chief Financial Officer — Hilla Sferruzza

Takeaways

• Home deliveries -- 2,967 homes closed in the quarter, as disclosed by Steven J. Hilton.
• Home closing revenue -- $1.1 billion for the quarter, 17% lower than the prior year due to both fewer closings and a 5% lower average sales price (ASP).
• Net income per share (EPS) -- Diluted EPS of $0.82, a decrease of 51% year over year from $1.69.
• Gross margin on home closings -- 17.5% for the quarter, 400 basis points below the 21.5% to 22% range in the prior year, affected by higher incentives and lot costs partially offset by improved direct costs, lower compensation expense, and cycle times.
• Book value per share -- Increased 6% year over year as of March 31, 2026.
• Community count -- 345 active communities at quarter end, up 19% year over year and 3% sequentially.
• Home sales orders -- Orders were 5% lower year over year, driven by an 18% decline in average absorption pace, nearly offset by a 17% increase in average community count.
• Average sales price on orders -- $382,000, down 5% from the prior year, reflecting increased incentives and geographic mix shifts.
• Spec inventory -- Ended with 4,700 spec homes, down 30% year over year and 19% sequentially, with 14 specs per store, representing the lowest level since early 2022.
• Backlog conversion rate -- Achieved 254%, well above the long-term target of 175% to 200%.
• SG&A expense ratio -- 11.8% of home closing revenue, up from 11.3% in the prior year due to lost leverage on lower revenue and increased sales and marketing spend per sale.
• Share repurchases -- Utilized $130 million to buy back over 1.8 million shares in the first quarter, exceeding the quarterly programmatic target of $100 million and representing nearly three times the prior year repurchases.
• Dividend increase -- Quarterly cash dividend raised 12% to $0.48 per share, totaling $32 million for the quarter.
• Land spend -- $326 million spent in the quarter, down 30% year over year.
• Lot inventory -- Controlled a total of approximately 75,500 lots at quarter end, equating to 5.2 years' supply based on trailing twelve months' closings.
• Off-balance-sheet land structure -- 30% of lot inventory is optioned; approximately 10% with land bankers, with no cross-collateralization and walk-away ability for Meritage Homes.
• Second quarter 2026 guidance -- Projected 3,650-3,900 home closings, home closing revenue of $1.37 billion to $1.47 billion, gross margin around 18%, effective tax rate of 24.5% to 25%, and diluted EPS of $1.18 to $1.46.
• Capital returned to shareholders -- $162 million via buybacks and dividends during the quarter, up from $76 million in the prior year, equaling 295% of quarterly earnings.
• Balance sheet strength -- Ended the quarter with $767 million in cash and a net debt-to-capitalization ratio of 17.4%.

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Risks

• Steven J. Hilton identified that "military operations in Iran commenced in February, increasing interest rates, gas prices, and inflation, all of which negatively impacted consumer confidence."
• Hilla Sferruzza stated, "Our current land basis is primarily comprised of higher-cost land vintages from 2022 through 2024 and will continue to negatively impact margin in 2026."
• Gross margin pressure remains due to "increased use of incentives, higher lot costs, and lost leverage," along with the outlook that only "some margin relief will start at the tail end of 2027."

Summary

Meritage Homes (NYSE:MTH) reported a sharp decrease in revenue and earnings for the first quarter, as lower absorption rates and increased incentives pressured margins and diluted EPS. Management emphasized strategic growth in community count and disciplined capital allocation, with the quarter's capital returns to shareholders at landmark levels. Guidance for the next quarter anticipates stable gross margin and an increase in closings, with continued focus on inventory efficiency and flexible land strategy.

• Management reiterated that backlog conversion reached 254%, citing improved cycle times and a strong emphasis on their 60-day closing guarantee.
• Company leadership confirmed the effective use of off-balance-sheet land structures while maintaining strict deal-by-deal selectivity and walk-away protections.
• Phillippe Lord stated, "It is a lot easier to get to our long-term goal around 22.5% at four net sales per month. We are much more efficient at that level. We leverage our fixed and variable overhead more meaningfully and are able to navigate vertical cost environments more effectively."
• Hilla Sferruzza noted that customer credit quality metrics, such as FICO, DTI, and LTV, remain consistent with historical averages and have shown little movement despite macroeconomic volatility.
• Management expects any significant gross margin recovery to be contingent on improvements in land cost basis and macro stabilization, likely not materializing before late 2027.

