Michael Rehaut

Michael Rehaut inquired about Meritage Homes' perspective on the administration's comments regarding share repurchases, including Bill Pulte's remarks, and how these comments might influence the company's intention for a higher level of share repurchases in 2026.

Answer

Executive Chairman Steve Hilton affirmed Meritage Homes' commitment to affordability and collaboration with the federal government. He stated that buybacks are a key part of their balanced capital allocation, especially when the stock trades at a discount to intrinsic value, and they will continue this approach as long as there are no unintended consequences.

Michael Rehaut asked for more detail on Meritage Homes' encouragement regarding January demand trends and expectations for the spring selling season, clarifying if 'better' meant better than Q4 2025 or better than the spring selling season a year ago. He also inquired about the administration's comments on share repurchases versus core investment and Meritage's intentions for higher share repurchases in 2026.

Answer

Executive Chairman Steve Hilton stated that 'better' refers to better than Q4 2025, expressing optimism for returning to 4 sales per month in Q1 and Q2 2026 due to improved funnel prospects, increased realtor activity, and moderating incentive utilization in January. Regarding share repurchases, Steve Hilton emphasized Meritage's commitment to affordability and collaboration with the federal government, while also asserting that buybacks are a crucial part of their balanced capital allocation strategy, especially when the stock trades at a discount to intrinsic value.

Michael Rehaut asked for clarification on Meritage Homes' Q3 sequential margin decline, which was higher than peers, and the Q4 outlook, which appeared better. He questioned if this was due to real-time selling or an outsized impact from reducing finished specs in Q3. He also inquired about the company's share repurchase strategy, asking if the cadence would increase to a $50-100 million range, given past exceedances of earlier guidance.

Answer

Phillippe Lord (CEO, Meritage Homes) clarified that Meritage is not guiding to better margins in Q4; after backing out impairments, a modest sequential decline is expected due to clearing older specs. Hilla Sferruzza (EVP and CFO, Meritage Homes) confirmed the Q2 to Q3 decline and noted Q4 guidance reflects clearing older inventory and typical year-end higher incentive usage. Regarding share repurchases, Hilla Sferruzza stated that the current cadence (Q3 was $55 million) is likely the floor and a fair number to model going forward, with opportunistic deeper repurchases possible.

Michael Rehaut from JPMorgan Chase & Co. pressed for more details on the decision to pull full-year guidance and sought to quantify the year-over-year gross margin impact from increased incentives.

Answer

CEO Phillippe Lord and CFO Hilla Sferruzza explained that pulling guidance was a responsible action due to the lack of visibility from their high-conversion, low-backlog model, which makes Q4 results highly dependent on real-time sales. Sferruzza attributed the year-over-year margin pressure primarily to a lower ASP (down to $387k from $411k), driven by higher utilization of financing incentives which directly reduces top-line revenue.

Michael Rehaut from JPMorgan Chase & Co. pressed for more detail on the decision to withdraw full-year guidance and sought clarification on the year-over-year gross margin decline, specifically the impact from incentives versus other cost factors.

Answer

CEO Phillippe Lord and EVP & CFO Hilla Sferruzza reiterated that the guidance withdrawal was solely due to a lack of visibility from a low starting backlog for Q3 and zero identified closings for Q4. Sferruzza clarified the year-over-year margin decline was primarily driven by a lower average selling price (ASP) resulting from increased utilization of financing incentives, which are recorded as a direct reduction of revenue.

Michael Rehaut asked what factors are allowing Meritage to maintain its guidance amid industry volatility and inquired about the current M&A and land market backdrop.

Answer

CEO Phillippe Lord attributed their performance to hitting Q1 targets, positive April trends, and strong community count growth. He highlighted their move-in-ready inventory strategy as a key differentiator. On M&A, he noted that while deal flow is high, underwriting is challenging. He sees opportunities in the land market to renegotiate terms and confirmed they walked away from 1,500 lots in Q1 due to sellers' unwillingness to adjust prices.

Michael Rehaut asked about the primary drivers for the Q1 2025 gross margin guidance, questioning the impact of incentives versus other factors like lot costs and community mix. He also inquired if Meritage would need to increase incentives to meet its full-year closings guidance if the market remains soft.

Answer

EVP and CFO Hilla Sferruzza explained that the Q1 margin guidance is primarily a function of current market incentives, given the high number of homes sold and closed within the same quarter. CEO Phillippe Lord added that the company feels comfortable with its full-year closings guidance in a 7% mortgage rate environment with the current incentive structure, but noted that improved rates could lead to better performance.

Michael Rehaut asked about the cadence of incentives during Q3, their current level as a percentage of sales price compared to pre-COVID norms, and the general availability of finished lots across the company's footprint.

Answer

CFO Hilla Sferruzza stated that incentives are currently running several hundred basis points above the pre-COVID norm of 3-6%. CEO Phillippe Lord characterized the availability of finished lots as 'scarce, beyond scarce,' a long-standing market condition that reinforces their strategy of self-developing nearly 90% of their lots.

Michael Rehaut asked for details on PulteGroup's full-year gross margin outlook, including assumptions for ASP, house costs, land costs, and promotions, and also inquired about inventory and supply trends across major markets, particularly Florida.

Answer

Ryan Marshall, President and CEO, outlined expectations for flat ASP, slightly down house costs, 7-8% increase in land costs, and elevated discounts, emphasizing a focus on optimal return on investment. Mr. Marshall also noted positive order trends in Florida, with outperformers in Fort Myers, Naples, East Coast, and Orlando, while Tampa and Jacksonville remained stable.

Michael Rehaut inquired about the assumptions behind PulteGroup's full-year gross margin outlook of 24.5%-25.0%, specifically regarding sequential progression, land costs, promotions, labor, materials, and any impact from the ICG divestiture. He also asked about inventory and supply trends in major markets over the last three to six months, particularly in Florida.

Answer

Ryan Marshall, President and CEO, outlined expectations for flat ASPs, slightly down house costs, a 7%-8% increase in land costs, and elevated discounts, emphasizing a focus on optimal return on investment. For Florida, Mr. Marshall noted strong order trends in Fort Myers, Naples, the East Coast, and Orlando, with Tampa and Jacksonville showing stability.

Michael Rehaut asked about PulteGroup's anticipated buyer segment mix (first-time, move-up, active adult) for 2026-2027, especially with improved build times, and also questioned the prospects for volume growth in 2026 given current declining backlog volumes and community count expectations.

