Rafe Jadrosich

Rafe Jadrosich asked for quantification of the mitigated and unmitigated tariff headwind in 2025 and expectations for 2026, given that the impact was less than anticipated. He also sought clarification on the specific dollar amount that needs to be covered for 2026 versus 2025.

Answer

Chairman and CEO Jeff Lorberbaum stated that tariffs range from 15-50% and that actions in the supply chain, including freight rates, along with announced price increases, are expected to cover all associated costs. CFO James Brunk clarified that the annualized impact of tariffs was about $100 million, and Mohawk is committed to offsetting this over the relevant time period through pricing, supply chain management, and lower ocean freight costs.

Rafe Jadrosich asked for quantification of the mitigated and unmitigated tariff headwind in 2025 and the expected impact for 2026. He followed up by asking for a specific dollar amount of tariffs that Mohawk needs to cover in 2026 versus 2025.

Answer

Chairman and CEO Jeff Lorberbaum stated that tariffs range from 15% to 50% and that Mohawk has taken various actions, including supply chain optimization, leveraging lower freight rates, and implementing price increases, to offset these costs. He expects to cover all tariff costs through these combined actions. CFO James Brunk added that the annualized impact of tariffs was about $100 million, and the company is committed to offsetting this over the relevant time period through pricing, supply chain management, and lower ocean freight costs.

Rafe Jadrosich followed up on material costs, inquiring about the visibility of inflation into 2026 and potential relief, considering the lag in realization. He also asked for details on the cumulative tailwind from previously announced and new cost savings initiatives, their carry-over into 2026, and whether additional productivity is expected.

Answer

CFO James Brunk explained that it typically takes three to four months for material cost changes to cycle through inventory. He noted that Q1 2026 would see normal wage and benefit increases, continued tariff impacts, and minor higher material costs. He detailed that total restructuring savings increased to $110 million for the current year, with approximately $60-$70 million expected to favorably impact 2026, in addition to ongoing normal productivity initiatives.

Rafe Jadrosich asked for a definition of normal Q3 to Q4 seasonality for sales and EBIT, the potential short-term impact if current tariffs hold, and an update on channel inventory levels.

Answer

CFO James Brunk defined normal seasonality as a 5-6% sales decline and a 25%+ EBIT decline from Q3 to Q4, but noted this year would be different due to restructuring benefits. Chairman & CEO Jeffrey Lorberbaum explained the goal is to align pricing with tariff costs, with the outcome dependent on market actions. President & COO Paul De Cock added that while importers are heavy on inventory, customer pre-buys have been limited.

Rafe Jadrosich questioned how the $50 million tariff hit affects the previous outlook for year-over-year EPS growth, excluding the ERP system issue, and asked for the key puts and takes.

Answer

CEO Jeff Lorberbaum reiterated that the outcome depends on unpredictable market conditions but the plan is to cover tariffs with price increases. Executive James Brunk added that if the economy stabilizes and tariffs remain at current levels, the company could still exceed last year's results (ex-system conversion). However, weakening economies would put results under pressure.

Rafe Jadrosich inquired about the rationale behind Taylor Morrison's shift in land investment away from non-core submarkets towards move-up and resort lifestyle segments, asking if there are better land deals or less competition in these areas, and why returns are expected to be higher. He also asked about current land inflation for newly contracted land and expectations for 2027, given the mid-single-digit lot inflation outlook for 2026.

Answer

Erik Heuser (CCOO, Taylor Morrison) explained that the shift is a pivot back to historical exposure, reducing tertiary entry-level investment from 20-25% post-COVID to 15%. He noted that the competitive landscape in move-up and resort lifestyle markets offers more opportunities and aligns better with the company's expertise, leading to better performance. Sheryl Palmer (Chairman and CEO, Taylor Morrison) added that move-up and Esplanade buyers have stronger financial capabilities. Erik Heuser also stated that the land market is stabilizing, resulting in low single-digit appreciation expectations today, and mentioned success in renegotiating deals with sellers.

Rafe Jadrosich asked about the rationale for shifting incremental land investment away from non-core submarkets towards move-up and resort lifestyle segments, inquiring if this was due to better land deals, less competition, or higher expected returns.

Answer

Chief Corporate Operations Officer Erik Heuser explained that this is a pivot back to historical exposure, reducing tertiary entry-level investment from 20-25% post-COVID to 15%. He confirmed less competition and more opportunities in move-up/resort lifestyle land, aligning with the company's historical focus. Chairman and CEO Sheryl Palmer added that buyers in these segments have stronger balance sheets, making sales less about affordability and more about timing. Rafe Jadrosich also questioned the mid-single-digit lot inflation outlook for 2026, asking about current inflation for land being contracted and expectations for relief in 2027. Erik Heuser noted a stabilization in the land market, resulting in low single-digit appreciation expectations, and mentioned success in renegotiating deals with sellers.

Rafe Jadrosich asked about the differences in incentive changes across consumer segments, specifically quantifying margins for each segment and how incentives vary between entry-level, move-up, and resort lifestyle buyers.

Answer

Sheryl Palmer, Chairman and CEO, explained that while specific segment margins are not provided, resort lifestyle typically has the highest margins. She noted that the most expensive incentives, often forward commitments, are generally used for first-time buyers to help with rates, while resort lifestyle buyers, less concerned with rates, receive incentives like options, lot premium reductions, or other value adds. Curt VanHyfte, CFO, added that incentives are tailored to maximize each buyer's specific situation. Rafe Jadrosich also inquired about the continued reduction in cycle times, asking how much further they could decrease and what impact this has on backlog conversion rates, particularly for Q4 and its sustainability. Curt VanHyfte, CFO, stated that cycle times are essentially at pre-COVID levels with some further improvement potential. He projected a higher backlog conversion rate for Q4 compared to Q3 due to the current mix of spec homes, noting that this higher rate is a point-in-time function and will likely continue for the next couple of quarters as the company aims to increase to-be-built sales over time.

