Tri Pointe TPH Q2 2025 Earnings Call Transcript

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DATE

Thursday, July 24, 2025 at 10 a.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Doug Bauer

Chief Financial Officer — Glenn Keeler

President and Chief Operating Officer — Tom Mitchell

Chief Marketing Officer — Linda Mamet

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TAKEAWAYS

Home Deliveries: Delivered 1,326 homes in Q2 2025, surpassing the high end of prior guidance.

Home Sales Revenue: Generated $880 million in home sales revenue in Q2 2025, at an average sales price of $664,000.

Adjusted Gross Margin: 22.1% after excluding an $11 million inventory impairment charge, consistent with company guidance.

Adjusted Net Income: Adjusted net income totaled $69 million for Q2 2025, equating to $0.77 per diluted share (adjusted), after adjusting for the impairment (non-GAAP).

Net New Home Orders: Received 1,131 net new home orders in Q2 2025, with a monthly absorption rate of 2.5 homes per average selling community.

SG&A Expense Ratio: 12.6% of home sales revenue, at the low end of guidance due to revenue leverage and G&A savings.

Total Lots Controlled/Owned: Controlled or owned over 34,000 lots at Q2 2025 quarter-end, with 51% controlled via option agreements.

Active Selling Communities: Had 151 active selling communities at Q2 2025 quarter-end, with 11 openings and 13 closings during the period.

Liquidity and Leverage: Maintained $1.4 billion in total liquidity as of Q2 2025, including $623 million in cash and an expanded $850 million revolving credit facility extended to February 2030; debt-to-capital ratio of 21.7% and net debt-to-net capital ratio of 8%.

Share Repurchases: Returned $100 million to shareholders in Q2 2025, reducing share count by 3.5%; Repurchased $175 million year-to-date as of June 30, 2025 for a reducing outstanding shares by 5.3% for the year-to-date period ended June 30.

Book Value Growth: Book value per share increased 12.4% over the last twelve months.

Land Investment: Invested approximately $250 million in land and development during Q2 2025.

Buyer Profile (Backlog, TRI Pointe Connect): Average annual household income of $220,000, average FICO score of 750, average loan-to-value of 79%, and debt-to-income ratio of 40%.

Q3 2025 Guidance: Anticipates 2,100 home deliveries for Q3 2025; average sales price of $675,000–$685,000 for Q3 2025; homebuilding gross margin of 20%–21% for Q3 2025; SG&A expense ratio of 13%–14% for Q3 2025; effective tax rate of approximately 27% for Q3 2025 and FY2025.

Full-Year 2025 Guidance: Revised full-year deliveries to 4,800–5,200 homes for 2025; average sales price of $665,000–$675,000 for the full year; homebuilding gross margin of 20.5%–22% (excluding impairment) for the full year; SG&A ratio of 12%–13% for the full year; effective tax rate of approximately 27% for Q3 2025 and FY2025.

Incentives: CEO Bauer said, "Incentives on revenues were 7.1% in the second quarter. They'll trend up slightly as we factor those into the seasonality of the back half of the year, which is implied in our gross margin guide."

New Market Expansions: Ongoing development in Utah, Florida, and Coastal Carolinas is on track, with performance improvements expected to start in February 2027.

Build Time: President Mitchell said, "our current average build time is 115 working days." New initiatives are underway to further reduce cycle times.

Inventory Impairment: CFO Keeler stated, "The $11 million impairment in the quarter was a Bay Area project that's been a challenging project for some time."

Community Absorption Detail: Absorption rates in Q2 2025 were 2.5 in the West (higher in Inland Empire, San Diego, Seattle; lower in Sacramento, Arizona), 2.3 in Central (steady in Houston, softer in Austin, Dallas, Denver), and 3.1 in the East (strong in DC Metro, Raleigh, average in Charlotte).

Contingency Sales: CMO Mamet said, "Currently, approximately 5% of our backlog is a home to sell contingency."

SUMMARY

Tri Pointe Homes, Inc. (NYSE:TPH) exceeded home delivery guidance for Q2 2025 while expanding liquidity and extending its credit facility. Management emphasized a commitment to prioritizing price over pace, which materially influenced net order trends and future margin expectations. The company initiated and progressed expansions in key new markets, positioning for increased diversified growth starting in 2027. Active inventory strategies, ongoing land investments, and substantial share repurchases reflect a disciplined approach to capital allocation. Revenue, order absorption, and margin outlooks for Q3 2025 and the full year were adjusted to reflect continued demand volatility, seasonal patterns, and rising incentive levels.

