Matthew Bouley

Matthew Bouley inquired about any unexpected impacts on Q3 plumbing margins beyond the anticipated 145% tariffs, and sought clarification on the drivers behind the performance of the builders' hardware business.

Answer

VP and CFO Rick Westenberg detailed three main drivers for Q3 plumbing margins: tariffs (including a $15 million impact from elevated 145% China tariffs), overall industry softness, and incremental costs (copper, inventory-related reserves). He clarified that new tariffs were primarily a Q4 event. For builders' hardware, Rick Westenberg attributed the performance to general industry softness and a planned shipping process change in Q3, not expecting a significant full-year impact.

Matthew Bouley inquired about the specific drivers behind the Q3 plumbing margins, asking if there were any surprises beyond the anticipated 145% tariffs, such as incremental tariffs or other unexpected costs. He also asked for more details on the builders' hardware business, specifically regarding lower volume, inventory timing, and price elasticity.

Answer

Rick Westenberg, VP and CFO, explained that Q3 plumbing margins were impacted by tariffs (including a $15 million impact from elevated China tariffs), overall industry softness, and incremental costs like higher copper prices and inventory-related reserves. He clarified that new tariffs since Q2 would primarily impact Q4. For builders' hardware, he attributed softness to lower sales across the industry and a planned shipping process change in Q3, which is not expected to significantly impact the full year.

Matthew Bouley questioned if the gross margins coming in below guidance (even excluding litigation) signaled a conceptual change in the balance between growth and gross margin, specifically if D.R. Horton is willing to sacrifice some gross margin to drive higher volumes. He also asked about the outlook for flattening or improving lot costs, given sequential inflation, and when such improvements might benefit the company.

Answer

Mike Murray, COO, stated that D.R. Horton continues to respond to market conditions, leveraging an unprecedented level of flexibility with community count and available lots, but clarified they would not operate at a zero profit margin. Paul Romanowski, President and CEO, indicated little shift in overall lot costs over the next 12 months due to portfolio mix, but noted flattening and reductions in development costs for new lots and opportunities to renegotiate land terms. Jessica Hansen, SVP of Communications, highlighted a better opportunity in 2026 to renegotiate stick and brick costs, which are expected to decrease throughout the year.

Matthew Bouley questioned D.R. Horton's gross margin in the context of guiding for growth in a non-growing market, asking if there's a conceptual shift in balancing growth and gross margin, potentially sacrificing margin for higher volumes. He also asked about the outlook for flattening or improving lot costs, given sequential inflation, and when D.R. Horton might benefit from this.

Answer

COO Mike Murray stated that D.R. Horton continues to respond to market conditions daily, leveraging its strong community count and lot portfolio. He emphasized that the company will not operate at a zero profit margin. President and CEO Paul Romanowski expects little overall shift in lot costs over the next 12 months due to portfolio mix, but anticipates flattening or reductions in development costs for new lots. SVP of Communications Jessica Hansen highlighted renegotiating stick and brick costs as a key opportunity for 2026, expecting them to decrease.

Matthew Bouley inquired about the flow-through of initial tariff-related price increases, the timing of benefits from recently announced additional price increases, and sought quantification of the mitigated or unmitigated tariff headwind, including its impact on Q4 guidance and potential Q1 2026 effects.

Answer

President and COO Paul De Cock confirmed that previously announced price increases are flowing and additional increases (5-10% for tariffs, ~5% for carpet) were announced in Q3, expecting time to reach equilibrium. Chairman and CEO Jeff Lorberbaum stated the average tariff impact is approximately 20% on imported products, an annualized $110 million before mitigations, with benefits from lower freight rates. CFO James Brunk confirmed tariff costs and initial price increase benefits are contemplated in Q3 and Q4 guidance.

Matthew Bouley asked for details on the 'over 100 new communities' planned for next year, including regional and product breakdowns, and the expected expansion and mix shift of the Esplanade brand.

Answer

Chairman and CEO Sheryl Palmer confirmed three new Esplanade communities opening in Q1 next year, including one with golf amenities, aligning with investor day discussions. CFO Curt VanHyfte stated broader details on outlet growth would be provided next quarter.

Matthew Bouley asked for details on the over 100 new communities planned for next year, specifically inquiring about their regional or product breakdown and any anticipated movement in the mix of Esplanade sales.

Answer

Sheryl Palmer, Chairman and CEO, indicated that specific details for 2026 would be provided next quarter but shared that three new Esplanade communities, including one with golf amenities, are scheduled to open in Q1 2026, consistent with investor day discussions. Curt VanHyfte, CFO, added that outlet growth would be broad-based across the country. Matthew Bouley also inquired about the significant SG&A leverage observed, asking if there were one-time factors in Q3 or if this represented a new run-rate level for modeling purposes. Curt VanHyfte, CFO, attributed the improvement to lower payroll-related and commission costs, noting that SG&A is a cultural focus. Sheryl Palmer, Chairman and CEO, highlighted efficiencies from the centralized contracts department and an 800 basis point reduction in broker-related sales through the reservation system in September, contributing to leverage.

Matthey Bouley asked about PulteGroup's dialogue with the administration regarding housing solutions and the company's updated spec production strategy, specifically the shift to running closer to 50% spec production.

Answer

Ryan Marshall, President and CEO, stated that the company's prepared remarks fully cover their stance on housing policy, emphasizing the complexity rooted in local politics. Regarding spec production, Mr. Marshall clarified that the target of 40-45% remains, but a challenging sales environment led to fewer built-to-order homes, resulting in a higher *percentage* of specs despite a reduction in the *number* of specs in production. The focus remains on dirt-to-be-built sales.

