John Lovallo

John Lovallo of UBS Group asked if the first quarter is still expected to be the softest margin quarter of the year, as previously guided. He also inquired about the company's plans for share repurchases given its strong cash position and reduced CapEx forecast.

Answer

President & CEO D. Scott Barbour explained that while they worked hard to offset cost pressures, the full-year guidance remains unchanged due to caution around "tepid" demand. CFO Scott Cottrill added that share repurchases are being evaluated, especially with increased cash flow from the OBBBA bill and lower CapEx, and could be deployed in the coming quarters as part of a balanced capital allocation strategy.

John Lovallo questioned the breakdown of the fiscal 2026 forecast, asking for the organic versus inorganic contribution to the flat sales guidance and the drivers behind the year-over-year EBITDA margin decline.

Answer

An executive explained that at the midpoint, organic volume is expected to be flat, implying outperformance and conversion gains against end markets that are projected to be down low-to-mid-single digits. For profitability, an executive noted the margin decline is impacted by a 50 basis point dilution from the full-year inclusion of the lower-margin Orenco (Renco) business, compared to a 30 bps impact in fiscal 2025. This suggests the organic business margin is expected to be relatively flat year-over-year, with pressure from Q1 absorption.

John Lovallo asked for a bridge to explain the implied Q4 margin expansion despite a sequential revenue decline and requested clarification on a 'flat year-over-year' comment regarding performance.

Answer

CFO Scott Cottrill attributed the expected Q4 margin improvement to stabilizing price/cost, ongoing manufacturing and transportation efficiencies, and favorable SG&A comparisons. He clarified that the 'flat' outlook was a composite view: organic growth in Infiltrator and Allied, plus the Orenco acquisition, would be offset by a decline in the Pipe business against a tough year-over-year comparison.

John Lovallo requested a detailed breakdown of the moving parts that led to the revised second-half EBITDA margin guidance, which implies a drop from around 31.5% to 28.5%. He also asked for color on the expected revenue and margin cadence between Q3 and Q4.

Answer

CFO Scott Cottrill identified three key drivers for the lower second-half margin outlook: manufacturing headwinds from lower absorption, negative mix from weakness in nonresidential Allied Products, and incremental pressure from rising material costs. He declined to give specific quarterly guidance but reiterated that the second half typically represents about 45% of annual revenue.

John Lovallo asked how quickly the sales environment could improve with better consumer confidence, given strong desire to own and good traffic, and how rapidly Meritage Homes could react to such a change. He also inquired if the long-term target margin of 22.5-23.5% could be achieved sooner, given that the 'building blocks' are in place and the primary missing piece appears to be the incentive level.

Answer

Phillippe Lord (CEO, Meritage Homes) stated that the sales environment could change very quickly with improved consumer psychology, and Meritage is well-positioned with move-in-ready inventory and plentiful lots to capture market share and reduce incentives rapidly. Hilla Sferruzza (EVP and CFO, Meritage Homes) added that the spec strategy allows for immediate capitalization on market improvements. Phillippe Lord agreed that the long-term target margin is achievable sooner if incentives moderate modestly and the company maintains scale and leverage (4-4.5 net sales per month).

John Lovallo from UBS sought a breakdown of the drivers for the sequential gross margin decline guided for Q3 and asked about the current land cost environment and when lower development costs might impact results.

Answer

CFO Hilla Sferruzza attributed the majority of the Q3 margin decline to lost leverage from seasonally lower volume, which she quantified at 75-100 basis points. CEO Phillippe Lord added that the land market is slowing, allowing for better terms but not yet price reductions. He noted that any savings from rebidding land development would not flow through to the P&L until the second half of 2026.

John Lovallo from UBS Group AG sought a breakdown of the drivers behind the projected Q3 gross margin decline and asked about the potential for a rebound in Q4. He also inquired about current land cost inflation trends and the timing for potential development cost savings.

Answer

EVP & CFO Hilla Sferruzza attributed the majority of the Q3 margin compression to lost leverage from lower seasonal volume, which she quantified as a 75-100 basis point impact. CEO Phillippe Lord added that the land market is slowing, allowing for better terms but not yet price reductions. He estimated that any savings from rebidding development jobs would not materially impact the P&L until the second half of 2026.

John Lovallo sought clarification on the full-year 2025 guidance, noting that it seems to imply better-than-normal seasonality and absorption rates to achieve the sales targets.

Answer

CFO Hilla Sferruzza responded that the confidence in the guidance is not based on assumptions of better seasonality. Instead, it is driven by the significant increase in community count and the initial sales 'pop' that typically occurs when a new community opens, which naturally results in a higher absorption rate for those specific communities in their opening months.

John Lovallo asked about the company's ability to achieve SG&A leverage below 10% given the sales growth guidance. He also requested color on market conditions, inventory, and demand across major Texas markets.

Answer

CEO Phillippe Lord reiterated the long-term SG&A target of 9.5% or better at 20,000 units, noting that near-term results will be impacted by market-dependent commissions and strategic investments. He described the Texas market as very strong, with high absorptions, and noted that resale inventory is not directly competitive due to different price points and the lack of financing incentives.

John Lovallo sought clarification on whether the October order pace was similar to September's but achieved with higher incentives. He also asked if Meritage would reduce incentives to capture more margin should interest rates decline.

Answer

CEO Phillippe Lord confirmed that the sales pace was being maintained through higher financing incentives, which is factored into the Q4 margin guidance. He stated '100%' that they would pull back on incentives to improve margins if rates fall, provided they can maintain their target sales pace. CFO Hilla Sferruzza added that lower rates could also increase resale competition, creating a balancing force.

John Lovallo asked for clarity on the lower employee-related costs mentioned in the Q2 call, specifically their impact in Q3 and expected impact in Q4. He also inquired about non-tariff cost savings initiatives being taken in both segments to lower the cost basis and their expected go-forward impact.

Answer

Rick Westenberg, VP and CFO, clarified that the favorable employee-related benefit in Q2 was a one-time item not repeated in Q3, but emphasized ongoing cost discipline. He detailed Masco's cost savings initiatives, which leverage the Masco operating system to drive productivity, supply chain efficiencies, procurement savings, automation, and austerity measures across all businesses, not isolated to specific segments.