Management described the current environment as "choppy" citing policy uncertainty, geopolitical tensions, and rising inventory as dampening buyer confidence and near-term pricing strength.

Favorable buyer credit quality, high average income, and a modest 5% contingency rate as of Q2 2025 underpin a focus on the move-up market segment.

President Mitchell disclosed that absorption pace is being managed on a community-by-community basis, with selective use of incentives and ongoing efforts to further reduce build times.

CFO Keeler clarified that gross margin guidance remains wide due to the lack of significant backlog for Q4 2025 and the need for additional sales in the remainder of the year.

Compared to peers, management stated continued preference for supporting earnings per share through price, even at the expense of order volume and pace relative to peer averages.

Repurchases have lowered shares outstanding by 46% since program inception in February 2016, underpinning book value per share growth.

INDUSTRY GLOSSARY

Absorption Rate: The average number of new home orders per selling community per month, used to gauge community-level demand.

Contingency Sale (Home to Sell Contingency): A contract provision where the buyer's purchase is dependent on the sale of their existing home.

Spec Inventory (Speculative Inventory): Move-in ready or near-completion homes that are built without a purchase contract, supporting sales pace and flexibility.

Gross Margin (Homebuilding Gross Margin): Ratio of gross profit to home sales revenue, often adjusted to exclude impairment or other one-time items, indicating profitability from core operations.

Full Conference Call Transcript

Doug Bauer: Good morning, and thank you for joining us as we report our results for the second quarter of 2025. Our teams delivered good quarterly results while executing in a challenging environment. We met both our top and bottom line guidance while continuing to build a scalable foundation for long-term growth. In the second quarter, we delivered 1,326 homes, and the average sales price was $664,000, generating $880 million in home sales revenue. Homebuilding gross margin adjusted to exclude an inventory-related charge was 22.1%, supported by disciplined pricing, strong product positioning, and continued cost control. Adjusted net income was $69 million or $0.77 per diluted share.

While the long-term outlook for housing remains favorable due to strong demographics and the continuing undersupply of homes, the near term remains choppy. Continued policy uncertainty and geopolitical tensions have weighed on buyer confidence, and several markets are experiencing rising housing inventory levels and a softer pricing environment. We generated 1,131 net new home orders in the quarter, with a monthly absorption rate of 2.5 per average selling community. We continue to focus on balancing pace and price on a community-by-community basis and have moderated our start pace in an effort to manage our level of spec inventory.

By leveraging targeted incentives for design studio options and mortgage rate buy-downs, we are addressing monthly payment sensitivity and buyer preferences for home personalization, with the goal of optimizing margins. Our innovatively designed and well-located communities close to job centers and lifestyle amenities continue to attract a well-qualified buyer. Homebuyers in backlog financing through our mortgage company TRI Pointe Connect have an average annual household income of $220,000, an average FICO score of 750, a 79% loan-to-value, and an average debt-to-income ratio of 40%. Consistent with the last several quarters, we ended the quarter with $1.4 billion in total liquidity, including $623 million in cash. Our homebuilding debt-to-capital ratio was 21.7%, and net debt-to-net capital stood at 8%.

During the quarter, we further strengthened our financial position by extending and upsizing our revolving credit facility, expanding liquidity through February 2030. Backed by a strong balance sheet, our land investment strategy remains disciplined, with a selective focus on opportunities that produce the strongest returns in our core markets. In the near term, we have an excellent land position that enables us to grow our ending count in 2026 in the low double digits. During the quarter, we returned $100 million to shareholders through share repurchases. With our stock trading below book value, we accelerated repurchases, reducing our share count by 3.5% in the second quarter alone.

For the year-to-date period ended June 30, we have repurchased $175 million, reducing our shares outstanding by 5.5 million, or 5.3%. Since initiating the program in February 2016, our share count has decreased by 46%. This reflects our confidence in the long-term value of the business and our commitment to enhancing per-share returns for our shareholders. In the last twelve months, our book value per share has grown 12.4%. Our new market expansions in Utah, Florida, and the Coastal Carolinas remain on track and are expected to contribute to meaningful top and bottom line growth over time while broadening our geographic footprint. Development activity in these markets is progressing as planned, supported by strong local execution and scalable operating models.