Rafe Jadrosich asked about the differences in incentive changes and gross margins across Taylor Morrison's consumer segments: entry-level, move-up, and resort lifestyle.

Answer

Chairman and CEO Sheryl Palmer explained that incentives are tailored by customer need, with first-time buyers receiving the most expensive (as a percentage) for rate assistance. Resort lifestyle buyers, less rate-sensitive, often receive options or lot premium reductions. CFO Curt VanHyfte noted resort lifestyle margins are typically the highest.

Rafe Jadrosich asked for a breakdown of margins and incentives by consumer segment and sought to understand the specific contribution of incentives versus mix to the Q3 margin decline.

Answer

CEO Sheryl Palmer noted that incentives are highest on finished inventory, often involving rate buydowns, while resort lifestyle incentives may focus on options. CFO Curt VanHyfte attributed the majority of the Q3 margin step-down to higher spec penetration and its associated incentives, with minimal impact from product mix, assuming stable interest rates.

Rafe Jadrosich asked about the potential cost savings from the SG&A cuts made in Q4 2025 and the annualized benefit. He also inquired about Meritage Homes' longer-term target for net debt to cap and the opportunity to increase off-balance sheet financing from current levels.

Answer

EVP and CFO Hilla Sferruzza stated that a full annualized benefit for SG&A savings is not yet provided, as it's partly a function of 2026 performance. She highlighted that significant savings are expected from overhead count reductions and improved efficiencies from technology investments, leading to year-over-year SG&A leverage lift. Regarding the balance sheet, Hilla Sferruzza confirmed comfort with a low 20% net debt to cap as a long-term target and expressed a strong focus on increasing off-balance sheet vehicles, aiming for a mix of about 60% owned and 40% option lots, expecting this percentage to increase throughout 2026.

Rafe Jadrosich inquired about Meritage Homes' long-term target for net debt to capital and the potential for increasing the use of off-balance sheet financing vehicles.

Answer

EVP and CFO Hilla Sferruzza confirmed a long-term net debt to cap target in the low 20% range and expressed a strong focus on increasing off-balance sheet financing, noting that Q4 2025 ratios were temporarily skewed due to lot terminations.

Rafe Jadrosic asked about current lot inflation and future trends, specifically for 2026, and if there's visibility on when costs might start to decline. He also inquired about the sequential increase in the midpoint of Q4 revenue guidance and delivery ASP, given flattish orders, and the drivers behind this improvement, especially since past delivery ASPs were below guidance due to incentives.

Answer

Hilla Sferruzza (EVP and CFO, Meritage Homes) stated that Meritage is not providing specific guidance on lot cost inflation for 2026, expecting it to continue or worsen slightly into 2026, with improvements starting in 2027-2028. Phillippe Lord (CEO, Meritage Homes) explained that past ASP misses were 100% due to incremental incentives. The Q4 higher delivery number is driven by community count growth, and any ASP change is due to the mix of communities, with only a modest assumption for increased year-end incentives.

Rafe Jadrosich of Bank of America requested color on the fixed-cost component within COGS to better understand margin deleverage and asked about the geographic mix of future community count growth.

Answer

CFO Hilla Sferruzza explained that while she could not provide a specific dollar amount, fixed costs are primarily human capital and that volume deleverage accounts for 75-100 bps of the sequential margin decline. CEO Phillippe Lord clarified that all planned community count growth for 2025 and 2026 is within their existing markets, with no new MSA entries planned, but with focused investment in recently entered areas like Jacksonville and Utah.

Rafe Jadrosich of Bank of America requested more detail on the fixed costs within COGS to better understand margin deleveraging. He also asked for a breakdown of the community count growth outlook between new and existing markets.

Answer

EVP & CFO Hilla Sferruzza declined to provide specific fixed cost figures but confirmed the primary driver is human capital and that volume deleverage accounts for 75-100 basis points of the sequential margin decline. CEO Phillippe Lord stated that all planned community growth for 2025 and 2026 is within their existing footprint, excluding recent entries in Jacksonville, Utah, and the Gulf Coast, where they are over-investing to gain scale.

Rafe Jadrosich asked about Whirlpool's capital allocation plan for 2026, specifically the funding gap between the $400M-$500M free cash flow guidance, $200M dividend, and $400M debt paydown. He questioned if additional India share sales are contemplated or if other cash-generating options are on the table. He also asked about the promotional cadence, inquiring if competitors have made actual price announcements or if the improvement is due to inventory clearance, and what is driving this change.

Answer

CFO Roxanne Warner stated that the India transaction (reducing stake from 51% to 40%) was executed, and Whirlpool will continue to evaluate all options to further reduce debt in line with the $400M guidance. Chairman and CEO Marc Bitzer added that while they are comfortable with their current India stake, they have other minority stakes globally and smaller asset sale opportunities to close any funding gap. Regarding promotional cadence, Mr. Bitzer explained that observations are based on a sophisticated price scraping tool, which tracks thousands of in-cart prices weekly. He noted that competitors' specific mechanisms vary, but the key is the observed consumer prices, which have shown improvement.