John Lovallo sought clarification on the impact of lower employee-related costs in Q3 and expected Q4, and asked about cost savings initiatives in both segments beyond tariff mitigation.

Answer

VP and CFO Rick Westenberg confirmed a favorable one-time benefit from employee-related costs in Q2 that did not repeat in Q3, emphasizing ongoing cost discipline and efficiency drives. He explained that Masco leverages its operating system to drive productivity, supply chain efficiencies, procurement savings, and austerity measures (headcount, discretionary spend) across all businesses, not just for tariff mitigation.

John Lovallo of UBS Group AG inquired about Masco's capital allocation plan, specifically the $450 million for M&A and share repurchases, and the sustainability of the Pro Paint segment's growth.

Answer

CEO John Nudi confirmed that any M&A would be bolt-on, consistent with the current strategy, and that the Pro Paint business has significant room for continued growth through its partnership with The Home Depot. CFO Rick Westenberg added that absent any M&A, the remaining allocation would go to share repurchases.

John Lovallo requested quantification of the partial inventory timing reversal that negatively impacted paint sales in Q1 and asked if more of this headwind is expected in Q2. He also asked for details on the higher marketing costs that drove up SG&A and the company's ability to reduce this spending.

Answer

CFO Richard Westenberg explained that the inventory reversal accounted for the difference between the high-single-digit reported paint sales decline and the mid-single-digit decline on an adjusted basis, representing roughly a 4% impact on the segment's sales. He noted channel inventory is still higher year-over-year, suggesting a potential further headwind. He attributed the higher Q1 marketing costs primarily to biannual trade shows, like the ISH show, which is a Q1-specific phenomenon.

John Lovallo questioned how Masco maintained its 2026 margin targets after the Kichler sale, asking about the offsetting impact from softer DIY trends and when DIY volumes might recover. He also asked about contingency plans for potential tariffs on products from Mexico.

Answer

President and CEO Keith Allman cited strong fundamentals like millennial household formation and deferred demand as supportive of an eventual DIY recovery, which is contingent on consumer confidence. He also confirmed Masco has the capability to resource spa products from Mexico to the U.S. if necessary. CFO Rick Westenberg affirmed the softer DIY outlook offsets the mechanical margin benefit from the Kichler divestiture.

John Lovallo inquired about the Mineral Fiber volumes, which were up slightly in Q3 2025, and how this performance compared to the underlying market conditions. He also asked about the drivers behind the strong 9% year-over-year sales growth in the distribution channel for Mineral Fiber, relative to other channels.

Answer

CEO Vic Grizzle explained that Mineral Fiber volume growth was slightly ahead of expectations, with significant contributions from growth initiatives, while the underlying market conditions remained relatively soft and flattish. CFO Chris Calzaretta attributed the strong sales performance in the distribution channel to robust commercial execution and the benefits derived from the company's growth initiatives.

John Lovallo asked how the slight increase in Mineral Fiber volumes compared to the underlying market performance. He also inquired about the drivers behind the strong 9% year-over-year growth in Mineral Fiber sales to the distribution channel.

Answer

CEO Vic Grizzle noted that while precise market comparison is difficult in flat conditions, growth initiatives significantly contributed to Mineral Fiber's volume upside in a relatively soft market. CFO Chris Calzaretta attributed the strong distribution channel sales to robust commercial execution and ongoing initiatives.

John Lovallo inquired about the specific drivers of the modest input cost inflation seen in the Mineral Fiber segment during Q2 and the outlook for the second half. He also asked if there was an opportunity to increase share repurchases given the company's cash generation.

Answer

CFO Chris Calzaretta identified natural gas pressure and low single-digit raw material inflation as the Q2 drivers. He guided to low single-digit inflation for the full year. Regarding capital allocation, he reiterated that share repurchases remain the 'flex option' after investments in the business and M&A, with priorities unchanged.

John Lovallo asked why the Mineral Fiber AUV incremental margin was below historical levels in the quarter and if it would normalize. He also inquired about the drivers behind the manufacturing cost headwind in the Architectural Specialties segment.

Answer

CFO Christopher Calzaretta explained that the lower AUV incremental margin in Q1 was a matter of timing and quarterly noise from project shipment mix, and he expects it to normalize to historical rates for the full year. He clarified that the increased manufacturing costs in the Architectural Specialties segment were primarily due to the integration of the two businesses acquired in 2024, 3form and Zahner.

John Lovallo asked how the flattish 2025 Mineral Fiber volume forecast compares to the broader market and what is needed to return to the 2-4% growth target. He also questioned if recent acquisitions would delay achieving the 20% EBITDA margin goal for the Architectural Specialties segment.

Answer

CEO Vic Grizzle explained the flattish forecast assumes a +/- 1% market, with AWI's initiatives adding a point of growth. He stated that a market recovery is necessary to get back to the 2-4% growth range. He acknowledged that new acquisitions are initially dilutive to AS margins but expressed confidence in reaching the 20% target over time, highlighting three straight years of organic margin expansion.

John Lovallo asked to quantify Armstrong's volume outperformance versus the market in Q3 and inquired about the potential for the company to participate in hurricane rebuild efforts.

Answer

CEO Vic Grizzle estimated the market was down low-single-digits in Q3, and Armstrong's growth initiatives contributed over 1% of volume, offsetting a good portion of the softness, a delta he expects to continue. Regarding hurricanes, he stated it is too early to tell, but past storms have not been material needle-movers for the business.

John Lovallo inquired about the sequential gross margin walk from Q4 to Q1, specifically asking about the impact of incentives, land, labor, material costs, and the expected persistence of a 60 basis point headwind from warranty litigation costs.