Answer

Ryan Marshall (President and CEO, PulteGroup Inc.) outlined optimal mix targets of 38%-40% first-time, 35%-38% move-up, and 25% active adult, noting current sales are nearly aligned, with active adult expected to reach 25%. He deferred formal 2026 guidance but expressed optimism for volume growth due to a strong land pipeline, improved build times (106 days), and potential for enhanced consumer confidence and lower rates, emphasizing the ability to quickly ramp production.

Michael Rehaut asked about PulteGroup's business mix strategy for 2026-2027 across first-time, move-up, and active adult segments, and the prospects for volume growth next year given current backlog trends.

Answer

Ryan Marshall, President and CEO, outlined an optimal mix target of 38-40% first-time, 35-38% move-up, and 25% active adult, noting the current mix is close and active adult is expected to grow. While deferring formal 2026 guidance, Mr. Marshall expressed optimism for volume growth due to a strong land pipeline, improved build times (106 days), and potential for lower rates and improved consumer confidence.

Michael Rehaut of JPMorgan Chase & Co. inquired about the factors driving Q2 gross margins to the high end of guidance, focusing on incentive trends. He also sought confirmation that the reiterated back-half margin guidance was due to lower-than-expected tariff headwinds offsetting higher incentives.

Answer

EVP & CFO James Ossowski attributed the Q2 gross margin beat to a favorable mix of homes sold and closed within the quarter, noting that incentives rose to 8.7%. President & CEO Ryan Marshall confirmed that the reiterated back-half guidance reflects a balance where the impact of elevated incentives is offset by a more minimal-than-expected impact from tariffs in 2025, thanks to procurement efforts and supply chain inventory.

Michael Rehaut of JPMorgan Chase & Co. asked if the reduction in the full-year closings guidance was a direct reflection of April's market volatility and if further price adjustments might be necessary. He also requested more detail on the product categories impacted by tariffs.

Answer

CEO Ryan Marshall confirmed the revised guidance incorporates the increased volatility seen in April but emphasized the company's confidence in its operating platform. He identified plumbing, HVAC parts, tile flooring, and electrical components as the main categories affected by tariffs. He also noted the back-half margin guide reflects the combination of incentives, higher land costs, and the tariff impact.

Michael Rehaut of JPMorgan Chase & Co. inquired about regional performance trends, particularly in Texas and Florida, and sought clarity on the company's share repurchase plans given its strong balance sheet and new leverage philosophy.

Answer

CEO Ryan Marshall highlighted the resilience of the Midwest and Northeast markets. He noted Texas orders were down slightly due to affordability pressures on first-time buyers, while Florida sign-ups were flat year-over-year. Executive Vice President and CFO Robert Shaughnessy explained that the company will continue its disciplined capital allocation, prioritizing business investment and dividends, with excess capital used for buybacks or debt retirement, and that leverage will be an outcome rather than a target.

Michael Rehaut sought to understand the cadence of incentives during Q3, asking if they decreased in September amid stronger demand. He also questioned if incentives have increased unusually in Florida and Texas compared to six months ago.

Answer

EVP and CFO Robert O'Shaughnessy stated that incentives remained elevated throughout the quarter and did not mitigate, as they are driven by affordability needs rather than minor moves in the 30-year mortgage rate. President and CEO Ryan Marshall added that Texas has been more competitive, likely leading to higher incentives there compared to earlier in the year, but did not characterize the actions as unusual or uncomfortable.

Michael Rehaut asked Roxanne Warner and Juan Carlos Puente about their strategic approach to their new roles, particularly concerning the path to margin recovery in North America over the next few years, and whether they plan structural changes or an expansion of existing initiatives. He also sought clarification on the 5% like-for-like sales growth guidance, its breakdown between price and mix, and its applicability to the North American segment.

Answer

CFO Roxanne Warner stated that top priorities include debt paydown, driving cash and working capital (especially inventory reduction), continued cost takeout, and focusing on price mix benefits from industry pricing and new product launches. EVP of North America and Global Strategic Sourcing Juan Carlos Puente emphasized focusing on new products, aggressive cost actions, and leveraging their strong North American manufacturing footprint. Chairman and CEO Marc Bitzer confirmed the 5% growth is directionally reflective of North America, with 1.75 percentage points from price and mix, including a healthy mix portion from new premium products and some unit growth from market share gains by new products.

Michael Rehaut asked new CFO Roxanne Warner and EVP Juan Carlos Puente about their perspectives on approaching their new roles, the strategy for North America margin recovery over the next few years, and whether they plan any bigger-picture structural changes or an expansion of existing initiatives. He also inquired about the 5% like-for-like sales growth guidance, seeking clarification on the anticipated contribution from price versus mix, and if this applies broadly to the North American segment.

Answer

CFO Roxanne Warner outlined key priorities: debt paydown, driving cash and working capital (especially inventory reduction), continued cost takeout, and leveraging price mix benefits from new product launches. EVP Juan Carlos Puente emphasized focusing on new products, aggressive cost actions, and Whirlpool's strong North American manufacturing footprint to turn the business around. Chairman and CEO Marc Bitzer confirmed the 5% growth is directionally reflective of North America, with 1.75 percentage points from price and mix (a healthy mix from premium new products and pricing from a normalized environment), alongside 2-3 points of unit growth from new product market share gains.

Michael Rehaut of JPMorgan Chase & Co. asked for clarification on the $70/unit cost disadvantage, questioning why the tariff impact on competitors wouldn't be higher, and requested a breakdown of the 250 basis point tariff offset between pricing and cost actions.

Answer

Marc Bitzer (executive) explained the $70 disadvantage is a pre-existing loophole related to steel and component costs that they expect to be closed, noting Whirlpool's 80% domestic production contrasts with competitors' ~25%. He stated that over half of the offset would come from pricing. James Peters (executive) added that the full pricing benefit would materialize in the second half due to promotional timing and competitor inventory work-down.

Michael Rehaut asked for details on the financial impact of the extensive new product launches throughout 2025, specifically on price/mix and potential costs. He also requested quantification of the Q4 retailer destocking impact and the company's exposure to potential tariffs.

Answer

CEO Marc Bitzer stated that the launches are spread throughout the year and that associated transition costs are factored into the guidance. He noted the premium brand launches should lift margins. Regarding Q4, he described the destocking impact as 'sizable' and a one-time event. He clarified that potential tariffs are not included in guidance but emphasized that over 80% of products sold in the U.S. are produced domestically, which differs significantly from competitors.