Industry glossary

• Spec home: A home built without a committed buyer, intended to be move-in ready and sold to purchasers seeking quick occupancy.
• Absorption pace: The average number of net home orders per community per month, indicating sales velocity.
• Lot option/optioned lots: Land that is controlled via a purchasing option, not owned outright, allowing flexibility to exercise or abandon before buying.
• Backlog conversion rate: The ratio of homes closed relative to the pre-existing backlog, reflecting operational efficiency in converting orders to revenue.
• Land bank/land banker: A third-party entity that purchases land and subsequently offers builders options or purchase contracts, often keeping the assets off the builder's balance sheet.

Full Conference Call Transcript

With us today to discuss our results are Steve Hilton, Executive Chairman, Phillippe Lord, CEO, and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes Corporation. We expect today's call to last about an hour. A replay will be available on our website later today. I will now turn it over to Mr. Hilton. Steve?

Steven J. Hilton: Thank you, Emily. Welcome to everyone joining today's call. Today, I will begin with a brief overview of market trends and highlight our first quarter results. Phillippe will then discuss our strategy and provide an operational update. Finally, Hilla will review our financial performance and share our 2026 forward-looking guidance. Entering 2026, we were cautiously optimistic that lower interest rates and pent-up demand would translate into a solid performance for homebuilders, balanced by more muted volatility. As you well know, a few weeks into the year, many of our markets were impacted by a severe winter storm, where sales activities were halted for several days.

As we were starting to recover from the lost days of sales, military operations in Iran commenced in February, increasing interest rates, gas prices, and inflation, all of which negatively impacted consumer confidence. Despite these challenges, our first quarter 2026 sales orders totaled [inaudible], as our slower absorption pace was almost fully offset by our increasing community count. While we still believe that long-term fundamentals for the home industry are strong, we also acknowledge that the current market conditions are causing potential homebuyers to hesitate and that capturing demand for the near term will require higher-than-anticipated use of incentives.

Looking to our operations, our 60-day closing guarantee, available supply of new completed spec inventory, and year-over-year improved cycle times contributed to another quarter with an exceptional backlog conversion rate of 254%. We delivered 2,967 homes and home closing revenue of $1.1 billion this quarter. However, the slower start to the spring selling season and the increased incentives resulted in home closing gross margin of 17.5% and diluted EPS of $0.82 per share. As of 03/31/2026, our book value per share increased 6% year over year. And with that, I will now turn it over to Phillippe.

Phillippe Lord: Thank you, Steve. Given the current uncertainty in the macro climate, I am proud of the Meritage team for navigating these choppy waters. We started the year with 336 active communities, which we then grew to 345 by March 31, another company record. In the near term, we expect total volume and top-line results will largely be driven by increased community count, not higher per-store absorptions. Our first quarter 2026 ending community count of 345 was up 19% year over year compared to 290 at 03/31/2025, and up 3% sequentially compared to 336 at 12/31/2025. During the quarter, we brought on 40 new communities throughout all of our regions.

We reiterate our expectations of 5% to 10% full-year community count growth for 2026. We continue to lean into our strategy in this competitive market. Through our 60-day closing guarantee, move-in ready homes, and strong realtor engagement, we offer certainty and consistency to our customers. Despite the current headwinds that Steve mentioned, we believe that long-term demand remains supported by favorable demographics and an undersupply of affordable homes in the U.S. And when demand normalizes, our strategy and increased store count will provide a competitive advantage and allow us to increase our market share.

In volatile times, we believe keeping a strong balance sheet and a critical focus on capital allocation will place us on a solid footing when the market stabilizes. Once again, we intentionally stepped up our share buybacks, repurchasing $130 million worth of common shares in Q1, which was above our previously announced target of $100 million in quarterly programmatic spend in 2026, taking advantage of the significant discount to intrinsic value for our share price. Additionally, we increased our dividend 12% to $0.48 per share. We will continue to seek balance between growth and shareholder returns given the current market backdrop. Now turning to Slide 4.

First quarter 2026 orders were 5% lower year over year, primarily due to an 18% decline in average absorption pace which was mostly offset by a 17% increase in average community count. The cancellation rate of 11% remained slightly below the historical average of mid- to high-teens as we benefit from a quick sale-to-close process. Our first quarter 2026 average absorption pace was 3.6 compared to 4.4 in the prior year. This quarter, we again committed to finding the right balance between velocity and margin in the current macroeconomic environment and did not pursue four net sales per month where community-level market dynamics would not support it.