Answer

Bill Wheat, CFO, clarified that the 60 basis points unusual impact from litigation in Q4 is not expected to persist into Q1, making the pro forma Q4 margin 20.6%. He noted the Q1 guide of 20%-20.5% reflects a slight decrease due to the current environment and elevated incentive levels, as the exit gross margin at the end of Q4 was lower than anticipated. Paul Romanowski, President and CEO, addressed the significantly lower starts pace, explaining it was intentional to align inventory and improve cycle times, and to seek reduced stick and brick costs. He expressed confidence in their ability to ramp starts to meet demand for the spring selling season.

John Lovallo asked about the sequential gross margin walk from Q4 to Q1, specifically regarding incentives, land, labor, material costs, and the persistence of the 60 basis point litigation headwind. He also inquired about the significantly lower starts pace in the quarter and D.R. Horton's ability to ramp up production to meet the 87,000 delivery midpoint.

Answer

CFO Bill Wheat clarified that the 60 basis points litigation impact is not expected to persist, noting the pro forma Q4 margin would be 20.6%. He explained the Q1 guide reflects the current environment and incentive levels, with the exit gross margin being lower than anticipated. President and CEO Paul Romanowski stated that the lower starts were intentional to align inventory and improve cycle times, and to seek reduced stick and brick costs. He expressed confidence in D.R. Horton's ability to ramp starts to meet market demand.

John Lovallo of UBS Group AG inquired about the drivers behind the Q3 gross margin beat and the rationale for the Q4 guidance, specifically asking if the potential for higher incentives was the main factor. He also asked about the decision to raise the full-year share repurchase guidance.

Answer

EVP & CFO Bill Wheat clarified that Q3 incentives were less impactful on closings than anticipated, but recent sales reflect higher incentive costs, which are expected to lower Q4 margins. He attributed the increased share repurchase guidance to strong cash flow, an attractive share valuation, and operating within target leverage ranges.

John Lovallo from UBS Group asked for the reasons behind the third-quarter gross margin beat and the drivers for the lower fourth-quarter guidance, questioning if it was solely due to incentives. He also inquired about the rationale for increasing the full-year share repurchase assumption.

Answer

EVP and CFO Bill Wheat clarified that the Q3 margin beat occurred because anticipated incentive increases did not materialize as quickly as expected. However, recent sales reflect higher incentive costs, which are factored into the Q4 guidance. He attributed the increased share repurchase plan to strong cash flow, attractive share valuation, and the company's comfortable position within its target leverage range.

John Lovallo of UBS Group AG inquired about the drivers of the third-quarter gross margin guidance, specifically the role of incentives, and asked about the company's strategy for managing potential cost increases from tariffs.

Answer

EVP and COO Michael Murray confirmed that incentives are the primary variable in the gross margin outlook and that flat incentives could push margins to the high end of the guided range. President and CEO Paul Romanowski addressed tariffs, stating that while the situation is uncertain, D.R. Horton's scale and strong supplier relationships position them well to manage potential cost impacts.

John Lovallo of UBS inquired about the key drivers for the sequential decline in the Q2 gross margin guidance and sought clarity on the decision to maintain the full-year delivery forecast despite a strong Q1 performance.

Answer

President and CEO Paul Romanowski attributed the Q2 margin pressure primarily to higher incentive levels, noting that margins on December closings were already lower. COO Michael Murray and Executive Jessica Hansen explained the Q1 delivery beat was due to improved cycle times and a higher-than-usual rate of intra-quarter sales and closings (53%), justifying a cautious stance on the full-year guide pending the spring selling season.

John Lovallo asked for clarification on the housing supply environment and whether inventory conditions worsened during the quarter. He also questioned the drivers behind the lower Q1 gross margin guidance, seeking specifics on current incentive levels and their expected trend.

Answer

President & CEO Paul Romanowski stated that while overall supply hasn't grown significantly, the lock-in effect continues to limit existing home inventory. EVP & CFO Bill Wheat confirmed the Q1 margin guidance reflects higher incentive costs due to rate volatility. EVP Jessica Hansen specified that over 80% of DHI Mortgage buyers received a rate buydown, and the primary issue is the rising cost of these buydowns, not the percentage of buyers using them.

John Lovallo asked about the significant changes that lowered fourth-quarter EPS expectations from earlier projections and inquired about the revenue and margin outlook by segment. He also asked about specific product categories and regions where Mohawk Industries outperformed the market and the reasons for this outperformance.

Answer

CFO James Brunk explained that weakened conditions, elevated interest rates, declining consumer confidence, slower builder activity, and softened international markets contributed to the revised outlook. Chairman and CEO Jeff Lorberbaum attributed market outperformance to improved product and channel mix, a larger commercial business, new product introductions, and ongoing restructuring benefits, specifically citing ceramic sales, insulation, boards businesses, and U.S. hard surface categories.

John Lovallo asked what drove the better-than-seasonal sequential sales growth in the Flooring Rest of World segment and questioned if the historical 20% sequential EPS decline from Q3 to Q4 is a reasonable expectation for this year.

Answer

CFO James Brunk attributed the sales strength primarily to a favorable foreign exchange impact from a strengthening euro, along with improving laminate performance. He indicated that typical seasonality might not hold this year due to the significant, evenly-spread benefits from restructuring actions and the impact of price increases.

John Lovallo inquired about the timing of the $50 million annualized cost impact from tariffs in 2025 and the strategy to offset it. He also asked how Mohawk plans to leverage its domestic LVT capacity to gain share or raise prices if tariffs increase import costs.

Answer

Executive James Brunk explained that due to FIFO accounting, the tariff impact would materialize in late Q3/Q4 2025, allowing time for price increases and supply chain adjustments. He noted Mohawk has already stopped importing from China. President and COO Paul De Cock added that the company's East and West Coast LVT production provides a service and cost advantage, and they will use a balance of sourced and manufactured goods to optimize results and fill existing capacity.

John Lovallo inquired about the potential for homeowners to use home equity as a catalyst for R&R spending in 2025. He also asked about the company's ability to be more acquisitive given its strong balance sheet in the current challenging industry environment.

Answer

CEO Jeff Lorberbaum acknowledged that while they don't have a significant recovery in their plans, rising consumer confidence could unlock home equity for remodeling projects. On M&A, he explained that the market is currently quiet as potential sellers are not motivated with earnings compressed, but noted Mohawk is well-positioned to act when opportunities arise as the market improves.