We expect a notable improvement in the performance from our new divisions beginning in February 2027. As volumes increase and operating leverage improves, supporting our long-term growth strategy. While near-term conditions remain challenging, we are executing through a differentiated premium product offering, targeted incentives, and continued focus on cost discipline and cycle time improvements. We remain confident in the long-term fundamentals underpinning housing demand, including favorable buyer demographics and the undersupply of housing over the last decade. The current market dynamics present not only challenges but also meaningful opportunities. Through disciplined capital allocation, including strategic land investments, prudent inventory management, and opportunistic share repurchases, we are positioning TRI Pointe for continued strong returns and long-term shareholder value creation.

With a healthy balance sheet, a seasoned team, and a differentiated brand, we are well-positioned to navigate evolving market conditions and deliver sustained growth and performance. With that, I'll turn the call over to Glenn. Glenn?

Glenn Keeler: Thanks, Doug, and good morning. I'd like to highlight some of our results for the second quarter and then finish my remarks with our expectations and outlook for the third quarter and full year for 2025. The second quarter produced strong financial results for the company. We delivered 1,326 homes, which beat the high end of our guidance range. Home sales revenue was $880 million for the quarter with an average sales price of $664,000. Our average sales price was lower than our previous guidance due to the mix of deliveries that were sold and closed in the quarter. Gross margin adjusted to exclude an $11 million inventory impairment charge was 22.1% for the quarter, in line with our guidance.

SG&A expense as a percentage of home sales revenue was 12.6%, and at the lower end of our guidance, benefiting from savings in G&A and better top line revenue leverage as a result of exceeding our delivery guidance. Finally, net income for the year was $69 million or $0.77 per diluted share, adjusted for the same inventory-related charge. Net new home orders in the second quarter were 1,131, with an absorption pace of 2.5 homes per community per month. For some market color, absorption pace in the West was 2.5 for the quarter, with the Inland Empire, San Diego, and Seattle markets showing stronger demand. Softer markets in the West for the quarter were Sacramento and Arizona.

In the 2.3 for the quarter, with increased supply of both new and resale homes, Austin, Dallas, and Denver showed softer demand during the quarter, while Houston continued to experience steady demand. Finally, in the East, absorption pace was 3.1 for the quarter, with our DC Metro and Raleigh division showing strong demand, while Charlotte was consistent with the company average. During the second quarter, we invested approximately $250 million in land and land development. We ended the quarter with over 34,000 total lots, 51% of which are controlled via option. During the second quarter, we opened 11 new communities and closed out of 13, ending the quarter with 151 active selling communities.

And we continue to anticipate ending 2025 somewhere in the range of 150 to 160 active communities. Looking at the balance sheet and capital spend, we ended the quarter with approximately $1.4 billion of liquidity, consisting of $623 million of cash and $786 million available under our unsecured revolving credit facility. As Doug mentioned, during the quarter, we extended our revolving credit facility out to 2030 and increased the revolver size by $100 million to a total borrowing capacity of $850 million. At the end of the quarter, our homebuilding debt-to-capital ratio was 21.7%, and our homebuilding net debt-to-net capital ratio was 8%. Now I'd like to summarize our outlook for the third quarter and full year of 2025.

For the third quarter, we anticipate delivering between 2,100 homes at an average sales price between $675,000 and $685,000. We expect homebuilding gross margin percentage to be in the range of 20% to 21%. We expect our SG&A expense ratio to be in the range of 13% to 14% and we estimate our effective tax rate for the third quarter to be approximately 27%. For the full year, we are updating our guidance to a lower range of deliveries based on the slower market conditions we have experienced in the spring. We now anticipate delivering between 4,800 and 5,200 homes for the full year with an average sales price between $665,000 and $675,000.

Doug Bauer: We continue to expect our full year homebuilding gross margin to be in the range of 20.5% to 22%.

Glenn Keeler: Which excludes the inventory-related charge we recorded this quarter. Finally, we anticipate our SG&A expense ratio to be in the range of 12% to 13%. And we estimate our effective tax rate for the full year to be approximately 27%. With that, I will now turn the call back over to Doug for closing remarks.