Michael Rehaut sought clarification on the drivers behind the projected decline in fiscal 2026 closings guidance, asking if it's primarily due to lower beginning backlog or other factors like community opening timing or a slower sales pace. He also questioned the factors contributing to the sequential and full-year gross margin decline, specifically regarding incentives and land cost inflation.

Answer

Douglas Yearley, Chairman and CEO, confirmed that the decline in closings guidance for fiscal 2026 is primarily driven by the lower beginning backlog of 4,500 homes, with the company assuming a consistent sales pace of two contracts per community per month. He clarified that the gross margin decline from 27.3% to 26% is fully explained by the increase in average incentive per house, from $68,000 a year ago to $80,000 currently, which is projected to remain flat throughout 2026.

Michael Rehaut sought clarification on the primary drivers behind Toll Brothers' projected decline in fiscal 2026 closings, considering factors like backlog, community openings, and sales pace.

Answer

Chairman and CEO Douglas Yearley confirmed that the projected decline in fiscal 2026 closings is primarily driven by the lower beginning backlog of 4,500 homes. He reiterated that the guidance assumes a consistent sales pace of about two sales per community per month and does not factor in potential market improvements. Yearley also clarified that the sequential and full-year gross margin decline from 27.3% to 26% is attributed to an increase in average incentive per house from $68,000 a year ago to $80,000 currently, which is projected to remain flat throughout 2026.

Michael Rehaut from JPMorgan Chase & Co. asked if rising incentives implied a likely gross margin moderation in fiscal 2026. He also sought to understand the demand impact from the recent decline in mortgage rates relative to other factors like seasonality.

Answer

Douglas Yearley, Chairman & CEO, deferred specific 2026 margin guidance to the December call but highlighted the comfort provided by the high-margin backlog. Martin Connor, CFO, noted that significant margin erosion has already occurred over the past year. Regarding interest rates, Mr. Yearley stated there has been no immediate, measurable impact on sales from the recent rate drop, attributing the lack of response to the August timing and the psychology of their luxury buyer, but he remains encouraged about the future impact.

Michael Rehaut sought to confirm if the reiterated full-year guidance already incorporates the continuation of 'mixed' market results and asked for historical incentive data and the outlook on land cost inflation.

Answer

Executive Chairman Douglas Yearley confirmed the guidance assumes the current mixed market will continue. He stated Q1 2024 incentives were $55,000 and described current land cost inflation as modest, in the 'low to mid-single digit' range. CFO Martin Connor added that this inflation does not impact 2025 projections, as the land is already under contract.

Michael Rehaut asked for a breakdown of the Q1 gross margin dip between mix and incentives, and questioned if market volatility might alter the company's spec home strategy.

Answer

Executive Chairman and CEO Douglas Yearley attributed approximately 80% of the Q1 margin pressure to geographic mix and 20% to higher incentives on finished specs. CFO Martin Connor and Mr. Yearley both affirmed the company's commitment to the spec strategy, highlighting its crucial role in driving higher returns on equity, increasing revenue, and improving capital efficiency, calling the current mix 'perfect' for the business.

Michael Rehaut asked if the previously anticipated $30 million price-cost headwind for the back half of the year is still factored into current guidance and how insulation pricing trended during the third quarter. He also inquired about the market trajectory for residential and commercial/industrial segments into the first half of 2026, considering current activity levels and 2025 softness.

Answer

Rob Kuhns (CFO) confirmed the $30 million price-cost headwind remains in guidance, with a roughly $12 million impact in Q3, primarily affecting distribution. He noted residential product pricing pressure in installation was offset by cost management, while distribution saw stronger residential pressure but was balanced by positive pricing in commercial products like gutters and mechanical insulation. For 2026, Rob Kuhns expects single-family to be flat to slightly down in 1H, with multifamily backlogs showing some improvement. Robert Buck (President and CEO) added that commercial and industrial backlogs are building, indicating positive momentum.

Michael Rehaut asked about the impact of price-cost headwinds on TopBuild's guidance, specifically the $30 million headwind, and how insulation pricing trended in the third quarter. He also inquired about the company's residential and commercial/industrial end market assumptions for 2025 and the potential trajectory for residential sales in the first half of 2026.

Answer

Rob Kuhns, CFO, confirmed the $30 million price-cost headwind is still in guidance, with a $12 million impact in Q3, primarily affecting distribution. He detailed residential product price pressure in installation and stronger pressure in distribution, offset by positive pricing in commercial products like gutters and mechanical insulation. For 2026, Kuhns anticipated flat to slightly down single-family residential in 1H, with some improving backlog in multifamily. Robert Buck, President and CEO, added that commercial and industrial backlogs are building, showing positive momentum.

Michael Rehaut of JPMorgan Chase & Co. inquired about the Progressive Roofing acquisition's margin impact and synergy potential, and also asked about the drivers behind the weaker residential outlook and its potential to extend into 2026.

Answer

CFO Rob Kunins stated Progressive will add ~$215M in H2 sales with EBITDA margins around 20%, in line with the core business. CEO Robert Buck highlighted a data center project as an example of cross-selling synergies. Kunins attributed the weaker residential guidance to deteriorating single-family starts, while Buck provided color on mixed geographic trends.

Michael Rehaut of JPMorgan Chase & Co. asked for clarification on the reiterated full-year guidance, seeking to understand what factors offset the newly lowered outlook for the residential business.

Answer

CFO Rob Kuhns detailed the offsetting factors. He explained that while the single-family outlook was revised downward, this was counterbalanced by better-than-expected pricing realization in Q1, a more optimistic outlook for commercial and industrial sales, and an incremental $10 million in revenue from the recent Seal-Rite acquisition.

Michael Rehaut of JPMorgan Chase & Co. requested clarification on the percentage of sales from the commercial and spray foam businesses. He also asked about the M&A backdrop for medium-to-large deals following the terminated SPI transaction and the prospects across TopBuild's verticals.

Answer

CFO Rob Kuhns detailed that C&I represents about 35% of total sales, while spray foam is 10-15%. CEO Robert Buck described the M&A pipeline as very active across all end markets, including 'chunky' deals. He emphasized that TopBuild's core competencies in running a dispersed branch network, managing labor, and leveraging its supply chain open up avenues for future acquisitions, giving them a good line of sight for the next 2-3 years.