While over the long term we strive to be at four net sales per month in all markets, as we believe we best leverage our fixed costs at that volume, in geographies where demand is meaningfully inelastic due to affordability or competitive tension, we moderated our pace to avoid further deterioration to margins to ensure we are optimizing the underlying value of our land. ASP on orders this quarter of $382,000 was down 5% from prior year due to an increased use of incentives and discounts, as well as geographic mix shifting from the higher ASP West region into the lower ASP East region.

We saw a nice uptick in March, even though it was not quite as strong as a typical spring selling season. After a slow start, April is feeling the same as March. Consumer psychology remains fragile and can be driven by daily news announcements, but we still believe that pent-up demand will materialize once macroeconomic conditions stabilize. Moving to the regional-level trends on Slide 5. As always, sales performance was driven by local market conditions in the first quarter. While all markets required additional incentives, in some markets such as Dallas, Houston, and Phoenix, consumer demand was comparatively more elastic, where incremental volume was achievable with only small incremental incentives.

Meanwhile, other markets such as Austin, parts of Florida, and Charlotte continue to be tougher selling environments. Turning to Slide 6. We have been rightsizing our starts pace and spec inventory to align with our faster cycle times. We maintained a sub-110 calendar day construction schedule for the fourth straight quarter, allowing us to carry less home inventory without constraining availability to meet consumer demand and preferences. In Q1, we moderated starts to approximately 2,500 homes, 30% less than last year's Q1 and 6% lower than Q4.

We traditionally align our starts pace with our sales pace, but due to faster cycle times and the need to work through some inventory in certain locations, we reduced our starts pace this quarter. We expect our go-forward starts pace to more closely align with our sales expectations as we progress throughout the year. With nearly 70% of Q1 closings also sold during this quarter, our backlog conversion rate was 254%. As a result, our ending backlog declined 7% year over year, from approximately 2,000 as of 03/31/2025 to approximately 1,900 homes as of 03/31/2026. We reiterate our long-term backlog conversion target of 175% to 200%, as we expect to carry fewer specs in the future.

Internally, we look at our inventory as the combined total of specs and backlog because more than half of our deliveries consistently come from intra-quarter sales since we began our new strategy six quarters ago. We had around 6,600 spec and backlog units at 03/31/2026, 25% less than the approximate 8,800 units we had at 03/31/2025. We ended the quarter with approximately 4,700 spec homes, down 30% from approximately 6,800 specs in the prior year, and down 19% sequentially from Q4. The 14 specs per store this quarter was our lowest level since early 2022 but appropriately aligned with our current absorption targets.

This translated to a little under four months of supply, intentionally at the low end of our target of four to six months of spec supply due to the slower demand expectations and improved cycle times. Comparatively, in 2025, we had 23 specs per store or five months of supply. Although our completed spec units decreased 17% year over year, our completed specs as a percent of total specs were 46% at 03/31/2026, down from 50% in 2025, still above our target of approximately one-third complete specs. We will continue to focus on bringing this ratio down in Q2. With that, I will now turn it over to Hilla to walk through our financial results.

Hilla Sferruzza: Thank you, Phillippe. Let us turn to Slide 7 and cover our Q1 results in more detail. First quarter 2026 home closing revenue of $1.1 billion was 17% lower than prior year due to 13% lower closing volume and a 5% decrease in ASP on closings, reflecting the tougher demand environment this quarter. As Phillippe noted, nearly 70% of closings also sold in the current quarter, so the events impacting Q1 performance are already mostly reflected in our P&L.

While our closings and revenue reflect our intentional decision to limit incremental incentives and focus on both margin and pace, overall ASP on closings was still impacted by the increased use of incentives as well as the geographic mix shift towards the East region. Home closing gross margin of 17.5% for the quarter was 400 bps lower than prior year's 21.5% to 22% as a result of increased use of incentives, higher lot costs, and lost leverage, all of which were partially offset by improved direct costs, decreased compensation expense, and faster cycle times.

First quarter 2026 home closing gross margin included $2.4 million of real estate inventory impairments and $1.4 million in terminated land deal walkaway charges, compared to no impairments and $1.4 million in terminated land deal walkaway charges in the prior year. Coupled with about 20 bps from lost leverage on anticipated higher closing revenue, these impairments also impacted margins by about 30 bps. Our current land basis is primarily comprised of higher-cost land vintages from 2022 through 2024 and will continue to negatively impact margin in 2026.