Rafe Jadrosich questioned the funding gap for Whirlpool's capital allocation plan, specifically how the $400M-$500M free cash flow guidance, $200M dividend, and $400M debt paydown align. He also asked about the drivers of the observed improvement in competitor promotional cadence, whether it's due to actual price announcements or inventory clearance.

Answer

CFO Roxanne Warner mentioned the India share sale transaction (reducing stake from 51% to 40%) as a source of proceeds for debt paydown and stated they would continue to evaluate all options to further reduce debt. Chairman and CEO Marc Bitzer added that while they are comfortable with their India position, they have other minority stakes and smaller asset sale opportunities to close the gap. Regarding promotional cadence, Bitzer explained that Whirlpool uses a sophisticated price scraping tool to observe in-cart pricing weekly, indicating that the post-Black Friday price recovery suggests preloaded inventory is out of the system, leading to a more normalized competitive environment.

Rafe Jadrosich from Bank of America inquired about the sellout trends for North American MDA in Q2 and Q3-to-date for both Whirlpool and the broader industry, and also requested an update on the status of the India business sale.

Answer

Marc Bitzer, Chairman & CEO, characterized Q2 industry sellout as flat to down 2-3%, with a weak product mix due to low consumer sentiment. He noted Whirlpool lost minor share early in Q2 after adjusting promotions but saw a positive sellout trend in early July. James Peters, EVP and CFO, confirmed the India sale process is on track to close around year-end, with expected proceeds remaining in the $550-$600 million range.

Rafe Jadrosich from Bank of America asked about the underlying second-half assumptions for industry demand elasticity and market share gains, and also inquired about competitor pricing behavior.

Answer

Marc Bitzer (executive) noted that overall category price elasticity is limited, especially with replacement demand constituting 65% of the market. He anticipates the primary upside will be market share gains and increased factory utilization once tariffs are fully implemented. James Peters (executive) added that their guidance assumes a flat industry environment in the second half, consistent with the first.

Rafe Jadrosich requested a breakdown of the 75 basis point price/mix guidance for 2025 and asked if there were additional headwinds in Q4 North America beyond price/mix, given the 2025 guide seems below the prior expected run rate.

Answer

CEO Marc Bitzer explained the price/mix benefit is a combination of a small carryover, a larger impact from new promotional changes, and mix from new products building throughout the year. Regarding the 2025 guidance, both Bitzer and CFO Jim Peters acknowledged that they adjusted production down in Q4, which was a headwind. They are setting a realistic 7.5% EBIT target for 2025 to ensure they deliver on commitments, noting it represents a 100 bps full-year improvement and includes incremental marketing investments.

Rafe Jadrosich inquired about the potential tailwind from declining steel prices, the company's hedging strategy, and the outlook for raw materials into 2025.

Answer

CEO Marc Bitzer explained that the full-year impact from raw materials is expected to be largely neutral, as previously guided. He noted that while steel contracts are typically locked in annually around Q3/Q4, other inputs like plastics have shorter hedging cycles. For 2025, he stated it was too early to provide specific guidance but acknowledged they are trying to lock in some small favorable elements, though the magnitude is not yet significant. Full details will be provided in January.

Rafe Jadrosich asked about the expected Built-to-Order (BTO) mix for fiscal Q1 and the full year, including the anticipated exit rate compared to the 70% target. He also sought clarification on the Q1 gross margin decline beyond fixed costs and leverage.

Answer

President and COO Robert McGibney expects Q1 BTO mix to be similar to Q4 (57%-60%) due to ongoing inventory clearance, with a gradual progression to an exit rate of at least 70/30 BTO mix by year-end, driven by new communities. He attributed the Q1 gross margin decline to regional and product mix, pricing pressure on moving older, higher-cost spec inventory, and confirmed Q1 as the bottom for margins with expected improvement throughout 2026.

Rafe Jadrosich asked about the expected built-to-order (BTO) mix for fiscal Q1 and the full year 2026, including the target exit rate of 70%. He also sought clarification on the factors contributing to the quarter-over-quarter decline in Q1 gross margin beyond fixed costs and operating leverage.

Answer

President and COO Robert McGibney projected the Q1 BTO mix to be in the 57-60% range due to ongoing inventory clearance, with a goal to exit the year at a 70/30 ratio. He explained that the Q1 gross margin decline is primarily driven by regional and product mix, along with pricing pressure on older, higher-cost inventory, confirming Q1 as the expected bottom for margins.

Rafe Jadrosic inquired about KB Home's preliminary revenue outlook for fiscal year 2026, considering the shift back to the built-to-order (BTO) model and the current volatile environment. He also asked for clarification on the drivers behind the implied leverage or better-than-normal seasonality in the fourth-quarter SG&A guidance.

Answer

Jeffrey Mezger, Chairman, President & CEO, stated that specific 2026 guidance would not be provided but anticipated a solid year with improved affordability and increased community count, expecting margin improvement as the company shifts to BTO. Robert Dillard, EVP & CFO, explained that the Q4 SG&A improvement was due to a 15% year-over-year reduction in gross SG&A, driven by fixed cost reductions and compensation scheme adjustments, rather than operating leverage.

Rafe Jadrosich asked for a preliminary view on next year's revenue outlook, considering the company's shift back to a built-to-order (BTO) model. He also inquired about the implied leverage on SG&A in the fourth quarter guidance and the drivers of this sequential improvement.