Michael Rehaut focused on the carryover impact of the $2 billion cost reduction program, expected to be completed by year-end 2025, on 2026 results, and the anticipated cost benefits from the ongoing reduction of the China supply chain footprint.

Answer

Chris Nelson, President and CEO, stated that while 2026 guidance is not yet available, key priorities include gross margin progression and thoughtful SG&A management. He outlined a target of 35% gross margin by Q4 2026, with full-year 2026 between 31% and 35%. He also mentioned targeting $350 million-$400 million in gross productivity and $200 million-$300 million in tariff mitigation through China shifts and USMCA compliance.

Michael Rehaut asked about the carryover impact of the $2 billion cost reduction program, expected to be completed by year-end 2025, on 2026 financials. He also inquired about the cost benefits from the ongoing reduction of the China supply chain footprint.

Answer

President and CEO Chris Nelson stated that 2026 will focus on gross margin progression and thoughtful SG&A management, targeting 35% gross margin by Q4 2026. He outlined a gross productivity target of $350 million-$400 million for 2026 and an aim to remove $200 million-$300 million of tariff expense through China shifts and USMCA compliance. SG&A is expected to remain around 21% and a fraction.

Michael Rehaut of JPMorgan Chase & Co. asked for clarification on the Q2 earnings beat, why the upside didn't fully translate to the annual guidance, and the company's ability to recover the projected $0.65 tariff headwind in 2026.

Answer

EVP & CFO Patrick D. Hallinan explained the Q2 beat was primarily due to the timing of a discrete tax benefit and some tariff expense recognition, which will balance out in the second half. He stated that for 2026, the company expects mitigation strategies and pricing actions to largely offset the estimated $800 million run-rate tariff expense, allowing for margin accretion in the back half of the year.

Michael Rehaut of JPMorgan Chase & Co. asked for confirmation on the potential size of the second price increase, suggesting a mid-single-digit range. He also sought to clarify if the guidance for Q2 implies that earnings per share will be 'minimally positive.'

Answer

COO Chris Nelson corrected the assumption, stating the second price increase would likely be higher than the first, though he did not provide a specific figure. An executive, likely EVP and CFO Pat Hallinan, confirmed that Q2 earnings, on both a pretax and after-tax basis, are indeed expected to be positive but 'minimally so.'

Michael Rehaut sought clarification on the tariff impact, asking how the current $90-$100 million estimate for a 10% tariff reconciles with a previous $200 million estimate for a larger tariff increase. He also asked about the timing of mitigation efforts and exposure to potential Mexico tariffs.

Answer

CFO Pat Hallinan clarified that the previous scenario was for a larger tariff percentage on a narrower set of SKUs (List 301), while the current scenario is a smaller 10% tariff on all China imports. CEO Don Allan confirmed that initial mitigation steps will be pricing, while the company simultaneously accelerates permanent supply chain fixes. Regarding Mexico, Hallinan noted it represents about 20% of global COGS and any potential tariffs there would be handled with a similar measured approach.

Michael Rehaut asked for clarification on Q3 plumbing margins, specifically if inventory-related reserves were a larger factor than anticipated tariffs, and sought more granularity on the full-year sales guidance, particularly which segments are driving the lower end of the range.

Answer

VP and CFO Rick Westenberg confirmed that while the elevated China tariff was anticipated, inventory-related adjustments and softer sales in certain markets (like China) were more impactful developments since the Q2 call. He also confirmed that the industry is trending towards the lower end of expectations, impacting plumbing (especially China), builders' hardware, and DIY paint, though Masco's underlying performance remains solid relative to the industry.

Michael Rehaut sought clarification on the Q3 plumbing margins, specifically whether inventory-related reserves were a larger factor than anticipated tariffs. He also asked for more granularity on the full-year sales guidance, which is at the lower end of the range, and which segments are primarily contributing to this softness.

Answer

Rick Westenberg, VP and CFO, confirmed that while elevated China tariffs were anticipated, inventory-related adjustments and softer sales in certain markets like China were additional factors impacting Q3 plumbing margins. He stated that the full-year sales guidance is at the lower end due to overall industry softness impacting the plumbing segment (especially China), builders' hardware, and DIY paint, noting Masco's underlying performance remains solid relative to the weaker industry.

Michael Rehaut of JPMorgan Chase & Co. asked about Q2 demand trends, the specific breakdown of tariff mitigation actions, and the quantification of non-repeating Q2 cost benefits.

Answer

CEO John Nudi noted stable trends in Plumbing and a continued dynamic of soft DIY and strong Pro in Paint. CFO Rick Westenberg explained that the $140 million in-year tariff impact will be offset by cost reductions and pricing. He also quantified that of the $27 million SG&A reduction in Q2, about half was from the Kichler divestiture and half from favorable, non-repeating cost items.

Michael Rehaut inquired about recent top-line trends through April for both the paint and plumbing segments and asked for any outlook on Q2 revenue. He also sought to dimensionalize the tariff mitigation efforts, particularly the magnitude of price increases and any expected demand elasticity.

Answer

President and CEO Keith Allman noted continued strength in e-commerce and International Plumbing, but softening in U.S. trade and retail channels, especially in DIY paint, which he expects to persist. CFO Richard Westenberg explained that mitigation involves pricing, cost cuts, and sourcing changes, with pricing being a major near-term lever. However, the company declined to quantify specific price increases or the potential impact on demand elasticity due to the high level of uncertainty.

Michael Rehaut asked what percentage reduction in construction costs would be needed to offset mid-to-high single-digit land cost inflation and keep gross margins flat, assuming no help from better pricing. He also inquired about the year-over-year construction costs for Q4 and sought an update on regional challenges, specifically comparing Texas and Florida to California and the Pacific Northwest, and any marginal changes over the past three months.

Answer

Paul Romanowski, President and CEO, estimated a 3%-5% reduction in construction costs would be needed, noting that vendors are interested in increasing starts and helping make homes more affordable. Jessica Hansen, SVP of Communications, stated that construction costs were down 1% year-over-year in Q4, flat sequentially, and down about 1.5% for the full year. Paul Romanowski added that California has also been a struggle, while the Midwest and Mid-Atlantic show stability. He described the overall market as choppy, similar to three months ago, with consumer confidence still impacting conversions despite recent mortgage rate reductions.