Based on what we are seeing in the market today, we expect some margin relief will start at the tail end of 2027 due to some lower land basis and land development costs we have recently started to experience. In Q1, we had direct savings of nearly 5% per square foot on a year-over-year basis as we were able to flow to the income statement the lower costs from our extensive vendor negotiations. However, lumber costs have started to trend higher this quarter, and as a result of the Iran conflict, we are monitoring any potential long-term inflationary impact on oil prices.

Although we do not anticipate a notable material gross margin impact this year, our long-term gross margin target remains at 22.5% to 23.5% in a normalized market when incentives and interest rates stabilize near historical averages. SG&A as a percentage of home closing revenue in 2026 was 11.8% compared to 11.3% for 2025, despite curtailing discretionary spend. Although SG&A dollars declined year over year, we lost leverage on lower home closing revenue and had to spend more sales and marketing dollars to earn each sale. As we look specifically at external commission costs, we believe our strategic focus on partnering with the external broker is a key driver to our success.

Our broker relationships remain strong with co-broke percentages consistently in the low 90% range and a healthy percentage of our total sales volume generated by resales from our realtors, all while maintaining our external broker commission cost relatively flat as a percentage of home closing revenue year over year. With our continued investment in technology, we are driving long-term improvement through back-office automation. This will position us to operate more efficiently as closing volumes increase, supporting our continued commitment to a long-term SG&A target of 9.5%. The first quarter's effective income tax rate was 23.7% this year, compared to 23.3% for 2025.

We expect a minimal impact in 2026 after the elimination of the energy tax credit program at June 30 as our eligibility for such credits was significantly reduced starting in 2025 when the higher construction thresholds went into effect. Overall, lower home closing revenue and gross profit led to a 51% year-over-year decrease in first quarter 2026 diluted EPS to $0.82 from $1.69 in 2025. Before we move on to the balance sheet, I wanted to cover our customers' first quarter credit metrics. As expected, FICO scores, DTIs, and LTVs remain consistent with our historical averages.

Despite market volatility, we have not seen much movement in these metrics over the last year or two, validating our belief that hesitation in the market is at least partially a psychological decision versus a purely financial one. On to Slide 8. Our balance sheet remains healthy at 03/31/2026, with cash of $767 million, nothing drawn under our credit facility, and net debt-to-cap of 17.4%. As a reminder, the ceiling for our net debt-to-cap ratio remains in the mid-20% range. As we have been more selective with land deals and timing of land development, our land spend was down 30% year over year this quarter, totaling $326 million in Q1.

Given current market conditions, we are reiterating our forecasted land acquisition and development spend of up to $2.0 billion in 2026. We returned $162 million of capital to shareholders via buybacks and dividends this quarter, up from $76 million in the same period last year. We bought back over 1.8 million shares in the first quarter, or 2.7% of shares outstanding at the beginning of the year, for $130 million, nearly three times more than 2025, as we believe this was the right use of our cash under current market conditions. We repurchased the shares this quarter at an average 6% discount to book value.

With $384 million remaining available under the repurchase program, we reiterate our plan to programmatically buy back $100 million in shares for each remaining quarter in 2026, assuming no additional material market disruptions. We increased our quarterly cash dividend 12% year over year to $0.48 per share in 2026 from $0.43 per share in 2025. Our cash dividend this quarter totaled $32 million. For 2026, the $162 million of capital we returned to shareholders was 295% of our quarterly earnings. Slide 9. In 2026, we secured almost 400 net new lots under control, which included the impact of about 850 terminated lots. In 2025, we put nearly 2,200 net new lots under control.

As of 03/31/2026, we owned or controlled a total of about 75,500 lots, equating to 5.2 years’ supply of the last twelve months’ closings. In today's market conditions, we believe that this is the right amount of years’ supply of lots to meet our growth targets. We also had approximately 14,600 lots that were still undergoing diligence at the end of the quarter, which is another potential one-year supply in the pipeline that we can choose to control. When it comes to financing land purchases, we target around 40% option lots.

About 70% of our total lot inventory at 03/31/2026 was owned, and 30% optioned, compared to prior year where we had a 62% owned inventory and a 38% option lot position. As we shift more land to off balance sheet, we are doing so very slowly and cautiously, remaining hyper-focused on margin and IRR and only considering land yields with sufficient margin to absorb the additional cost, as we do not believe that all or most land today belongs off book.

While we have set 40% as our initial off-book target, our actual percentage will be solely driven higher or lower by the underlying financial metrics of each deal and its ability to appropriately bear the burden of the incremental cost. Finally, I will direct you to Slide 10. Based on current market conditions, we are updating our guidance for full-year 2026 home closing volume and revenue to at or within 5% of full-year 2025 results.