Doug Bauer: Thanks, Glenn. As we close, I want to express my sincere appreciation to the entire TRI Pointe team for your continued dedication, focus, and alignment with our mission and values. Your commitment is the cornerstone of our success and plays a vital role in delivering another solid quarter. I'm also proud to note that TRI Pointe was once again named to the Fortune 100 Best Companies to Work For in 2025, a reflection of the culture of excellence and collaboration we built together. Looking ahead, we remain confident in the long-term fundamentals of the housing industry, underpinned by favorable demographics and a persistent supply-demand imbalance.

With a clear strategy, a disciplined operating model, and an exceptional team, we believe we are well-positioned to navigate short-term headwinds and seize the opportunities that lie ahead. Thank you again to our team members, customers, trade partners, and shareholders for your continued trust and support. With that, I'll turn the call over to the operator for any questions. Operator?

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, while we poll for questions. Our first question comes from Trevor Allinson with Wolfe Research. Please proceed with your question.

Trevor Allinson: Hi. Good morning. Thank you for taking my questions. I want to first ask about the implied 4Q volume guide based on your full year numbers. I think if I'm doing the math correctly, it implies you're to do 1,500 or 1,600 deliveries in the fourth quarter. In line with where your backlog sits currently. Can you talk about your confidence in hitting that number and did you increase your starts in the quarter to make sure that you had inventory in place to hit that number?

Glenn Keeler: Hey, Trevor. It's Glenn. Good question. We're going into the third quarter with plenty of move-in ready and spec homes to be able to hit that number. And like you said, the implied guidance is kinda consistent with the absorption that we're having actually adjusted down a little bit for seasonality. So we definitely have the starts to hit that guide.

Trevor Allinson: Okay. Gotcha. Makes sense. And then second one's just on incentives and your expectations for the rest of the year. I think previously, you talked about expecting roughly 7% incentives hold the remainder of the year. You've maintained your gross margin guidance here. Are you still thinking that roughly 7% incentives is where you're gonna be at? We just heard a couple other builders talk about expectations for incentives move higher. Hoping to get some color on your thoughts on that here moving forward.

Doug Bauer: Yeah, Trevor. It's Doug. Incentives on revenues were 7.1% in the second quarter. They'll trend up slightly as we factor those into the seasonality of the back half of the year, which is implied in our gross margin guide.

Trevor Allinson: Okay. Thanks for all the color. Appreciate it. Good luck moving forward.

Doug Bauer: Thank you.

Operator: Our next question comes from Stephen Kim with Evercore ISI. Please proceed with your question.

Stephen Kim: Yeah. Thanks a lot, guys. Appreciate the color. I was curious if you could give a little bit of detail on the impairment charge, third $13 million in the quarter, kind of where was that? And also, I know that you guys in addition to communities that you actually do impair, there's also communities that you subject to the impairment analysis if they're perhaps somewhat close. I was wondering if you could give us some insight into sort of that watch list, if you will, what that looks like.

Glenn Keeler: Sure. Steven, this is Glenn. The $11 million impairment in the quarter was a Bay Area project that's been a challenging project for some time. So you know, based on the current market conditions, it just when you do that test, it failed the test, and so we booked the impairment this quarter. So nothing surprising there. It's just kind of a one-off project that was challenged. On the impairment process for us, so what we do is, you know, any project that has a margin starting to get around at 10% range kinda comes on to a watch list for us.

And we watch those projects, and then we run impairment analysis if there's indicators of impairment, which is required from the accounting standards. So that's how we do it. Once it gets to that 10% range, we start watching it from an accounting perspective now. We're always watching every project in the margin and trying to you know, do the best we can to improve margins in our projects. But from a pure impairment accounting perspective, that's our process.

Doug Bauer: Yeah. I guess my question yeah. Go ahead.

Stephen Kim: Sorry. I was just gonna tag on to maybe hit question. The list is not significant. And so we do have projects that are on that list, and they have been on that list, but we seem to continue to implement strategies to have those projects have consistent absorptions and work through that without getting into that impairment zone.

Stephen Kim: Would it be fair to say, Tom, that we have not seen, in the last few months, a significant increase in the number of communities that have made that watch list.

Tom Mitchell: No. I think, you know, obviously, as absorption has slowed, throughout the industry, it does put pressure on margins because of increased incentives, but again, it's not to anywhere near an alarming rate.