Answer

Jeff Mezger, Chairman and Chief Executive Officer, stated that specific guidance for next year's revenue would not be provided, but directionally, an uptick in community count for the spring selling season and improving affordability are expected to set up a solid year with improving margins as the BTO mix grows. Regarding SG&A, Mezger explained that the improvement was not primarily due to leverage but rather a 15% year-over-year quarterly reduction in gross numbers, resulting from fixed costs removed from the business and the annual compensation structure.

Rafe Jadrosich asked for a preliminary outlook on KB Home's 2026 revenue, especially considering the company's shift back to a built-to-order (BTO) model. He also questioned the drivers behind the implied better-than-normal seasonality for the fourth-quarter SG&A guidance.

Answer

Jeff Mezger, Chairman and Chief Executive Officer, declined to provide specific 2026 guidance but indicated an expected uptick in community count for the spring selling season and improving affordability, which should set up a solid year. He also anticipated margin improvement as the company transitions to more BTO homes and works through inventory. Regarding SG&A, Mezger clarified that the improvement was due to a 15% year-over-year quarterly reduction in gross SG&A expenses, driven by fixed costs removed from the business and the yearly total compensation scheme, rather than operating leverage.

Rafe Jadrosich of Bank of America inquired about the level of land inflation flowing through the P&L and whether land prices are softening in the current market. He also asked about the amount of fixed cost in cost of goods sold and how deleverage is impacting the second-half gross margin guide.

Answer

Chairman & CEO Jeffrey Mezger noted that rising land development and city fee costs are significant factors, not just land acquisition prices. He observed that land sellers are offering better time and terms, which typically precedes price reductions. EVP & CFO Rob Dillard clarified that the margin change from Q2 to Q3 is driven by mix and pricing, while the sequential improvement from Q3 to Q4 is primarily due to gaining operating leverage from higher volume.

Rafe Jadrosich asked for the outlook on direct construction costs and the current level of land cost inflation. He also inquired about the current mix of spec versus build-to-order (BTO) homes and the margin difference between them.

Answer

President & COO Rob McGibney stated that direct costs were down sequentially, and he sees further opportunities for reduction through value engineering and simplified home designs. He noted that while land costs have stabilized, they are at a higher level. On the sales mix, McGibney said it's roughly 60% BTO and 40% spec, but the goal is to return to the more historical 80/20 mix, as personalized BTO homes generate higher margins.

Rafe Jadrosich asked for a detailed explanation of the guide-to-guide changes in Somnigroup's financial outlook, specifically focusing on the altered assumptions from prior guidance and the embedded like-for-like and underlying industry growth expectations for the fourth quarter.

Answer

Scott Thompson, Chairman, President, and CEO, Somnigroup International, and Bhaskar Rao, Executive Vice President and Chief Financial Officer, Somnigroup International, clarified that the key changes included an improved industry outlook (now down low to mid-single digits) and an increased balance of share for family brands at Mattress Firm (mid-50% range). For Q4, they projected consolidated sales slightly above $1.9 billion, with Tempur Sealy like-for-like growth in the mid to high single digits, North America like-for-like in the mid-single digits, and Mattress Firm sales growing low single digits. They also noted the expected seasonal step-down in gross profit from Q3 to Q4.

Rafe Jadrosich from Bank of America requested clarification on the specific changes in assumptions driving the updated guidance, particularly regarding industry outlook and revenue synergies, and the implied like-for-like and underlying industry growth rates embedded in the fourth-quarter forecast.

Answer

Chairman, President, and CEO Scott Thompson and EVP and CFO Bhaskar Rao clarified that the primary changes in guidance assumptions were an improved industry outlook (down low to mid-single digits vs. mid-single digits previously) and higher expected balance of share for family brands at Mattress Firm (mid-50s vs. low 50s). For Q4, they projected consolidated sales slightly north of $1.9 billion, implying mid to high single-digit like-for-like growth for Tempur Sealy legacy, mid-single digits for North America like-for-like, and low single digits for Mattress Firm like-for-like, with a natural seasonal step-down in gross profit from Q3 to Q4.

Rafe Jadrosich inquired about the distribution segment's pricing dynamics, noting improved overall pricing but worsening price-cost on the residential side, and asked if cost reductions could lead to price-cost neutrality if the market remains soft. He also questioned TopBuild's capital allocation priorities, specifically the balance between M&A and buybacks, and the comfort level with leverage above the long-term target.

Answer

Rob Kuhns, CFO, explained that distribution's overall positive pricing is due to product mix (inflationary pressures in gutters and mechanical insulation), while residential products face cost/price declines, resulting in a slightly negative net price-cost. Robert Buck, President and CEO, added that TopBuild continuously evaluates productivity and makes adjustments. Kuhns stated that TopBuild is comfortable with its current 2.4x pro forma leverage, having been higher before, and aims for the 1-2x target over the longer term through EBITDA growth, debt paydown, or cash retention, while continuing to balance M&A and buybacks.

Rafe Jadrosich sought clarification on the distribution side's pricing, which improved overall but saw a worsening price-cost dynamic on the residential piece, and whether cost reductions could lead to price-cost neutrality if the market remains soft. He also asked about the priority of achieving a leverage ratio below two times versus continuing M&A and buybacks, and the company's comfort with current leverage levels.

Answer

Rob Kuhns (CFO) explained that distribution's overall positive pricing is due to a product mix favoring inflationary commercial products like gutters and mechanical insulation, while residential products saw both costs and prices decline, resulting in a net slightly negative price-cost for distribution. Robert Buck (President and CEO) added that they continuously seek productivity improvements and make adjustments as needed. Rob Kuhns stated they are comfortable with the current pro forma leverage of 2.4x, aiming for the 1-2x long-term target through EBITDA growth, debt paydown, or cash retention, and plan to continue balancing M&A and buybacks.