John Lovallo asked for an update on Q4 revenue expectations by segment, referencing prior expectations, and inquired about the anticipated cadence of margins, particularly how the price/mix versus productivity dynamic would play out.

Answer

Executive James Brunk explained that while the company provides EPS guidance, not revenue guidance, the Q4 outlook is impacted by weak demand, the negative effects of recent hurricanes, and seasonal shutdowns. Regarding margins, Brunk noted that the company has lapped the period of deflationary benefits and will face inflation in Q4, driven by wages. He expects the price/mix headwind to continue but highlighted that productivity gains should be similar to or greater than the $44 million seen in Q3.

John Lovallo inquired about the stabilization of demand, pricing, and inventory in Florida and the Southeast markets, and whether PulteGroup is seeing favorable terms on land development and renegotiating land prices.

Answer

Ryan Marshall, President and CEO, confirmed stabilization and positive year-over-year order comps in Florida and the Southeast, attributing it to desirable locations and pro-growth policies. Mr. Marshall also noted favorable terms on earth moving and underground work in land development, which is expected to help reduce future land inflation.

John Lovallo inquired about the stabilization of demand, pricing, and inventory in Florida and Southeast markets, and also asked if PulteGroup is seeing favorable terms on land development costs, including renegotiations of price and take-down schedules.

Answer

Ryan Marshall (President and CEO, PulteGroup Inc.) confirmed seeing stabilization in Florida and the Southeast, attributing positive year-over-year comps to strong locations, desirable weather, pro-growth environments, and favorable tax policies. Mr. Marshall also confirmed seeing favorable terms on land development, particularly for earth moving and underground work, which is expected to help reduce future land inflation.

John Lovallo of UBS Group AG asked if the demand improvement from late June, spurred by lower interest rates, continued into July and whether rising consumer confidence was a contributing factor. He also inquired about recent trends in stick-and-brick and land development costs.

Answer

President & CEO Ryan Marshall confirmed a positive consumer response to lower rates in late June but described July's demand as more volatile, with both strong and weak days. EVP & CFO James Ossowski stated that stick-and-brick costs were stable sequentially and year-over-year at $79 per square foot. He added that while there are encouraging signs of cost relief on the land development side, it is not yet reflected in quarterly results.

John Lovallo of UBS asked about PulteGroup's second-half margin expectations, inquiring if the 8% incentive level on Q1 deliveries was consistent with orders. He also sought details on the anticipated tariff impact, including the cost per home and affected products.

Answer

CEO Ryan Marshall confirmed the full-year margin guidance assumes the 8% incentive level seen in Q1. He quantified the tariff impact as approximately 1% of the average sales price, or around $5,000 per home, affecting all consumer groups. Regarding share repurchases, Marshall stated the company feels good about its $300 million buyback in Q1 and will report on Q2 activity at the end of the next quarter.

John Lovallo of UBS inquired about the drivers behind the sequential gross margin guidance for 2025 and whether historical seasonality for Q1 absorption rates is a reasonable expectation.

Answer

CEO Ryan Marshall stated the margin guide reflects the current backlog and anticipated sales, assuming incentives remain consistent with Q4 levels. Executive Vice President and CFO Robert Shaughnessy added that a 10% year-over-year increase in land costs is the primary cost driver. Marshall noted the company is encouraged by early "green shoots" in the spring selling season but did not provide a specific absorption guide.

John Lovallo inquired about the drivers behind the sequential gross margin decline from Q3 to Q4, specifically the split between incentives and mix, and asked about the operational impact from recent hurricanes.

Answer

EVP and CFO Robert O'Shaughnessy explained the margin pressure is from a combination of elevated incentives needed in the current market, a less favorable product mix with a temporary dip in high-margin active adult homes, and a geographic mix shift. President and CEO Ryan Marshall added that while hurricane impacts were minimal on property, they caused lost production days and potential delays in getting power meters set, though the company is confident in its Q4 guidance.

John Lovallo asked about the discrepancy between KB Home's third-quarter gross margin exceeding expectations and a slightly lower projected fourth-quarter gross margin, inquiring if delivery timing or mix shifts were factors, given the improved full-year outlook. He also sought insight into expected year-over-year and sequential movements in stick-and-brick and land costs for Q4 and 2026.

Answer

Robert Dillard, EVP & CFO, clarified that the Q3 margin beat was due to strong construction performance and product mix, not delivery timing. He noted that Q4's margin reflects ongoing inventory work and the transition to more built-to-order homes. For costs, he indicated no significant trend shift from Q3 to Q4 for land or stick-and-brick, with construction productivity offsetting impacts, and expects continued offset opportunities in 2026.

John Lovallo asked about the third-quarter gross margin exceeding expectations while the fourth-quarter gross margin was guided slightly lower, questioning if delivery timing or mix shifts between quarters played a role. He also inquired about the year-over-year and sequential movement in stick-and-brick costs and land costs into the fourth quarter, and expectations for 2026.

Answer

Jeff Mezger, Chairman and Chief Executive Officer, clarified that the Q3 margin beat was due to strong construction performance and product mix, not a toggle in delivery timing. Rob Dillard, Executive Vice President and Chief Financial Officer, reiterated the strong construction performance. Mezger stated that no significant trend shift in stick-and-brick or land costs was expected from Q3 to Q4, with construction productivity largely offsetting impacts, and anticipated continued offset opportunities in 2026.

John Lovallo questioned the third quarter's gross margin exceeding expectations compared to a slightly lower anticipated fourth quarter gross margin, asking if delivery timing or mix shifts between quarters played a role. He also sought insight into the year-over-year and sequential movement of stick and brick costs and land costs into Q4, and expectations for 2026.

Answer

Jeff Mezger, Chairman and Chief Executive Officer, clarified that there was no significant toggle on delivery timing; the Q3 margin performance was driven by strong construction execution and product mix. For Q4, he indicated no expected trend shift in the year-over-year impact of land or stick and brick costs, with construction productivity largely offsetting these, and anticipated continued offset opportunities into 2026.