Stephen Kim: Okay. That's helpful. And then I was wondering if you could talk a little bit about absorption maybe as they trended through the quarter. Know, on a monthly basis, I think you had said three months ago that April had kinda gotten off to a little bit of a tougher start. Just curious how in the end, that all wound up sort of average out your 2.5 for the quarter?

Doug Bauer: Yes, Stephen, it's Doug. The quarter absorption started decent in April, peaked in May. And then trended down in the back half of June, which kinda follows some seasonal patterns. The July is also very seasonal with the holidays and so forth. It's a choppy market. To be honest with you. I've seen a lot worse conditions, and these are all short-term conditions that shall change and shall move on when you look at the fundamentals of the business. But it's not it's not earth-shattering at all.

Stephen Kim: Yeah. I appreciate that. One last one if I could. Glenn, you gave a range for gross margin, which I think is pretty consistent with what you've done before. It's a pretty wide range. And you know, you haven't narrowed it here as you've progressed through the year. I was kind of curious, it seems if my math is right, it could potentially imply a gross margin in 4Q as low as 17%. Know you're not guiding to that, but I was curious, why didn't you tighten the range as you've may progressed through the year? And kind of environment could actually drive a gross margin as low as 17% in the fourth quarter?

Glenn Keeler: Well, like Doug said, it still is a choppy environment. There's a lot of moving pieces still to go the rest of the year. There's not a lot of backlog going into the fourth quarter. So there's still a lot of sales to make. And so that's why we kept that wider range.

Stephen Kim: Appreciate it. Thanks. Thanks, dude. Yep.

Operator: Our next question comes from Alan Ratner with Zelman and Associates. Please proceed with your question.

Alan Ratner: Hey, guys. Good morning. Thanks, as always, for all the details so far. My question is more kind of strategic in terms of how you're thinking about pace and price now. If I look at your orders the last four quarters, they're down 25% year over year. And the group is down low single digits for comparison. And I know initially, you flagged the price over pay strategy and certainly your margins reflected that. But if I look at your guidance for the next couple of quarters, margins coming down quite a bit and reverting closer to where the peer group average is.

So I'm curious how you're thinking about that interplay today and what do you attribute the relative order weakness versus peers to? Because it would seem like from a price point perspective, you guys are in the right part of the market geographically speaking. You're not big in Florida, which is a big pain point for a lot of builders. I'm just curious how you're thinking about that right now.

Doug Bauer: Yes, Alan, it's Doug. We're going to continue to favor price over pace. Demand is, in my mind, is fairly inelastic. And in the consumer confidence is really the driving force. As you know, you see it all the time as all of us see all these headlines that the consumer continues to see including just the kind of disruption that we've seen, you know, just with the administration with tariffs and everything. Just creates a lot of uncertainty. So we're gonna continue to favor price over pace. When you run sensitivities, it's pretty clear that you run your business that way to increase and maintain margins and profitability and earnings per share?

Tom Mitchell: Alan, I think also the difference in margin as you've highlighted really relates to, you know, some of those orders that were driven in March last year that have closed early this year. Versus orders that were generated. This year that just had higher incentive levels. So it's not necessarily a huge trend towards an increase as we go through the back half.

Alan Ratner: Got it. Okay. Appreciate that, Tom. And then I guess, you kind of brought up the consumer uncertainty. I'm curious how you guys think about contingent sales given your exposure to the move-up buyer. Have you seen more concern among those buyers regarding their ability to sell a resale home? And have you changed the way you're approaching that from either a marketing perspective or just a willingness to accept contingent self?

Linda Mamet: Alan, this is Linda. Good question. We do use contingencies as a strategic part of our sales program. We are very disciplined with our home to sell contingencies. Currently, approximately 5% of our backlog is a home to sell contingency. We do set limits at each community as appropriate on how many home to sell contingencies we would carry at any one time. And, because we do a lot of due diligence on each of the contingencies before we write the contract, our success rate is very strong. So we continue to see that as an important part of our sales program, but we're not overly reliant on it.

And we do, certainly, in the move-up space, see customers who would like to sell their current home before buying ours, but they don't always have to sell their existing home. So, you know, sometimes that will get worked through in the process where they may end up carrying both homes for some period of time and still close on out.

Alan Ratner: Got it. Appreciate that, Linda. Thanks a lot.

Linda Mamet: Thanks, Alan.

Operator: Our next question comes from Jay McCanless with Wedbush Securities. Please proceed with your question.