For Q2 2026, we are projecting total home closings between 3,650 and 3,900 units, home closing revenue of $1.37 billion to $1.47 billion, home closing gross margin around 18%, effective tax rate of 24.5% to 25%, and diluted EPS in the range of $1.18 to $1.46. With that, I will turn it back over to Phillippe.

Phillippe Lord: Thank you, Hilla. In closing, please turn to Slide 11. Before we conclude, it is worth reinforcing what sets Meritage Homes Corporation apart. We are a top five homebuilder focused on spec building that is supported by streamlined operations. Our go-to-market strategy differentiates us from peers and is anchored on three tenets: our 60-day closing guarantee, move-in ready inventory, and strong realtor engagement. Together, who we are and how we operate give us a competitive advantage in the entry-level space to provide homebuyers certainty and consistency. Amid today's market backdrop, our priorities are centered on balance sheet strength and disciplined capital allocation. We are maintaining a low net debt-to-cap and structuring land deals off balance sheet where appropriate.

This approach gives us flexibility to moderate land spend and accelerate the return of capital to shareholders through a combination of share buybacks and dividends. When you compare our strategy with our growing community count, faster cycle times, and disciplined cash commitment framework, we believe Meritage Homes Corporation is well positioned to capture incremental market share as demand conditions improve and normalize, and to continue creating long-term shareholder value. With that, we will now turn the call over to the operator for instructions on the Q&A. Operator?

Operator: Thank you. To remove your handset mute so others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We will take our first question from Trevor Scott Allinson with Wolfe Research. Your line is now open.

Trevor Scott Allinson: First one is on your spec count, which you noted is the lowest it has been in several years. I think we have heard other builders talk about a reduction in specs across the industry helping to take some pressure off of margins here. So, appreciating you operate a spec model, are you seeing both your lower spec count and also kind of industry lower spec count ease the margin pressure here? Is that something you expect to be supportive of margins moving forward even if demand remains choppy? And then second one, you talked about your off-balance sheet portfolio.

Can you talk about what portion of that portfolio is held by land banks versus more traditional land options or other structures? And then any detail on whether those agreements are structured with an eye on your ability to walk away, and then just generally your view on use of land banks moving forward for your off-balance sheet needs? Thanks.

Phillippe Lord: Yes, thanks, Trevor. I think that is absolutely the condition we are seeing. A lot of builders are either pivoting away from carrying as much finished inventory as they did before during the COVID and supply chain environment and are moving to reduced finished inventory, selling homes earlier in the cycle. And then some folks are pivoting more to a BTO model, which is clearing out a lot of inventory in the market.

So we saw across all of our markets less finished inventory that we were competing with, and we are optimistic as we move throughout the year that creates a better environment for margin stability on a go-forward basis, specifically for our strategy where we are focused on continuing to build specs and carry them to a later stage.

Hilla Sferruzza: I can take the off-balance sheet portion. About 38% of our total inventory controlled is off book. Of that, about one-third is with land bankers. So, all in, only about 10% of total land supply is with traditional land bankers at this point in time. As far as structure, we do not cross-collateralize. We always have the ability, if any deal goes sideways, to walk away from that deal without other hooks and implications that would make us stay in a transaction that does not structurally or financially work any longer. We are very cautious from that perspective, so the only thing at risk for us would be the deposit and any other ancillary costs.

Phillippe Lord: And the only thing I would add is, as Hilla said, it is a very small percentage with true lot financing. But because it is not cross-collateralized, working through those deals on a one-by-one basis is much easier. We have had some scenarios where we have gone back to our land bank financers and asked for some more time to stabilize the market and our inventory levels, and again, working on one deal creates more of an opportunity to do so.

Hilla Sferruzza: We addressed this in our prepared remarks. Because we are very selective at the outset as to what deals even go off book, they typically have a little bit of breathing room on the margin versus having arbitrary targets where we are forcing deals off book to hit a percentage. For us, the ability to work with our off-book partners is high since they understand the transaction and see the margin profile and are willing to work with us on terms if we need them.

Trevor Scott Allinson: Very helpful. Thanks for all the color. Good luck moving forward.

Operator: Thank you. Our next question comes from Stephen Kim with Evercore ISI. Your line is now open.

Stephen Kim: Thanks very much. I appreciate it. If I could follow up on the land bank question, can you give us a sense for roughly what percent of your land bank deals you have extended your takedown schedules? And in a typical land bank deal, if you extend, say, six months, would that drive roughly 100 basis points lower gross margin on the remaining lots versus the initial expected lot price?