John Lovallo of UBS Group AG inquired about KB Home's SG&A expense management, questioning why the ratio guidance only increased slightly despite a 6% revenue cut. He also asked for a breakdown of the drivers behind the lower gross margin outlook, including volume, ASP, mix, and land costs.

Answer

Chairman & CEO Jeffrey Mezger explained that KB Home is actively adjusting headcount to align with revised revenue projections and is focused on bringing the SG&A ratio back below 10% over time. EVP & CFO Rob Dillard attributed the gross margin pressure to reduced operating leverage, higher relative land costs, and unfavorable regional mix, noting that lower construction costs provided a partial offset.

John Lovallo inquired about the key variables, other than interest rates, that could push the full-year gross margin to the high or low end of its 20% to 21% guidance range, and also requested more detail on housing inventory levels across key markets.

Answer

EVP and CFO Jeff Kaminski stated that the margin range reflects rate uncertainty, with the Q1 sequential margin decline primarily due to lower operating leverage on reduced volume. Chairman and CEO Jeffrey Mezger noted that resale inventory is generally healthy at 3.5-4 months, with some markets like Austin and Jacksonville higher, but KB Home is competitively positioned at lower price points where inventory remains scarce.

John Lovallo asked for a detailed breakdown of why the Q3 gross margin came in at 20.7%, below the guided range, and what factors are driving the expected sequential increase in Q4. He also questioned the dynamic of rising existing home inventory and its potential impact on KBH's ability to reduce incentives.

Answer

EVP & CFO Jeff Kaminski attributed the Q3 gross margin variance primarily to a higher-than-expected mix of deliveries from the West Coast region, which currently carries margins below the company average. He noted the sequential Q4 improvement is supported by a detailed backlog forecast and improving margins within the West Coast. Chairman & CEO Jeffrey Mezger added that while resale inventory is rising, it remains limited at KBH's affordable price points, positioning the company to compete favorably.

John Lovallo inquired if Lennar is observing stabilization or improvement in Florida's inventory levels, particularly in key markets like the I-4 Corridor, consistent with reports from peers.

Answer

Jon Jaffe, Co-CEO and President, confirmed seeing some stabilization in Florida's inventory levels, aligning with Lennar's focus on managing its own inventory. Stuart Miller, Executive Chairman and Co-CEO, added that moderating inventories are contributing to a more stable environment.

John Lovallo asked about the cause of Lennar's slight miss in Q3 deliveries, given solid orders and historically low cycle times. He also inquired if the observed stabilization and improvement in Florida inventory levels, particularly in key markets like the I-4 corridor, were consistent with Lennar's on-the-ground observations.

Answer

Co-CEO & President Jon Jaffe attributed the slight delivery miss to timing and the mortgage approval process, not other underlying issues. Executive Chairman & Co-CEO Stuart Miller and Jaffe confirmed that they are seeing stabilization in Florida inventory levels, both existing and new homes, which is contributing to a more stable market environment.

John Lovallo asked about the reasons behind Lennar's slight miss in third-quarter deliveries, especially given solid orders and historically low cycle times. He also inquired if Lennar's observations in Florida, particularly in key markets like the I-4 corridor, align with reports of stabilizing or improving inventory levels.

Answer

Jon Jaffe, Co-CEO and President, attributed the delivery miss to timing related to sales and mortgage approval processes, with no other significant factors. Regarding Florida, Mr. Jaffe confirmed that Lennar's observations align with reports of stabilizing inventory levels, particularly in markets like Tampa and Orlando, noting Lennar's consistent focus on managing its own inventory. Stuart Miller, Executive Chairman and Co-CEO, added that moderating inventories across the competitive landscape in Florida are contributing to a more stable environment.

John Lovallo asked for a breakdown of the Q2 gross margin guidance, including purchase accounting impacts, and for a response to the bear case that Lennar's even-flow strategy increases margin cyclicality.

Answer

CFO Diane Bessette clarified that the purchase accounting impact on Q2 gross margin is expected to be about 20 basis points. She also confirmed that homes sold and closed within the quarter are likely being sold at margins within the 18% guidance range. In response to the bear case, Executive Stuart Miller defended the strategy, stating that in a softening market, it is better to convert assets to cash rather than hold them, as their value is unlikely to increase with time. He stressed that the strategy is to move through inventory efficiently.

John Lovallo questioned the rationale for using an external manager for the Millrose spin-off and asked for appropriate valuation comparables. He also followed up on the 10% delivery growth target, asking if it would have been lowered without the Rausch Coleman acquisition.

Answer

Executive Chairman Stuart Miller and COO Fred Rothman explained that Kennedy Lewis was chosen as the external manager due to a strong existing relationship and their familiarity with Lennar's systems, ensuring a seamless launch. On growth, Miller clarified that the Rausch Coleman deal was part of their strategic thinking when the target was formulated and not a later addition. Rothman highlighted that Rausch provides immediate number-one market share in several new markets.

Followed up on SG&A, asking if reducing broker commissions was simply shifting costs to sales incentives. He also asked about the pros and cons of using a REIT structure for the Millrose spin-off and why this isn't common for private land banks.

Answer

Management stated they have not seen a reduction in traffic from their broker strategy and that the goal is to genuinely reduce the total cost of the home, not just shift expenses from commissions to incentives. They declined to comment on the specifics of the REIT structure for Millrose, stating that more details would be available when the S-11 is filed publicly.

John Lovallo followed up on SG&A, asking if the reduction in broker usage was simply shifting costs from SG&A to incentives in cost of goods sold to drive volume. He also questioned the choice of a REIT structure for the Millrose spin-off, asking about its pros and cons and why it's not a more common structure for private land banks.

Answer

Executive Chairman Stuart Miller asserted that the company has not seen a reduction in traffic and that the strategy is not about shifting costs but about genuinely reducing the total cost of a home for the customer, which benefits both affordability and margin. He acknowledged it's a 'complicated balance' they monitor daily. Regarding the REIT structure for Millrose, Miller declined to provide details, stating he was limited by the SEC confidential review process and that more information would be available when the S-11 registration is made public.