Jay McCanless: Hey. Good morning, everyone. First question for me, I guess, what got you over the hump on closings for the quarter to beat the guidance? Was it one market in particular or just a couple extra closings in every division?

Glenn Keeler: It was more broad-based, Jay. Like I said, I think the team did a good job of focusing on homes that were completed or soon to be completed and was able to concentrate their sales efforts on those homes to generate more volume in the quarter.

Jay McCanless: And then we've heard from some of your competitors. I know you guys don't have a lot in the specific Bay Area, but some concern around demand in Northern California tech job concerns, etcetera. Have you guys been hearing that from the field and maybe dive down a little bit also in Sacramento and fill us in on what's going on what's happening there?

Tom Mitchell: Hey, Jay. This is Tom. I'll take that one. Yeah. Northern California has continued to soften throughout the second quarter. But we have not heard of job loss being a factor in that softness. As Doug mentioned, you know, the underlying confidence and chaos that the consumer is feeling is really what we think is the obstacle to absorption pace. We are down in community count in Northern California as well. So I think that accounts for some of the year-over-year variance in orders. But as you look at it, we're well-positioned in core markets. And we still think there's underlying demand in those markets for our product.

And it's just a matter of that confidence factor coming back, and we think we'll be in good shape.

Doug Bauer: Alright. Yeah. That's great. That's up. Jay, is it Jay had add Southern California as long as we're talking about California. Actually, the IE San Diego is well above the company average. So you know, every market across the country, we've got several five or six markets that are well absorbing well above company average. So it's a very choppy market. It's nothing to get all lathered up on. It's actually a as I mentioned to, I think it was Alan, I've seen a lot worse in my thirty-five years. So know, we're still seeing demand, and in Southern California, it's been actually pretty good. Out in the Inland Empire in San Diego.

Jay McCanless: Sounds good, Doug. Thank you. That's all the questions I have. Thanks.

Glenn Keeler: Thanks, Jay. Thanks, Jay.

Operator: Our next question comes from Mike Dahl with RBC Capital Markets. Please proceed with your question.

Mike Dahl: Hey. Good morning. Thanks for taking my questions. As I just wanted to follow-up on some of the questions around in kind of pace and how you're thinking about the back half. With the down to two and a half a month, I think this historically has been or at least in recent years, kind of the lower bound that where you wanted to operate. So when you think about the back half of the year, obviously, normally, we get seasonal pressure. But are you are you reaching a level where you're thinking about trying to do more to hold that pace sequentially? And keep that two and a half or how should we think about that?

When you talk about that price versus pace balance, what that threshold is for you?

Doug Bauer: Yeah. I mean, we factored in the fact that the back half of the year is definitely more seasonal. You'll have some divisions or projects moving below two and a half. But, again, we're gonna continue to focus on price over pace overall. You know, I still think two and a half ish is probably a good number for the back half of the year. It could trend down a little bit. It could trend up. It's as I mentioned earlier, it might it's very inelastic. So there's not you know, just throwing more money at things doesn't really do anything. And so we you know, our projects are well located. Main and main.

There's no reason to give away the store, so to speak. We were just actually up in the state of Washington We have a project up there that's selling for over $3 million, and it's like taking orders. So every market, every project's different.

Mike Dahl: Yeah. I hear you. That makes sense. And then just shifting gears back to the marketing question around the wide range and implied outcomes for 4Q. I know you have the range out there, but, Glenn, I mean, you know, midpoint of that range is kinda 19 ish on four q. Is that really like based on what you're seeing today in the you can see and specs that you can see is that kind of should we be thinking about the midpoint? Or do you really want kinda the whole range on the table, at this point?

Glenn Keeler: No. I think the midpoint makes sense. That's kinda how we base our guidance is that midpoint, and that's what we see you know, with the level incentives that is currently flowing through. You know, if we had to pick you know, still, like I said, there's a lot of orders still to make to get there, but know, we're driving that guidance towards the midpoint.

Mike Dahl: Okay. Alright. Thanks, Steve.

Operator: Our next question comes from Ken Zener with Seaport Research. Please proceed with your question.

Ken Zener: Good morning, everybody.

Doug Bauer: Hey, Ken. Hi, Ken.

Ken Zener: I have a slew of questions here, so I appreciate your patience. First, can you address the rising variable SG&A costs and is that kind of the new baseline, and what's driving that?