Phillippe Lord: Thanks, Stephen. First, we have such a small percentage of our land book with traditional land bank lot financing that, even as you look at what percent of our deals required us to restructure—when I say restructure, maybe we needed a quarter delay in the next take to buy some time to get through some inventory or stabilize margins—for the most part, that was very small as well. Most of our deals are performing fine. We are continuing to take lots down and moving through the inventory as planned. As far as your other question, I think it is a bit of an oversimplification.

It really depends on the deal, how many lots you are buying per quarter, and the structure of the deal. In some cases, land bankers are willing to actually give you a delay for no carry just to keep you in the deal rather than taking back and owning the lots. We are seeing that with our partners today. So it is hard to answer with a single metric; it depends on your relationship and the specifics of the deal. If all things are equal and they were going to charge you for those delays, your math might be in the ballpark, but it varies.

Hilla Sferruzza: It depends on what part of the cycle you are in, how many assets you still have on book, and of course what your interest rate is. For us, good things do not get better with age. If we are asking for a hold, it is typically to rework a product lineup or to value engineer something. We are not just holding and crossing our fingers that something is arbitrarily going to get better in three to six months. That is the benefit of being very selective about what deals you put into an off-book structure in the first place.

If you cannot work a free extension, it is typically going to cost you whatever your interest burden is for that six-month hold, so there will be an implication, but 100 bps may be a little heavy.

Stephen Kim: Appreciate that. I also appreciate your comments about how there is a human component to this; it is not all just simply math. If I could also talk about your long-term gross margin target of 22.5% to 23.5%, which is quite a bit above where you are currently. You have talked in the past, Hilla, about the importance of volume in achieving that level of gross margin. Am I right to assume that target is consistent with at least a four-per-community absorption rate, or do you think there is an opportunity to hit that long-term gross margin level with a lower level of absorptions than you had envisioned in the past?

Phillippe Lord: Thanks, Stephen. It is a lot easier to get to our long-term goal around 22.5% at four net sales per month. We are much more efficient at that level. We leverage our fixed and variable overhead more meaningfully and are able to navigate vertical cost environments more effectively. The path at four net sales per month is much easier. If we were to run at something less than that, then the offset would have to be in direct margin. You might be able to hold on to your margins at a slower pace and try to drive it, so there is a path at, say, 3.x versus four, but long term, four is the way to get there.

Hilla Sferruzza: You are exactly right—there are two components: absolute volume and volume per store. We are more efficient at four-plus, so we definitely want that because the costs at the local store level and the division level are leveraged better with higher per-store volume and higher overall volume. Right now, the opportunity for us is at a higher store count. Hopefully, you will see that improvement between Q1 and Q2. The volume that we are guiding to on closings in Q2 is higher than Q1, and we guided to higher margin than where we ended the quarter, and part of that is going to be incremental leverage.

Once we get back to that four net sales per store average, there is another bump for us on incremental leveraging above that.

Phillippe Lord: We see our path from where we are to where we want to go, both this year and in future years, really driven by the following: volume from a higher store count, less inventory in the market to compete with which should create a stronger pricing backdrop, and then reducing our incentives over time. A lot of the incentives that are currently in the market are psychological—we are trying to convince folks that it is a good time to buy. It is part affordability and part psychology. So we are optimistic that, as long as nothing from the macro environment continues to erode, we can see a path there.

Operator: Thank you. Our next question comes from Alan S. Ratner with Zelman. Your line is now open.

Alan S. Ratner: Good morning, and thanks as always for the details so far. First, on the margin guide—and I think you touched on it in Steve’s question, but I want to dig a little deeper. I was pleasantly surprised to see that you expect to hold margins roughly steady quarter over quarter. I would have thought, given what we are hearing from other builders and what we are seeing in the macro environment, that there might have been some pressure at least flowing through in 2Q.

It sounds like some of that is top-line leverage, but I am curious if you feel like, now that you have reset some of the absorption goals for the near term, whether this kind of 18% margin in the current backdrop is something that might be sustained through the year if market conditions remain fairly steady with where they are today?

Phillippe Lord: A lot of good questions in there. I do think there are a couple of things we see that feel like they are forming a potential floor. Now, again, I do not know what is going to happen geopolitically or with other factors outside our control that can impact this. But in the industry, we see a couple of things. Number one, we see inventory levels stabilizing, which I think is a positive development.

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