Michael Rehaut asked about gross margins, specifically what theoretical reduction in construction costs would be needed to offset mid-to-high single-digit land cost inflation to maintain flat gross margins, assuming no benefit from better pricing. He also inquired about regional market conditions, asking if Texas and Florida remain the most challenged, how California and the Pacific Northwest compare, and if there's been any marginal change in these markets over the past three months.

Answer

President and CEO Paul Romanowski estimated that a 3-5% reduction in stick and brick costs would be needed to offset land cost increases, noting vendor interest in increasing starts and supporting affordability. SVP of Communications Jessica Hansen stated that construction costs were down 1% year-over-year in Q4 and flat sequentially, with a 1.5% decrease for the full year. Paul Romanowski added that California has also been a struggle, while the Midwest and Mid-Atlantic show stability. He noted similar conditions to three months prior, with consumer hesitation despite recent rate reductions.

Michael Rehaut of JPMorgan Chase & Co. sought to better understand the trend in incentives, asking for quantification and what might cause them to rise further. He also asked about any potential tailwinds, such as cost savings, that might be offsetting the incentive pressure.

Answer

SVP Jessica Hansen reiterated that the company does not quantify incentives beyond a high-single-digit range and pointed to the gross margin guidance, which implies a 50 basis point sequential decline. EVP & CFO Bill Wheat acknowledged that slight improvements in stick and brick costs provide a partial offset, but confirmed that incentives remain the primary driver of margin trends.

Michael Rehaut of JPMorgan Chase & Co. requested a quantification of incentive trends, referencing a competitor's recent commentary, and asked if incentives are expected to continue rising. He also questioned if any tailwinds, such as cost savings, were offsetting incentive pressures, given the relatively stable gross margin performance.

Answer

SVP Jessica Hansen did not quantify the incentive increase but highlighted the forward-looking gross margin guidance, which implies a 50 basis point decline in Q4. EVP and CFO Bill Wheat acknowledged that slight improvements in stick and brick costs provided a partial offset, but confirmed that incentives remain the primary driver of margin trends, though the pace of decline has moderated.

Michael Rehaut of JPMorgan Chase & Co. sought to understand D.R. Horton's incentive levels relative to the market and whether they were prioritizing price over volume. He also asked about the company's exposure to Canadian softwood lumber.

Answer

President and CEO Paul Romanowski emphasized a community-by-community competitive strategy and noted that a shift to smaller homes has supported margins. Executive Jessica Hansen highlighted their financial services arm as a competitive advantage in managing incentives. On lumber, Paul Romanowski stated that about 20% comes from Canada and any tariff-related price changes are not expected to impact results until late fiscal 2025 or 2026.

Michael Rehaut of JPMorgan Chase & Co. asked for details on regional inventory levels at affordable price points and inquired about future levers for improving capital efficiency, particularly regarding the optioned lot percentage.

Answer

President and CEO Paul Romanowski noted some inventory buildup in Florida and Texas markets but stated that overall supply remains in good shape. CFO Bill Wheat added that while the average optioned lot percentage is 76%, there is still room for improvement in markets with lower percentages, emphasizing that the company continually evaluates structures that balance risk transfer with capital efficiency benefits.

Michael Rehaut requested regional color on demand, particularly in Florida and Texas, and whether the closings guidance reflects any specific regional challenges. He also asked about the sales pace trend during the quarter, noting that some competitors saw a stronger September.

Answer

EVP & COO Michael Murray explained that the guidance does not reflect specific regional concerns, as the buyer pause was felt across the entire footprint. He described the sales environment throughout the quarter as 'choppy' due to mortgage rate volatility, which he believes caused buyer hesitation. EVP Jessica Hansen added that rate volatility continued into October.

Michael Rehaut asked for a quantification of the cost impact of tariffs on the business for Q1, Q2, and Q3, and the extent of price recovery in each quarter. He also questioned the company's balance sheet and capital allocation strategy, specifically why share repurchases have been restrained given the strong balance sheet, and if M&A opportunities are being prioritized.

Answer

CFO James Brunk reiterated an average tariff impact of about 20%, or $100-$110 million annually before mitigations, with cost impacts seen in Q3 and expected to continue in Q4, offset by pricing. He noted the company has repurchased $108 million year-to-date on $350 million free cash flow, confirming share buybacks remain part of the capital allocation strategy. He also stated that investments in businesses and M&A opportunities are expected to increase as the market strengthens.

Michael Rehaut sought clarification on whether the expected Q4 year-over-year improvement applies to margins, asked for details on where competitive pricing is most pervasive, and questioned if there were abnormal actions by importers in response to tariffs.

Answer

CFO James Brunk confirmed that the anticipated Q4 improvement includes margins. Chairman & CEO Jeffrey Lorberbaum explained that while pricing pressure varies, the industry is at a cyclical bottom and will likely have to pass through high tariff costs. He added that while importers, including Mohawk, increased inventory, he did not observe excessive pre-buying from customers.

Michael Rehaut requested more granularity on the revenue impact from pricing in Flooring North America for Q2 and Q3. He also asked for a breakdown of the countries of origin for the ~$500 million in imports subject to tariffs.

Answer

Executive James Brunk clarified that recent price increases have been selective to offset specific raw material costs and that overall pricing remains pressured. President and COO Paul De Cock detailed that a big component of the tariffed imports is LVT, largely from Vietnam, with other sourcing from countries like India and Korea. He reminded that products from their Mexican facilities are not subject to these tariffs.

Michael Rehaut asked for clarification that the guidance for 'normal seasonality' in Q2 is based on an adjusted Q1 performance, excluding the system issue impact. He also requested quantification of the expected Q1 impacts from currency fluctuations and rising natural gas costs.

Answer

CFO James Brunk confirmed that the Q2 seasonality outlook should be applied to a Q1 baseline that excludes the system issue impact. He noted the natural gas cost impact would be limited in Q1 but ramp up in Q2 and Q3. For currency, he estimated a negative operating income impact of approximately $7-$10 million in Q1 due to the stronger dollar.

Michael Rehaut inquired about Taylor Morrison's elevated spec inventory, the expected sequential dip in Q4 gross margins due to specs, and the anticipated timeline for the spec overhang to dissipate.

Answer

Chairman and CEO Sheryl Palmer explained the company is balancing spec inventory by aligning starts with sales, having pulled back in Q3. She noted permits are ready to respond to demand without flooding the market, with ongoing monitoring.