Rafe Jadrosich from Bank of America asked about potential cost relief from fiberglass manufacturers to offset the price-cost headwind. He also questioned the company's willingness to increase leverage for larger commercial roofing M&A.

Answer

CEO Robert Buck acknowledged an abundance of fiberglass supply and confirmed 'constant dialogue' is occurring with those partners. CFO Rob Kunins stated that while the company prefers 1-2x net leverage, it would go up to the 2.5x-3.0x range for the right deal, noting a history of rapid deleveraging after large acquisitions.

Rafe Jadrosich of Bank of America followed up on the footprint rationalization, asking when the company might adjust expenses more aggressively toward its 27% long-term decremental margin target if single-family weakness persists.

Answer

CFO Rob Kuhns clarified that the company has already begun adjusting its cost structure with the headcount reductions made in Q1, which affected back-office support in addition to variable installers. He stated that after accounting for M&A and price/cost headwinds, the company's expected decremental margin for the full year is already in the high-20s to low-30s range.

Rafe Jadrosich noted the wide guidance range for 2025 and asked for the key assumptions that differentiate the high and low ends, particularly regarding single-family starts. He also questioned why Q1 was expected to be the weakest quarter and whether this assumed a macro improvement later in the year.

Answer

CFO Rob Kuhns clarified the guidance assumptions: the midpoint assumes flat single-family volume, while the low end is near -2% and the high end is +2%. He explained that Q1 is projected to be the weakest due to tougher year-over-year comps, one less business day, and trends observed year-to-date, not an assumed macro recovery. CEO Robert Buck added that the company is being cautious and not baking in second-half optimism after the 2024 forecast did not materialize as expected.

Rafe Jadrosich inquired about the timing of tariff impacts on the P&L and the cadence of mitigation efforts, specifically how much impact is currently realized and the plan for full mitigation in 2026.

Answer

VP and CFO Rick Westenberg explained that most tariff impacts are concentrated in the second half of the year, with Q3 seeing a $15 million impact from elevated China tariffs. He noted the $270 million annualized impact is a run-rate, but the environment is dynamic. For mitigation, he stated actions are aggressive, with varying timelines, aiming to offset dollar and margin impacts. Sourcing footprint changes, a key lever, have already reduced China exposure by 45% since 2018, with more details for 2026 to be provided in February.

Rafe Jadrosich sought a better understanding of the timing of when tariffs hit Masco's P&L and the cadence of mitigation efforts, including how much impact is currently in the P&L and the plan for full mitigation in 2026.

Answer

Rick Westenberg, VP and CFO, explained that most tariff impact is occurring in the second half of the year, with a $15 million additional impact in Q3 from elevated China tariffs. He stated the annualized tariff impact is $270 million ($140 million China, $130 million other). Mitigation actions are aggressive, with a large part offset this year, and the goal is to offset both dollar and margin impacts over time, with more details for 2026 to be provided in February. He noted that sourcing footprint changes, a key mitigation lever, take time.

Rafe Jadrosich of Bank of America requested more detail on Masco's non-China tariff exposure by country and asked about the drivers behind the strong Q2 organic growth in the Plumbing segment, including sell-through trends.

Answer

CFO Rick Westenberg declined to provide a country-by-country breakdown of tariff exposure, citing the dynamic nature of both tariffs and the company's sourcing footprint, but reiterated transparency on overall impacts. He attributed the strong plumbing performance to underlying business strength in volume and price, particularly in the e-commerce and trade channels.

Rafe Jadrosich asked about potential ASP or margin tailwinds if the office market improves, specifically regarding Class A offices or regional "green shoots." He also sought directional visibility on cost inflation, AUV, and SG&A trends for 2026.

Answer

CEO Vic Grizzle noted that office market recovery is broadening across 18 regions, with encouraging signs in leasing and renovation, though still early. CFO Chris Calzaretta stated that 2026 outlook is still being prepared, but the company's core value drivers—AUV growth, productivity, and disciplined SG&A investments—remain in place, with expectations for EBITDA growth and margin expansion.

Rafe Jadrosich asked about the potential for the office market to rebound after seven years of headwinds, including any anticipated ASP or margin tailwinds, and specific regional green shoots. He also sought directional visibility for 2026 regarding cost inflation, AUV, SG&A, and any significant puts and takes.

Answer

CEO Vic Grizzle noted that office market improvement is broadening beyond major cities and the Sun Belt to 18 regions across the U.S., with positive leasing activity driving renovation, though it's still early. CFO Chris Calzaretta stated that while 2026 modeling is ongoing, the company's value creation drivers—AUV growth, productivity, and SG&A leverage—remain in place, and the expectation is for continued EBITDA growth and margin expansion.

Rafe Jadrosich asked about the potential for further Mineral Fiber margin expansion, noting that margins have returned to near-2019 levels on lower volumes. He also questioned if a competitor's recent price increase creates an opportunity for Armstrong to raise its own prices.

Answer

CEO Vic Grizzle explained that the same drivers that enabled the margin recovery—strong AUV from innovation, consistent productivity gains, and SG&A management—will propel margins higher going forward. On pricing, he stated that Armstrong runs its own play based on its costs and customer conversations, rather than reacting to competitor moves.

Rafe Jadrosich of Bank of America requested an updated outlook on full-year cost inflation, its components, and how pricing offsets it. He also asked about the implied organic growth for the Architectural Specialties segment for the rest of the year and its performance relative to the market.