Matthew Bouley asked about PulteGroup's dialogue with the FHFA and the administration regarding housing policy, seeking insight into actionable solutions for the housing shortage, and also inquired about the company's shift in spec production strategy to run closer to 50% from the previously stated 40%-45% target.

Answer

Ryan Marshall (President and CEO, PulteGroup Inc.) stated that the prepared remarks fully covered the administration dialogue, emphasizing the complexity of the housing shortage rooted in local politics and anti-growth mentalities, requiring a coordinated, long-term effort. Regarding spec production, Mr. Marshall clarified that the goal of aligning starts with sales and maintaining 40%-45% spec inventory remains unchanged. The current 50% is a mathematical outcome of a challenging sales environment leading to fewer to-be-built homes, despite a reduction in the actual number of specs in production, with the focus remaining on built-to-order sales.

Matthew Bouley followed up on the cancellations environment, asking for an update on trends and Lennar's interpretation of current cancellation rates.

Answer

Jon Jaffe, Co-CEO and President, stated that the cancellation pace remained consistent from Q2 to Q3. He noted that cancellations are directly tied to community-specific efforts to support customers facing affordability challenges.

Matthew Bouley asked about Lennar's future incentive strategy, specifically whether the company anticipates maintaining rate buydowns as a competitive advantage against the resale market, or if a material pullback is foreseen if mortgage rates drop to 6% or lower. He also requested an update on the cancellations environment, including current trends and Lennar's interpretation of them.

Answer

Stuart Miller, Executive Chairman and Co-CEO, explained that while builders provide lower rates through buydowns, a broader market decline in interest rates unlocks the existing home market, creating a 'flywheel effect' that benefits the entire housing ecosystem. Jon Jaffe, Co-CEO and President, stated that cancellation rates remained 'pretty consistent' from Q2 to Q3, directly tied to community-specific efforts to support customers facing affordability challenges.

Matthew Bouley asked about Lennar's future incentive strategy, specifically whether the company anticipates maintaining mortgage rate buy-downs as a competitive advantage or if a material pullback is foreseen if rates reach 6% or lower. He also requested an update on the cancellation environment trends from Q2 to Q3.

Answer

Executive Chairman & Co-CEO Stuart Miller explained that while builders provide buy-downs, lower market interest rates unlock the broader housing market, creating a 'flywheel effect' that benefits the entire ecosystem. Co-CEO & President Jon Jaffe stated that cancellation rates remained 'pretty consistent' from Q2 through Q3, directly tied to community-specific efforts to support customers facing affordability challenges.

Matthew Bouley inquired about Ferguson's go-to-market strategy for large capital projects, specifically how the multi-customer group approach (waterworks, commercial PVF, fire protection) is leveraged with various contractors and customers, and sought insights into the data center project pipeline.

Answer

CEO Kevin Murphy detailed that Ferguson goes to market by being best-in-class for individual trade professionals while also engaging engineers, architects, and owners upstream to ensure timely and on-budget project completion. He noted strong growth in commercial mechanical (21%), waterworks (15%), and industrial/fire protection (5%), and confirmed accelerating data center activity across various geographies, with no pauses or cancellations observed.

Matthew Bouley inquired about Ferguson's success with large capital projects, specifically how the multi-customer group approach (waterworks, commercial PVF, fire protection) is leveraged to go to market with various contractors and customers, and the current pipeline for data center projects.

Answer

Kevin Murphy, President, CEO & Director, Ferguson, detailed Ferguson's multi-customer group strategy, emphasizing being a best-in-class provider for individual trade professionals while also engaging with engineers, architects, and owners to ensure timely and on-budget project completion. He highlighted strong growth in waterworks (+15%), commercial mechanical (+21%), industrial, and fire protection. Murphy confirmed accelerating data center construction activity across various geographies, noting no pauses or cancellations, and its positive impact on piping systems, valve automation, fabrication, and virtual design services.

Matthew Bouley asked about Ferguson's broad growth and end market outlook, including cross-currents in new residential, HVAC, non-residential, and inflation, seeking assumptions for price and volume quarter-to-date and going forward. He also inquired about specifics regarding large capital projects, the go-to-market strategy leveraging Ferguson's multi-customer group approach, and the pipeline for data centers.

Answer

Kevin Murphy (CEO) and Bill Brundage (CFO) explained that strong Q4 and full-year growth was driven by key areas like HVAC expansion, Ferguson Home, waterworks diversification, and large capital projects. They anticipate softer growth in the second half of calendar year 2025 due to continued new residential construction weakness, softer RMI, and HVAC affordability issues, while non-residential large capital projects remain resilient. Bill Brundage noted July was strong, August sales per day were up about 5%, and H2 growth is expected to be a touch softer. Kevin Murphy detailed Ferguson's multi-customer group approach for large capital projects, engaging individual contractors and upstream stakeholders (engineers, owners). He highlighted strong growth in waterworks, commercial mechanical, industrial, and fire protection, confirming accelerating data center activity and other large projects in biotechnology, pharma, and water/wastewater treatment.

Matthew Bouley followed up on the residential market, seeking insight into its performance in Q1 and Q2 2025, the expected cadence of weakening into the second half, and customer sentiment regarding lot development.

Answer

CEO Mark Witkowski noted that residential performance in Q1 2025 was better than expected, but weakened throughout Q2 and into August. He anticipates a low double-digit decline for the remainder of 2025, attributing it to builders scaling back projects and reduced investments in infrastructure.