Michael Rehaut asked about Taylor Morrison's elevated spec inventory, its expected impact on fourth-quarter gross margins, and when this inventory overhang might dissipate, assuming normal seasonal market trends.

Answer

Sheryl Palmer, Chairman and CEO, stated that the company intends to work through existing inventory while bringing new inventory to market from new communities, monitoring sales month-by-month. She noted that starts were pulled back in Q3 to right-size inventory and that the company is ready to respond to market demand without flooding it. Michael Rehaut also inquired about regional performance, asking which markets showed stronger-than-average trends and specifically about Florida's stabilization and market-by-market conditions across Texas, Carolinas, California, and Phoenix. Sheryl Palmer and Erik Heuser, Chief Corporate Operations Officer, confirmed Florida's stabilization with half of markets up year-over-year, Orlando leading in paces, and reductions in new and resale inventory. They detailed varied conditions in Texas (Austin bottoming, Dallas competitive, Houston strong but competitive), strong performance in Carolinas, and stable conditions in California and Phoenix, emphasizing the benefit of core locations and a balanced portfolio.

Michael Rehaut asked for details on the new $3 billion financing facility with Kennedy Lewis for the ForRent business and sought an early outlook on community count growth for 2026.

Answer

Chief Corporate Operations Officer Erik Heuser described the facility as a land bank-style structure for the ForRent business, providing optionality for timing asset sales to optimize value. CEO Sheryl Palmer stated that while growth is expected in 2026, the specific trajectory depends on market conditions as the company prioritizes returns over volume and maintains disciplined land spending.

Michael Rehaut inquired about the cadence of order trends through Q1 and April, the approach to incentives, and the key drivers for the back-half gross margin guidance.

Answer

Sheryl Palmer, Chairman and CEO, described a steady sales increase through Q1 but noted April has been 'choppier' due to market volatility, with incentives being adjusted daily. Curt VanHyfte, CFO, explained the back-half margin guidance of around 23% is driven by higher spec penetration, lot cost inflation, and the mix of homes. He confirmed that potential tariff impacts are already factored into the low single-digit cost inflation outlook for the year. Palmer added that interest rates are the primary factor influencing incentive costs.

Michael Rehaut of JPMorgan Chase & Co. asked about Taylor Morrison's pricing strategy, including a January price increase, and the drivers behind the company's SG&A leverage guidance for 2025, particularly regarding marketing and broker commissions.

Answer

Chairman and CEO Sheryl Palmer explained that the pricing strategy is community-specific, with a national price increase implemented in early January. She noted that the NAR settlement is contributing to a reduction in co-broke commissions, which fell over 10% YoY in Q4. Chief Financial Officer Curt VanHyfte added that SG&A leverage is driven by higher closing volumes, revenue growth, and a continued focus on operational efficiency.

Michael Rehaut asked about the contrast between Taylor Morrison's stable incentive levels and competitors' increases, particularly in Florida and Texas, and inquired about the new land banking partnership with Kennedy Lewis and its expected impact on margins, returns, and cash flow.

Answer

Chairman and CEO Sheryl Palmer attributed their pricing resilience to a strong preference for new homes and a proprietary, personalized incentive strategy that minimizes the impact of costly forward commitments. She provided a detailed market-by-market overview showing strength across key regions. Chief Corporate Operations Officer Erik Heuser explained the evolution of their land-light strategy, targeting 60-65% controlled lots, and detailed that the new land banking facility offers a significant return benefit for a sub-2% margin trade-off on deployed assets.

Michael Rehaut followed up on the impact of recent mortgage rate declines (20-30 basis points in August and September) on demand trends and potential relief on gross margins or incentives.

Answer

Jon Jaffe, Co-CEO and President, noted that lower rates help reduce the cost of mortgage buydowns but the impact isn't linear. Stuart Miller, Executive Chairman and Co-CEO, observed 'a little bit more interest' in Q4, anticipating significant optimism if rates stabilize at 6% or lower.

Michael Rehaut questioned the underlying rationale for Lennar's short-term adjustment, asking if it was driven by a desire to avoid gross margins falling below 17.5% or by demand elasticity issues where further incentives would not effectively drive volume. He also asked if recent mortgage rate declines (50 basis points net in August/September) had impacted demand trends and if this would reduce pressure on gross margins or incentives.

Answer

Stuart Miller, Executive Chairman and Co-CEO, explained that the company is responding in real-time to market conditions, taking pressure off sales and recalibrating. Jon Jaffe, Co-CEO and President, added that the approach is market-by-market and community-by-community. Regarding mortgage rates, Mr. Jaffe noted that lower rates help reduce buydown costs but the impact isn't linear. Mr. Miller observed 'a little bit more interest' in Q4 but no direct sales impact yet, anticipating optimism if rates fall to 6% or lower.

Michael Rehaut asked if Lennar's decision to maintain a 17.5% gross margin floor was driven by the high cost of driving volume or an elasticity of demand issue where further margin drops would not yield desired volume. He also questioned if recent mortgage rate declines (20-30 basis points in August and September) had impacted demand trends and if this would reduce pressure on gross margins or incentives.

Answer

Executive Chairman & Co-CEO Stuart Miller explained that the company is responding real-time to market conditions, taking pressure off sales, and recalibrating with a bottoms-up approach. Co-CEO & President Jon Jaffe added that it's a market-by-market and community-by-community analysis. Miller noted that while they saw 'a little bit more interest' entering Q4, there was no direct sales impact in Q3 from rate drops, but expressed optimism if rates consistently fall to 6% or lower.

Michael Rehaut questioned the gross margin impact from the Millrose land strategy and the potential for option walkaways, and also asked for updated thoughts on leverage, free cash flow, and share repurchases for 2025.

Answer

Executive Stuart Miller estimated the historical margin impact of the asset-light model at around 100 basis points but noted it's difficult to isolate in the current environment. He stated that the company does not anticipate any option walkaways, as it's more economical to work through assets at a lower margin. Regarding capital allocation, Miller and CFO Diane Bessette described 2025 as a transition year for cash flow but reaffirmed the long-term goal for cash flow to approximate net earnings, which would fuel a 'rather robust' share buyback program in the future.

Michael Rehaut asked for clarification on what a 'normalized' gross margin would look like for Lennar in the coming years, given the Q1 guidance is expected to be a trough. He also questioned the FY25 volume growth guidance, noting that after accounting for the Rausch Coleman acquisition, organic growth appears lower than the company's long-term targets.