Answer

CFO Christopher Calzaretta detailed the inflation forecast: total input costs up mid-single-digits, driven by a 10-15% increase in energy and mid-single-digit rise in raw materials, with freight remaining flat. He stated this is offset by pricing, manufacturing productivity, and cost controls. For Architectural Specialties, he noted the back half will see softer organic growth due to tough comparisons from a strong 2024, but the business continues to perform well and win in the market.

Rafe Jadrosich asked about the potential total addressable market (TAM) for Templok compared to other growth initiatives, the investment (SG&A/CapEx) required to support its growth, and its AUV relative to the company average.

Answer

CEO Vic Grizzle described the Templok opportunity as 'much, much bigger' than other initiatives, with the potential to eventually renovate the entire 39 billion square foot installed base. He confirmed its AUV is 2-3x the Mineral Fiber average and that the 2025 CapEx increase is partly to support its capacity. CFO Chris Calzaretta added that SG&A is already being allocated and will scale with sales.

Rafe Jadrosich asked for the drivers behind the implied Q4 revenue acceleration in the Architectural Specialties (AS) segment and sought details on the returns from past SG&A investments like Canopy and PROJECTWORKS.

Answer

CFO Chris Calzaretta clarified that Q4 Mineral Fiber volume is expected to be flattish, while the organic AS business is expected to see sequential top-line acceleration. CEO Vic Grizzle explained that the company is past the foundational investment stage for its growth initiatives and is now generating positive EBITDA and increasing operating leverage from them.

Rafe Jadrosich asked about the assumed cadence of starts pace and community count throughout the year, considering the second-half weighted delivery outlook. He also inquired about the year-over-year increases in lot costs and D.R. Horton's expectations for these costs through 2026.

Answer

President and CEO Paul Romanowski indicated that the starts pace needs to increase from 14,600, keeping pace with or exceeding sales in the first and second fiscal quarters. CFO Bill Wheat expects double-digit community count increases to moderate to mid-to-high single digits, which positions D.R. Horton to achieve its volume without needing higher absorptions. SVP of Communications Jessica Hansen reported an 8% year-over-year increase in lot costs per square foot, expecting them to remain sticky (mid-single to high-single digits) for the next year or so.

Rafe Jadrosich asked about the cadence of D.R. Horton's starts pace and community count through the year, given the second-half weighted delivery outlook. He also inquired about the year-over-year increases in lot costs and the expectations for these costs through fiscal 2026.

Answer

Paul Romanowski, President and CEO, stated that the starts pace needs to increase significantly from the 14,600 in the recent quarter, needing to keep pace with or exceed sales in the first and second quarters. Bill Wheat, CFO, added that while community count has seen double-digit year-over-year increases, it is expected to moderate to mid-to-high single digits. Jessica Hansen, SVP of Communications, reported that lot costs were up 8% year-over-year on a per square foot basis and are expected to remain sticky, potentially seeing mid-to-high single-digit increases for the next year or so in closings.

Rafe Jadrosich from Bank of America asked about performance differences between D.R. Horton's larger, more competitive markets and its smaller markets. He also inquired about the underlying trend in lot cost inflation, normalizing for mix, and when that pressure might ease.

Answer

President and CEO Paul Romanowski noted that smaller, secondary markets have shown more consistent performance relative to plan this fiscal year. EVP and COO Michael Murray stated that mid-single-digit lot cost inflation is expected to continue in the near term, as lots for upcoming closings are already secured. Any relief from current market softness would likely take several quarters to impact results.

Rafe Jadrosich of Bank of America Merrill Lynch asked about performance differences between D.R. Horton's larger markets versus smaller ones with more private competition. He also inquired about the underlying trend for lot cost inflation.

Answer

President and CEO Paul Romanowski noted that smaller markets with less public builder competition have shown more consistent performance this fiscal year. EVP & COO Michael Murray stated that he expects mid-single-digit lot cost inflation to continue in the near term, with any potential relief being several quarters away.

Rafe Jadrosich of Bank of America inquired about the year-over-year change in land costs and the potential for relief. He also asked if the long-term reduction in SG&A would come from operating leverage or active spending cuts.

Answer

EVP and CFO Bill Wheat stated that land and lot costs were up 10% year-over-year and are not expected to decrease due to supply constraints. Regarding SG&A, he explained that near-term improvements will come from leverage on higher seasonal volumes, while long-term management involves adjusting overhead at the local market level based on sustained volume trends.

Rafe Jadrosich from Bank of America inquired about the trend in land cost inflation and whether relief is expected. He also asked about the rationale and continuation of the accelerated pace of share repurchases.

Answer

Executive Jessica Hansen stated that lot costs were up 10% year-over-year and expects sequential increases to remain in the low to mid-single digits, with year-over-year growth moderating. CFO Bill Wheat explained that the Q1 share repurchase acceleration was a tactical response to a lower stock price and that the company will continue to be active, managing buybacks within its liquidity and balance sheet targets.

Rafe Jadrosich asked for the company's expectations on land inflation for Q1 and the full fiscal year 2025. He also inquired about the level of net price increase needed to maintain flat margins given the cost outlook.

Answer

EVP Jessica Hansen stated that lot cost inflation has moderated to high-single-digits and is expected to continue increasing at a mid-single-digit pace in fiscal 2025. EVP & CFO Bill Wheat responded that only a 'small amount' of net price increase would be needed to hold margins, as they anticipate stick and brick costs to remain relatively flat.