Glenn Keeler: It's really just percent of sales. Yeah. It's really just a function of lower volume. Right? So it's just less leverage on our fixed cost. It's not like we're spending referring to the variable piece.

Ken Zener: Well, there's still some fixed cost even in the s component. Right? Because you're spending advertising dollars on new communities and their salaries in the s component, so it's not all variable in the s.

Ken Zener: Got it. Okay. And then I guess this and the same question goes for the fixed piece. It's down, obviously, year over year, but how should we think about that corporate verse you know, the number of communities you have.

Glenn Keeler: You know, we're obviously watching Right? I mean, obviously, the market's a little bit more challenged than it was last year. So spending is something that we're challenging and being really smart about. And so that's why you're seeing GNA down a little bit year over year, but you know, it's something we're gonna continue to monitor and make sure as we're as efficient as possible.

Ken Zener: And then as it relates to right. There's starts. Closings, inventory. Do you guys expect inventory levels to basically be down year over year similar to where we are in 2Q?

Glenn Keeler: Yes. Yeah. I think you're seeing a little bit slower in the LANDAC than, you know, we were last year. And so that plays a part in it. And we're also working down know, our spec levels. And so we're hoping to end the year with less specs than we do now. And so that'll be a factor as well. And then Doug, this one's more for you or for Tom, I guess, but it's a big picture. Question. It's the main question I get from investors. So like, your book value is up 12%. You guys are still executing well. You've derisked as a company. In general, the industry is that way as well.

But, Doug, you mentioned the word inelastic demand. So you know, one could attribute that to consumer uncertainty, but there's also the fact that home price to income, it's very unaffordable. Given a lot of historical metrics. So if how is the industry gonna kinda solve that if, you know, if the companies are good, but the demand is just structurally lower because of affordability. Therefore, the cyclicality of the industry is diminished. How do you think that's gonna kinda what are the puts and takes there for you? We could just say it's inelastic, Right? It's so unaffordable to people. How do you kinda see this playing out?

Doug Bauer: Well, I think the inelastic demand right now is due to buyer confidence, Ken. And when you look at our buyer profile, having average household income of $220,000. You know, they can afford all the house price that we provide in many cases. So but on a kind of a national basis, as I read the earnings calls and reports that are coming out, you know, there's the entry-level side of the business, and they're having to give more and more incentives to move that product. So net pricing is coming down, and I think even John Burns indicated that in some of his analysis.

So long term, though, we think you know, the fundamentals of the market are going to work quite well in the favor of the new home builders and our current expansion strategies are well-timed. Instead of making some sort of M and A announcement, we are expanding organically. So we're still and Tom and I are very bullish about the future. These short-term conditions, and you can analyze it and look at all the headlines, and get all wrapped up in the short term. We look long term. We have a great land inventory, great community count that'll grow low double digits next year.

So we're well-positioned for a housing industry that'll continue to thrive as we look at it over the next three to five years.

Ken Zener: And if I could get one more in, I realize it's Yeah. That's

Doug Bauer: I one more question, Shannon. We gotta wrap it up.

Ken Zener: That's alright. I'll catch you. I'll do it later. Thank you.

Doug Bauer: Thanks.

Operator: Our next question comes from Alex Barron with Housing Research Center. Please proceed with your question.

Alex Barron: Good morning, everybody. Just wanted to ask what Yeah. What's your current what's your current build time on average, and, you know, is there any opportunity to keep improving it? And was there any improvement versus a quarter ago or a year ago?

Tom Mitchell: Hi, Alex. This is Tom. Good question. Certainly a focus area for us as we're looking at all areas to reduce costs and on cycle time. But our current average build time is 115 working days. So just about five and a half months, almost six months on that. We're meeting our schedules. We're maybe a little bit ahead of schedule. So we're in process of doing some new initiatives around reducing cycle times. It's time to do that. We're implementing some new templates and schedules, and we'll be looking to improve on those numbers.

Alex Barron: Alright, guys. Best of luck for this year. Thank you.

Doug Bauer: Thanks, Alex.

Operator: There are no further questions at this time. I would now like to turn the floor back over to Doug Bauer for closing comments.

Doug Bauer: Well, thank you, everybody, for joining us in today's call, and we look forward to chatting with you all in October. Have a great summer. Thank you.

Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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