Answer

Executive Chairman Stuart Miller stated that while a specific normalized margin is hard to predict, it will be 'north of where we are now' and will recover as demand activates. Co-CEO and President Jonathan Jaffe added that supply chain efficiencies will aid margin recovery. On growth, Miller blurred the lines between organic and inorganic, positioning acquisitions as part of their ongoing community growth strategy. CFO Diane Bessette emphasized that the asset-light acquisition structure is more akin to organic growth and helps grow market share.

Sought more specific details on the Millrose land spin, including the cash vs. land breakdown of the contribution and potential impacts on G&A. He also pressed for more clarification on the significant downward revision to the gross margin outlook.

Answer

Management reiterated that they are limited in what they can disclose about Millrose but clarified the stock will be distributed to shareholders and there will be minimal personnel impact on SG&A. They repeated that the margin revision was a result of using margin as a 'shock absorber' to maintain volume amidst challenging market conditions (sticky rates, low confidence) and a temporary community count dip.

Michael Rehaut sought more detail on the Millrose spin-off, asking about the cash portion of the $6-8 billion asset contribution and whether the transaction would reduce Lennar's SG&A. He also pressed for more clarity on the significant downward revision to the gross margin outlook for the year.

Answer

Executive Chairman Stuart Miller clarified that the $6-8 billion contribution to Millrose was always planned to include cash, but the exact amount is a moving target. He stated there would be 'very limited personnel movement,' so any SG&A savings would come from operational efficiencies, not transfers. CFO Diane Bessette added that Lennar will not hold Millrose stock; it will be distributed to shareholders. On margins, Miller reiterated that the company is strategically using margin as a 'shock absorber' to maintain volume during its transformation amid challenging market conditions.

Michael Rehaut sought more detail on the Millrose land spin, including the cash component of the contribution and potential impacts on Lennar's cost structure. He also pressed for more clarity on the significant downward revision to the gross margin outlook.

Answer

Executive Chairman Stuart Miller reiterated that the $6-8 billion contribution to Millrose always included a cash component, but details remain fluid. He noted minimal personnel would move, so SG&A savings would come from efficiency. CFO Diane Bessette clarified that Lennar will not hold Millrose stock, as it will be distributed to shareholders. Miller attributed the margin revision to using margin as a 'shock absorber' to maintain volume amid high rates and a community count lag.

Michael Rehaut asked about the Doors business, questioning the drivers for the Q3 margin guidance and the long-term path to achieving a 20%+ EBITDA margin, considering the business's pre-acquisition performance.

Answer

CEO Brian Chambers clarified the Q3 margin guide is in line with Q2, supported by sequential volume stability. He affirmed a long-term target of 20%+ EBITDA margins, driven by three factors: achieving the initial $125 million synergy target, realizing an additional $75 million in savings from network optimization, and leveraging commercial integration with Owens Corning's other product lines to drive growth.

Michael Rehaut asked about concerns regarding scheduled capacity additions in the insulation sector, given the uncertain macroeconomic environment.

Answer

CFO Todd Fister explained that the insulation industry can support housing starts between 1.4 million and 1.5 million units, supported by long-term underbuilding in the U.S. He differentiated between flexible 'loosefill' capacity and less flexible 'bat and roll' capacity, noting the industry has a wide range of asset cost structures to manage supply.

Michael Rehaut asked for an outlook on pricing trends and pricing power in 2025 for the Roofing, Insulation, and Doors segments, given potential softness in residential markets.

Answer

CEO Brian Chambers stated that pricing trends are mixed. Roofing remains strong with good demand and an announced April price increase. The Doors business is seeing stable market pricing, though OC is making targeted adjustments. CFO Todd Fister added that residential insulation industry utilization was in the high 90% range in Q4, supporting a positive pricing environment.

Michael Rehaut from JPMorgan Chase & Co. asked for context on the 170 basis points of market share gained from wood decking and questioned the rationale for a price increase on decking products, which are less affected by tariffs.

Answer

President & CEO Bryan Fairbanks explained the 170 bps gain occurred over 18 months and that the rate of conversion varies, citing external data and channel partner feedback as sources. He declined to elaborate on the company's specific pricing strategy or the price/volume mix within the full-year revenue guidance.

Michael Rehaut from JPMorgan Chase & Co. asked for context on the 170 basis points of market share gained from wood, its comparison to prior years, and the rationale for price increases on decking. He also asked for a price vs. volume breakdown of the growth guidance.

Answer

President & CEO Bryan Fairbanks explained that the rate of wood conversion varies and is currently impacted by a weaker low-end consumer, but the trend remains positive. He noted they use external data and channel feedback for this metric. He declined to discuss specific pricing strategy or the price/volume mix of guidance on the call.

Michael Rehaut asked how the high product vitality, with new products accounting for 22% of sales, is impacting financial metrics like margins and market share. He also sought insight into the market drivers behind the stabilization of entry-level product demand.

Answer

CEO Bryan Fairbanks explained that the product vitality metric highlights the success of recent R&D investments and product launches. He attributed the stabilization in the entry-level segment to significant pent-up demand in the repair and remodel market, as many of the 50 million wood decks in North America are at or beyond their useful life, making composite conversion an attractive option for homeowners.

Michael Rehaut sought clarification on whether the 2025 EBITDA margin target of over 31% is inclusive of startup costs. He also asked for a conceptual explanation for the sell-through divergence between premium and lower-end products.

Answer

CFO Brenda Lovik confirmed the 31%+ margin target is an adjusted figure that excludes onetime startup and transition costs. CEO Bryan Fairbanks explained the lower-end product weakness stems from inflation impacting lower-income consumers, but emphasized that composites are still gaining share from wood, which is declining at a faster rate.

Michael Rehaut of JPMorgan Chase & Co. probed the gross margin cadence, asking about the drivers for the expected rebound in Q4 from Q3 levels and whether it assumed any change in incentive usage. He also asked what percentage of communities saw price reductions during the quarter and which markets were most affected.

Answer

EVP & CFO Rob Dillard stated the expected Q4 gross margin improvement is almost entirely due to higher operating leverage from increased delivery volume. President & COO Robert McGibney added that while pricing was adjusted in over half of communities, the changes were surgical. He identified Las Vegas and parts of Texas and Florida as relatively strong, while markets like Sacramento, Austin, and parts of Florida faced more headwinds from rising resale inventory.