Rafe Jadrosich asked about the current number of finished specs per community, the target level, and how starts are being planned. He also inquired about the factors influencing the wide implied range for Q4 SG&A guidance, particularly what drives leveraging versus deleveraging.

Answer

Ryan Marshall (President and CEO, PulteGroup Inc.) stated that PulteGroup has approximately 2,000 finished specs, or two per community, which is double the ideal target of 1-1.2 per community. He noted this contributes to incremental incentives but is not a major concern, with starts aligned to sales and a goal to normalize finished specs and increase built-to-order sales in 2026. David Carrier (SVP of Finance, PulteGroup Inc.) indicated that Q4 SG&A is expected to be consistent with Q3, with the wider range attributed to the variability in the closing guide due to moving spec inventory, without highlighting unusual factors.

Rafe Jadrosich of Bank of America asked when the benefits of land cost relief and retrading might begin to flow through the P&L. He also inquired about how the new Del Webb Explore concept differs from the traditional Del Webb brand and its potential for growth.

Answer

President & CEO Ryan Marshall estimated that savings on land development realized today would likely begin benefiting closings in the back half of 2026. He described Del Webb Explore as a major growth opportunity targeting the Gen X buyer (45+). Unlike traditional Del Webb, it is not age-restricted and features nuanced lifestyle programming, such as different fitness activities and more private club-style dining, to appeal to a younger, active demographic.

Rafe Jadrosich from Bank of America asked about regional differences in incentive levels and the expected trend for land cost inflation, including whether the company is seeing any price relief.

Answer

CEO Ryan Marshall reiterated that incentives vary by consumer group but declined to provide a regional breakdown. He explained that the expected 10% land cost inflation for the year is largely due to land contracted in prior, higher-inflation periods. He also noted that the company directly manages over 85% of its own land development.

Rafe Jadrosich from Bank of America asked about the SG&A impact from new market entries, the timeline for these markets to reach scale, and the company's strategy regarding spec versus presale homes.

Answer

EVP and CFO Russell Devendorf explained that new divisions are the primary driver of SG&A increases, with a greenfield startup costing $1-2 million in the first year. He outlined a two-year plan to reach a 200-closing run rate. He also noted that while historically 70%+ presale, the current mix is closer to 50-60% spec due to market conditions, though the long-term focus remains on presales.

Rafe Jadrosich of Bank of America asked if the Q2 gross margin guidance decline was driven by higher incentives. He also questioned how the company can grow deliveries with a lower year-over-year backlog, inquired about the mortgage JV's progress, and asked if competitors were pulling back on housing starts.

Answer

EVP & CFO Russ Devendorf confirmed incentives are pressuring Q2 margins and explained that improved cycle times and available inventory support deliveries despite a lower backlog. He noted the mortgage JV capture rate is improving, recently hitting 56%. CEO Greg Bennett added that Smith Douglas's own starts are ahead of budget, and while they see some evidence of competitors slowing down, their proactive inventory build has aided recent conversions.

Rafe Jadrosich followed up on the 2025 gross margin outlook, asking about the underlying assumptions for inflation and net pricing. He also inquired about the margin performance of the Devon Street (Houston) acquisition relative to the corporate average.

Answer

CFO Russ Devendorf explained that the 2025 gross margin target of around 25% reflects the company's 'pace over price' strategy and anticipates continued compression from higher land costs. He confirmed the current backlog margin is 25.5%. He also stated that the Houston acquisition has performed well, with gross margins around 24-25% for the year, and the integration is now complete.

Rafe Jadrosich from Bank of America asked for clarification on the third-quarter margin guidance and the drivers behind the historically strong fourth-quarter outlook, particularly regarding production levels.

Answer

SVP & CFO Brenda Lovcik clarified that the company provided adjusted EBITDA margin guidance of approximately 32% for Q3 and 31% for Q4, not specific gross margin guidance. She noted the improvement is driven by the reversal of the level-loading production impact and the elimination of Enhance-related costs. President & CEO Bryan Fairbanks added that the level-loading strategy reduces quarterly earnings volatility.

Rafe Jadrosich from Bank of America asked for clarification on the third-quarter margin outlook and the drivers behind the stronger-than-historical fourth-quarter forecast, particularly regarding production levels.

Answer

SVP & CFO Brenda Lovcik clarified that the company provided EBITDA margin guidance of approximately 32% for Q3 and 31% for Q4, not specific gross margin guidance. She noted improvements would come from the reversal of level-loading impacts and the elimination of Enhance-related costs. President & CEO Bryan Fairbanks added that the level-loading strategy reduces quarterly earnings volatility, resulting in a more stable Q4 margin compared to previous years.

Rafe Jadrosich inquired about the sell-through rate in the first quarter and the underlying assumption for the remainder of the year. He also asked if the factors driving the year-over-year gross margin decline in Q2 were temporary and expected to reverse in the second half.

Answer

CFO Brenda Lovcik stated that sell-through is on track to achieve the full-year guidance of 5% to 7% growth, which reflects a mid- to high single-digit sell-through assumption for the year. She and CEO Bryan Fairbanks confirmed that the margin pressures in Q2 are temporary and should reverse in the second half of the year, with Fairbanks adding that the new Enhance profile's production efficiency is steadily improving.

Rafe Jadrosich of Bank of America inquired about the recent volatility in distribution channels, whether more changes are anticipated, and the visibility provided by new railing product commitments.