John Lovallo followed up on SG&A, asking if lower broker costs were simply being shifted to higher sales incentives. He also questioned the pros and cons of using a REIT structure for the Millrose spin-off and why this isn't common for private land banks.

Answer

Executive Chairman Stuart Miller stated that while there is a balance, he does not believe the trade-off between lower broker costs and incentives is outsized, as the primary goal is to lower the home's overall cost. Regarding the REIT structure for Millrose, Miller declined to provide details, citing the pending S-11 filing and describing it as a 'unique structure' that will be detailed in the future.

John Lovallo followed up on the previously announced $100 million in expected annual savings from restructuring actions, asking about the cadence of these savings and their impact in the fiscal fourth quarter.

Answer

Bill Brundage, CFO & Director, Ferguson, confirmed that the streamlining actions are progressing well, with cost savings playing through and improved decision-making agility. He stated that roughly $25 million of the annualized cost benefits were realized in the fourth quarter, and similar amounts are expected over the next three quarters. Brundage noted that Q4 costs as a percentage of sales were roughly flat year-over-year, with underlying cost reductions offset by sales volume, cost inflation, and performance-linked associate pay.

John Lovallo inquired about the sustainability of the 5% organic volume growth in the U.S., questioning the split between internal initiatives and market improvement. He also asked about the drivers behind the strong 31% gross margin and the outlook for Q4.

Answer

CEO Kevin Murphy attributed the strong organic growth to strategic initiatives in non-residential large projects and HVAC expansion. CFO Bill Brundage explained that the robust gross margin resulted from specific pricing actions and moderating deflation, adding that he expects gross margins to remain above 30% in the fourth quarter.

John Lovallo questioned if Ferguson is seeing any impact from Department of Energy (DOGE) regulations on water infrastructure projects and asked for quantification of the gross margin impact from the sales mix shift towards HVAC and Waterworks.

Answer

CEO Kevin Murphy stated that the company is not seeing any near-term impact from DOGE regulations and that current growth in civil infrastructure and Waterworks is driven by addressing aging infrastructure rather than a flood of federal dollars. CFO Bill Brundage quantified the gross margin impact, stating that roughly two-thirds was from market conditions and deflation, with the remaining one-third driven by the sales mix.

Matt Johnson, on behalf of John Lovallo, asked about organic sales trends throughout Q1 and into November, and also inquired about the M&A pipeline, including current valuation expectations and the potential for increased activity in 2025.

Answer

CFO Bill Brundage stated that organic sales and the overall 2% deflation rate were consistent throughout Q1 and into November. Regarding M&A, Brundage described the pipeline as 'quite healthy' with 'ample runway' for acquisitions. He noted that valuation expectations have not changed much over the past year and reaffirmed the company's ability to add 1% to 3% in annualized revenue from acquisitions over time, though the timing of individual deals remains hard to predict.

John Lovallo of UBS inquired about the outlook for price deflation, specifically its trajectory in the second half of the fiscal year, and asked for details on the drivers behind the FY25 operating margin guidance range.

Answer

CFO Bill Brundage stated that deflation of approximately 2% continued into the new fiscal year, driven by commodities, and is expected to ease in the second half. He noted the 9.0% to 9.5% operating margin guidance reflects near-term pressure on SG&A leverage from deflation and soft markets. Upside could come from price inflation and a faster residential recovery, while downside risks include prolonged commodity pressure. CEO Kevin Murphy added that the company continues to invest for medium-term growth despite near-term headwinds.

John Lovallo from UBS Group AG asked about Toll Brothers' growth prospects for fiscal year 2026, questioning if the historical sales pace target is still achievable and seeking confirmation on continued community count growth.

Answer

Douglas Yearley, Chairman & CEO, expressed strong confidence in the company's position for fiscal 2026. He highlighted significant community count growth, a robust pipeline of 3,200 spec homes in process and 1,800 ready-to-start permits, reduced cycle times, and a high-value backlog. Mr. Yearley reaffirmed previous soft guidance for similar community count growth in 2026 as seen in 2025, driven by a strong land position and favorable macro trends.

John Lovallo of UBS asked about the key factors influencing the second-half gross margin outlook and the drivers behind the Q2 delivery beat.

Answer

Executive Douglas Yearley explained that the stable Q3 and Q4 gross margin guidance of 27.25% is supported by a favorable product mix, with more high-margin luxury homes from the Pacific and Mid-Atlantic regions offsetting margin pressure from spec home sales. CFO Martin Connor attributed the Q2 delivery beat to outperforming projections on selling and settling spec homes, which he stated demonstrates the conservatism embedded in their full-year guidance.

John Lovallo asked about the assumptions for incentives embedded in the gross margin forecast and sought specifics on which markets and price points are seeing the most competitive pressure.

Answer

Executive Chairman Douglas Yearley stated the Q2 margin guidance is supported by a favorable mix shift towards higher-margin luxury and Pacific region homes. He confirmed the full-year forecast incorporates conservatism around incentives. Yearley identified softer Q1 markets as Jacksonville, Tampa, San Antonio, and Phoenix, primarily impacting their affluent first-time buyer segment ($600k-$800k homes), though he noted recent signs of improvement.

John Lovallo asked why the company guided for lower share buybacks in fiscal 2025 despite similar projected cash flow, and inquired about the cadence of gross margin improvement throughout the year.

Answer

Executive Chairman and CEO Douglas Yearley explained that the $500 million buyback figure is a starting guide and could increase, noting that last year's initial guide was also exceeded. Regarding margins, he clarified the full-year guidance does not assume lower rates or an improving market. CFO Martin Connor suggested modeling a relatively steady margin for the last three quarters of the year.

John Lovallo asked about North American residential insulation, inquiring how industry capacity utilization has trended and the outlook for pricing, given the expectation for negative price-cost in Q3.

Answer

CFO Todd Fister explained that enterprise exposure to North American residential is now only 13% of revenue. He noted that industry utilization is below the 90% level, a threshold where pricing trends are not conclusive. Fister stated that while the company is maintaining its price premium and stable share, it saw limited traction on its recent price increase and is facing inflation in materials, labor, and warehousing, leading to a negative price-cost outlook.