Michael Rehaut requested color on regional performance, asking where pricing adjustments were most needed versus which markets remained strong. He also asked about the company's long-term strategy for balance sheet leverage, dividends, and share repurchases.

Answer

COO Rob McGibney identified Florida as the softest market requiring the most pricing action, while Texas was mixed, and the West and Southwest regions held up best. CEO Jeffrey Mezger stated the capital allocation strategy is unchanged: prioritize business growth, use equity growth to improve leverage ratios, and opportunistically repurchase shares with excess cash. He noted the company does not anticipate needing more debt.

Michael Rehaut sought to confirm if the Q1 gross margin decline was primarily due to operating leverage and also asked about the trend in incentives during Q4, questioning if the company prioritized margin over volume compared to the broader market.

Answer

EVP and CFO Jeff Kaminski confirmed the sequential Q1 margin dip is almost entirely from lower leverage on fixed costs. President and COO Rob McGibney added that while incentives increased as rates rose in Q4, the company chose not to chase sales with deep price cuts during a seasonally slow period, a different approach than some competitors who were more aggressive with discounts.

An associate on behalf of Michael Rehaut asked about any potential changes KBH is making to its broker relationships following the NAR settlement. A second question concerned the opportunity to reduce build cycle times below historical averages.

Answer

President & COO Rob McGibney explained that the NAR situation is evolving. KBH is seeing some buyers opt out of using realtors and now requires a buyer's compensation agreement to determine commission, which is capped at 2%. He noted realtor participation in Q3 orders was down 5 percentage points sequentially. On build times, McGibney confirmed there is an absolute opportunity to improve upon the current 150 days, with a goal of reaching the historical low-end of four months (120 days), noting some divisions are already at 110 days.

Michael Rehaut from JPMorgan Chase & Co. questioned the new guidance framework, pointing out that the planned mid-single-digit price increase appears to generate more revenue than the stated $200 million tariff impact for the year. He also noted that underlying volume trends seem softer than previously guided, even at the high end of the new range, and requested a more specific framework for Q2 sales and margins.

Answer

President of Security and Connected Products, David Barry, clarified that the price increase is at the lower end of the mid-single-digit range and is supplemented by cost-out and supply chain actions. He stated that if volumes trend toward the downside scenario, the company would target decremental margins in the mid-20s by controlling hiring. For Q2, Barry guided to sales down low-to-mid-single digits and highlighted an unusually high tax rate approaching 30% due to a one-time cash repatriation from China.

Michael Rehaut questioned the drivers of core business outperformance beyond digital, noting the implied 50 bps was below historical levels, and asked for clarification on the price vs. volume mix in the sales guide considering potential tariffs.

Answer

CEO Nicholas Fink acknowledged the conservatism, explaining that resources were focused on digital in 2024, but he expects the core to outperform as new branding and innovation roll out. CFO David Barry added that headwinds from China in Q1 and the ongoing recovery in the core Security business temper the initial outlook. Barry clarified that only the China tariff impact (less than 1% price) is in the sales guide; potential Mexico/Canada tariffs are covered in the EPS range but not yet modeled into sales.

Michael Rehaut asked for details on the gross margin guidance reduction, including the expected cadence for the rest of the year and the specific drivers, such as tariffs versus other factors. He also inquired about the level of sales incentives compared to the previous quarter and the market dynamics necessitating them.

Answer

CEO Eric Lipar explained the gross margin adjustment is driven by three factors: anticipated tariff-related cost increases from suppliers, the prudent decision to lower guidance after a weaker Q1, and leaning into customer incentives, which average 5-6% of the average sales price (ASP). Lipar noted this incentive level is similar to the prior quarter and is used for closing costs, mortgage rate buydowns, and discounts on aged inventory to remain competitive amid market volatility.

Asked about the financial impact of the recent recycling acquisition, details on market share gains by channel or region, and potential exposure to tariffs from Mexico or Canada.

Answer

The recycling acquisition enhances existing plans by adding new technology and capacity, supporting future margin expansion. Share gains are driven by pro channel expansion and new product platforms. Tariff exposure from Mexico and Canada is considered minimal and manageable.

Michael Rehaut of JPMorgan Chase & Co. asked for a breakdown of market strength by region, the outlook for Average Selling Price (ASP) in 2025 and beyond, the specific gain from a project sale in 'Other Income', and the strategy behind the share repurchase program.

Answer

Financial Officer John Dixon highlighted the West as a strong region, with Southern California and Phoenix as standout markets, and noted Atlanta's strength in the Southeast. He indicated the 2025 guidance implies a flat to slightly down ASP to maintain affordability. Dixon also clarified that a ~$20 million gain from a Century Living project sale was the primary driver of the $13.3 million in 'Other Income'. Executive Chairman Dale Francescon explained the share repurchase strategy is focused on preventing share count creep, with opportunistic buybacks to reduce the count.

An analyst on behalf of Michael Rehaut asked about the company's assumptions for its incentive load in 2025 and for an update on the M&A environment, including any changes to the deal pipeline.

Answer

CFO Russ Devendorf responded that incentives, currently just over 3% of revenue, are budgeted to remain flat in 2025, with interest rates being the primary variable. Regarding M&A, Devendorf noted that while the pipeline is healthy, valuations can be rich, and the company's current strategy favors organic growth through greenfield start-ups, such as its recent entry into Greenville, South Carolina.

Michael Rehaut asked if the recent shift to higher gross margins (high 33% range) and higher SG&A (mid-18% range) is structural, and what factors might cause a reversion. He also sought to understand why gross margins have remained high despite negative mix shifts.

Answer

CFO Michael Miller reaffirmed the 32%-34% gross margin target range, explaining the company has been performing at the high end. He attributed the higher SG&A to lagging inflationary effects on costs like rent and administrative labor. CEO Jeffrey Edwards added that while mix shifts create pressure, the team's focus on operational efficiency and extracting value has successfully sustained strong margin performance.

Asked why the full-year EBITDA growth guidance lags the top-line outlook and whether the margin drag from greenfields and acquisitions is a one-time issue or if EBITDA growth is expected to exceed revenue growth in the future.

Answer

The executive stated that long-term, EBITDA growth is expected to outpace revenue growth. The current lag is attributed to recent large acquisitions having lower initial EBITDA margins, the immaturity of new greenfields, and the fact that margin-enhancing initiatives (like the new pricing model and private label) are just beginning to contribute significantly. This is not seen as a multi-year phenomenon.