John Lovallo questioned the outlook for fiberglass insulation pricing, given the guidance for a low to mid-teens revenue decline in North American residential insulation for Q2.

Answer

CFO Todd Fister clarified that a mid-2024 price increase is providing a favorable year-over-year price comparison for the first half of 2025. While the 2025 price increase has seen limited uptake, the overall Insulation segment is still guided to achieve positive pricing in Q2.

John Lovallo questioned the expected revenue cadence throughout the year for the businesses being moved into the Roofing and Insulation segments after the resegmentation.

Answer

CEO Brian Chambers clarified that the revenue contribution from these businesses (structural lumber, nonwovens, and glass fiber plants) should be fairly ratable throughout the year, with only minor seasonality in Q4 for nonwovens. He also explained the strategic rationale for the new alignment, noting the businesses will carry margin profiles consistent with their new parent segments.

John Lovallo from UBS Group AG asked about the sense of urgency and progress regarding potential strategic actions to address leverage, specifically mentioning the North American distribution and European businesses. He also questioned the primary drivers behind the significant implied EBITDA margin improvement expected in the second half of the year.

Answer

CEO William Christensen emphasized that while reducing the 5.7x leverage is a priority, there is no immediate time pressure due to ample liquidity and no restrictive covenants. He described the strategic review as being in the 'first innings' and committed to providing a clear plan by year-end. CFO Samantha Stoddard explained that the second-half EBITDA margin improvement is driven by a combination of ~30% incremental margins on volume plus discrete benefits from executed footprint actions and reductions in force, with a significant portion of transformation and cost-saving benefits being back-half loaded.

John Lovallo from Wolfe Research, LLC questioned the company's confidence in passing through the $30 million tariff impact to customers and asked for context on the Q2 EBITDA outlook, which is expected to be only 'slightly better' than Q1, contrasting with historical seasonal improvements.

Answer

CEO William Christensen explained that JELD-WEN is in constant negotiation with customers and is also exploring reshoring opportunities to mitigate costs. He noted the primary uncertainty is the second-order effect of tariffs on overall demand. Regarding Q2, Christensen confirmed a muted seasonal rebound, with April demand trends mirroring the weakness seen in Q1. CFO Samantha Stoddard added that the full demand impact from tariffs was not yet visible in Q1.

John Lovallo of UBS inquired about the specifics of JELD-WEN's quality issues, their potential link to a lost Midwest customer, the financial impact of that customer loss, and the reasons behind the high sequential decremental margins implied in the Q4 outlook.

Answer

CEO William Christensen clarified that the quality issues stemmed from an aged asset base and deferred maintenance, and were not the cause of the Midwest customer loss. He sized the lost customer at $75-$100 million in full-year revenue. CFO Samantha Stoddard added that the Q4 decremental margin is skewed by a non-repeating $20 million in other income from Q4 2023, and the company expects to return to 25-30% decrementals in 2025.

John Lovallo of UBS Group asked if the company could quantify the impact of adverse weather in Q2 and how a potential weakening of the consumer would affect new product introductions.

Answer

President & CEO Bryan Fairbanks stated that while the negative impact from weather was clear, it was difficult to quantify. He asserted that a weaker consumer environment would not alter their new product introduction strategy, as R&D is a long-term investment in maintaining market competitiveness.

John Lovallo of UBS Group AG asked if the company could quantify the impact of adverse weather in Q2 and how a potential consumer slowdown might affect the new product introduction pipeline.

Answer

President & CEO Bryan Fairbanks stated that while the negative impact of weather was clear in sales trends, it was difficult to quantify precisely. He affirmed that a consumer slowdown would not impact their long-term R&D investments or new product launch cadence.

John Lovallo asked about Trex's tariff mitigation strategy, specifically regarding the potential for resourcing out of China and the use of pricing actions. He also questioned what was driving the stabilization in the entry-level market, given that broader consumer sentiment appeared to be weakening.

Answer

CEO Bryan Fairbanks stated that Trex's direct exposure to China is 'very, very limited' and that the supply chain team is exploring sourcing alternatives without making rash moves. Regarding the entry-level market, he attributed its resilience to pent-up repair and remodel demand that has built up over several years, noting that even Trex's entry-level customer is a relatively high-income consumer.

John Lovallo from UBS asked about the cadence of the flat R&R market expectation for 2025 and the expected contribution from new products to 2025 sales.

Answer

CEO Bryan Fairbanks noted the flat R&R outlook is slightly weaker than previous expectations due to the lack of interest rate declines, emphasizing that sales must materialize in Q2 and Q3. He highlighted that new product launches, including new Lineage and Select colors and a doubled railing portfolio, will significantly expand the 20% of revenue that came from new products in 2024, with launches continuing every 6-9 months.

John Lovallo asked for quantification of the incremental capacity generated at existing plants that allowed for the delay of Arkansas decking production. He also inquired about the company's appetite for share repurchases.

Answer

CEO Bryan Fairbanks declined to quantify the specific efficiency gains but confirmed they, along with a weaker market, enabled the delay. He affirmed that the company has an open share repurchase program and coordinates its execution with the Board of Directors.

John Lovallo asked about the drivers behind the Water segment's high 25.6% margin, questioning if any one-time items were involved, and requested details on the plan to offset the updated tariff impact, including the mix of pricing and cost actions.

Answer

CFO Jon Baksht confirmed the strong Water margin was driven by productivity, manufacturing efficiencies, and SG&A control, with no one-time benefits. He noted strong performance in the luxury House of Rohl brand contributed. CEO Nicholas Fink added that pricing has been disciplined, averaging mid-single digits. Regarding tariffs, Fink stated that while the specific mix is competitive, the priority is always supply chain savings first, with pricing used to cover the remainder. Baksht specified that about half of the $260 million annualized tariff impact is from China.

John Lovallo of UBS Group AG asked about the company's confidence in achieving its $300 million sales target for digital initiatives and how it balances these new ventures with driving performance in the core business. He also questioned the Water segment's performance relative to a competitor, seeking more detail on the e-commerce pricing strategy and any notable market share shifts.

Answer

CEO Nicholas Fink expressed high confidence in the digital business, citing its value proposition is detached from the typical R&R cycle, and assured that the core business continues to receive significant investment and innovation. President of Security and Connected Products, David Barry, confirmed the digital business is on track to meet its full-year goal. Regarding the Water segment, Fink explained the company is implementing a firmer e-commerce pricing strategy for long-term channel health, which may cause a short-term share trade-off. Barry added that a significant inventory drawdown in the wholesale channel was a primary factor in the segment's quarterly results.

John Lovallo asked about the significantly lower 2025 CapEx forecast and whether it was sufficient for growth. He also sought clarification on the 2024 digital sales figure and requested more color on new insurance partnerships for Flo.

Answer

CFO David Barry explained that the lower CapEx reflects the completion of major capacity investments in prior years and that the business is well-positioned for growth. CEO Nicholas Fink addressed digital sales, noting choppiness in the Yale business offset strong growth in Flo. For Flo, Fink highlighted the signing of diverse insurance partnerships and plans to trial a subscription model in 2025 to accelerate adoption and create recurring revenue.

John Lovallo asked for clarification on the drivers behind the lowered full-year guidance and the significant margin improvements in the Outdoors and Security segments despite sales declines.

Answer

CEO Nicholas Fink explained the sales softness was due to a deliberate pivot from low-margin categories, a need to convert digital contracts to revenue faster, and consumer trade-down to knock-off brands. CFO David Barry added that of the ~$135M full-year sales revision, $80M occurred in Q3, with the remaining $55M in Q4 split between hurricane impacts and continued consumer softness. Barry attributed strong margins to shedding unprofitable business, productivity initiatives, and cost savings from footprint alterations, which are now funding new marketing and innovation investments.

John Lovallo of UBS Group AG inquired about the impact of upcoming Canadian lumber tariffs on the company's commodity outlook and how the above-target net leverage ratio of 2.3x might influence the capacity for share repurchases.

Answer

CFO Pete Beckmann confirmed that the lumber duty increases are factored into guidance but will have a minimal financial impact in 2025 due to inventory lead times. He highlighted OSB as the main source of commodity pressure. Regarding leverage, Beckmann stated that capital allocation priorities remain unchanged, emphasizing a focus on a healthy balance sheet, but noted no share buybacks have occurred since April.

John Lovallo from UBS asked about the competitive landscape, questioning the sustainability of smaller competitors given BLDR's projected 29-31% gross margins. He also asked for details on the cadence and drivers of the targeted $70-90 million in full-year productivity savings.

Answer

CEO Peter Jackson stated that some competitor behavior is unsustainable and that builders ultimately need stable partners who invest in the industry's future, which is BLDR's focus. On productivity, Jackson described it as a core, continuous effort. CFO Pete Beckmann added that the savings are expected to be realized ratably throughout the year, though the ERP rollout could have some impact in the second half.

John Lovallo requested a bridge from the Q1 implied EBITDA margin to the full-year guidance, considering impacts from weather and wildfires, and asked how the projected $500 million working capital swing would vary with sales performance.

Answer

CFO Pete Beckmann detailed that the full-year EBITDA margin improvement relies on lapping negative comps, back-half organic growth, and contributions from acquisitions and digital sales. He also noted the working capital swing is a function of the sales exit rate and that about $200 million of free cash flow was pulled forward into 2024.

John Lovallo of UBS inquired about the cadence of the expected $10-12 million in cost savings throughout the year and the specific initiatives driving them. He also asked about the moderating growth in Noke smart entry system installed units and the outlook for adoption through the rest of the year.

Answer

CFO Anselm Wong explained that the cost savings should reach their full run-rate by the end of Q2, driven by labor force adjustments and G&A reductions, such as exiting unneeded leases. Regarding Noke, Mr. Wong attributed the moderating sequential growth percentage to the expanding size of the installed base. He affirmed that the company remains bullish on the outlook for the new Noke Ion product for the remainder of the year and beyond.

John Lovallo of UBS asked about the company's performance so far in Q1 and whether it was tracking in line with expectations. He also questioned the reason for the slower pace of share buybacks in Q4 and inquired about any recent changes in the competitive landscape.

Answer

CFO Anselm Wong confirmed that Q1 was progressing on track with the company's guidance. He explained the reduced pace of share repurchases was a result of balancing capital allocation, preserving cash for potential M&A opportunities and year-end capital expenditures. CEO Ramey Jackson addressed the competitive environment, noting that smaller competitors are more affected by current market conditions, which positions Janus to gain market share in 2025 due to its focus on well-capitalized customers.

Spencer Kaufman, on for John Lovallo, asked if management expects a snapback in activity after the election, what it would take for project delays to become cancellations, and if recent hurricanes had any impact on results or the outlook.

Answer

CEO Ramey Jackson stated that a recovery depends on the broader macro environment, including both election clarity and interest rate movements, and that historically, self-storage sees tremendous tailwinds after such downturns. CFO Anselm Wong noted that the impact from recent hurricanes was very small, as active sites were not in majorly affected areas, but they are beginning to see some orders for replacement doors.

Asked about the outlook for share repurchases for the remainder of the year and inquired about the current M&A landscape and the company's acquisition priorities.

Answer

Share repurchases are still planned but are expected to be weighted to the back half of the year due to lower Q1 cash flow and near-term M&A opportunities. The M&A focus is on recycling assets and strategic tuck-in acquisitions that complement their existing business.

Asked for the expected magnitude of the R&R market decline in Q4, the outlook for R&R in fiscal 2025, and how a softer market might impact pricing strategy.

Answer

Executives follow external forecasts which call for a modestly negative R&R market in their fiscal Q4. For 2025, they are focused on their own initiatives to outgrow the market by 5-7% rather than predicting the macro, noting it would be historically unusual for R&R to be negative for a third consecutive year. They do not expect the macro environment to meaningfully impact their pricing strategy of seeking modest increases to offset inflation.