Answer

CEO Bryan Fairbanks stated that he anticipates a much calmer distribution environment in 2025, with some distributor infill occurring in Q1. He then outlined the three-stage commitment process for railing products, which involves securing distribution, getting placement in pro and retail channels, and finally, marketing to the end consumer to drive pull-through and build confidence in a single-manufacturer warranty.

Rafe Jadrosich asked about the reasons for higher-than-historical inventory levels and whether this represents a structural change. He also questioned the revenue assumptions underpinning the 2025 EBITDA margin target of over 31%.

Answer

CEO Bryan Fairbanks explained that carrying higher inventory is a new structural strategy to smooth production schedules and reduce operational volatility, in addition to supporting new product launches. He noted the 2025 margin target assumes a return to low single-digit growth in the repair and remodel market.

Rafe Jadrosich asked for details on the intra-quarter demand trends, particularly the noted improvement in June, and whether trends differed for discretionary versus non-discretionary products. He also inquired about the company's market share performance and where it sees opportunities for gains.

Answer

President and CEO Kevin Holleran described the quarter's demand as strong in April, softer in mid-May to early June, and then picking up in the latter half of June, a trend that continued into July. He noted that while still negative year-over-year, the rate of new construction permit filings improved through Q2. Holleran stated that the company believes it is gaining share through relationship building, service levels, and new products, and is targeting underpenetrated regions with incremental SG&A investments in sales, service, and marketing.

Rafe Jadrosich asked for a breakdown of the 2025 guidance, including assumptions for North America vs. international, M&A carryover, and channel inventory. He also inquired about warranty periods and a potential replacement cycle.

Answer

CEO Kevin Holleran stated that the ChlorKing acquisition will contribute about 1% of carryover revenue growth in 2025 and that channel inventory levels are considered healthy with no major restocking or destocking assumed in guidance. CFO Eifion Jones added that price realization will be higher in North America than internationally. Regarding warranties, Holleran confirmed a standard 3-year period, suggesting products from the 2020-2021 sales surge are now beginning to exit their warranty coverage.

Rafe Jadrosich sought clarification on whether the 2025 price outlook is net or gross, asked about tariff exposure, requested a summary of the new construction cycle, and inquired about Q3 channel sell-through.

Answer

CFO Eifion Jones confirmed the 3-5% pricing outlook is broadly net, assuming stable discounts, and stated that tariff-impacted goods represent a low percentage (10-15%) of COGS. He also noted that Q3 sell-through was 'relatively flat' based on their main U.S. data point. CEO Kevin Holleran detailed the new construction decline from a peak near 100,000 pools to an estimated 60,000 this year, a roughly 15% drop from the prior year.

Rafe Jadrosich requested quantification of the startup and maintenance costs impacting Q2 Roofing margins and asked if margins would have grown without them.

Answer

CEO Brian Chambers confirmed that temporary manufacturing cost headwinds are the primary driver of the slight year-over-year margin decline in Roofing. He quantified the Q1 impact at approximately $19 million and suggested a similar run rate for Q2. He affirmed that the underlying business strength in terms of price, volume, and mix remains intact.

Rafe Jadrosich from Bank of America asked about the assumptions driving the implied stronger second-half growth in the full-year guidance. He also inquired if the changing competitive behavior was more pronounced in commodities or manufactured products and if it was broad-based or regional.

Answer

CFO Pete Beckmann clarified that the stronger second half is driven by normal seasonality, stabilizing multifamily headwinds, and the full-year benefit of recent acquisitions, not an assumed market recovery. CEO Peter Jackson explained that competitive pressure was felt first in commodities but has since moved to other, more complex categories. He noted that while pressure is broad-based, it varies by region depending on local market dynamics.

Rafe Jadrosich inquired about the company's 2025 market outgrowth expectations relative to its long-term targets and asked for details on the install services business, including its size, margin profile, and growth opportunities.

Answer

CEO Peter Jackson stated that 2025 share gain expectations are modest and centered on digital, as defending share is a priority in the current weak market. CFO Pete Beckmann specified that install services represent 16-17% of sales with margins in line with the installed product categories. Framing, doors, and windows were cited as key opportunities.

Rafe Jadrosich asked about the decline in the manufactured products segment, seeking to understand the specific impact from multifamily trusses versus other products. He also inquired about the drivers of the value-add gross margin improvement shown in the long-term bridge, questioning if it was due to mix shift or margin expansion within the category.

Answer

CFO Designate Pete Beckmann noted that manufactured products within the multifamily segment were down nearly 45-50% due to volume declines and normalization. CEO Designate Peter Jackson added that multifamily trusses were the hardest-hit category, while single-family saw a shift from floor trusses to EWP. Regarding the margin bridge, Jackson explained the improvement is a result of multiple factors, including acquisitions, productivity savings, and a wider product portfolio, which he views as sustainable.

Sought clarification on the long-term guidance, asking about the breakdown of the projected $4.85 EPS, the role of synergies versus operating leverage, and whether the mid-single-digit growth assumption is for the company or the industry.

Answer

The long-term projection is an internal target, not formal guidance. It includes $100 million in synergies and assumes a return to normal industry growth. The mid-single-digit revenue growth is a company target, implying market share gains over the industry's expected 3-5% growth. The projection also includes manufacturing leverage and investments in store refreshes and advertising, without needing incremental CapEx.

Inquired about the company's market share performance versus the industry in Q1, the timing of recent shelf space gains, and the potential for securing additional white space with retailers.

Answer

The company estimates it significantly outperformed the U.S. market in Q1, with its sales down 2-3% versus an estimated 15% decline for the rest of the industry. Share gains are primarily driven by higher sales velocity from existing placements, but some new shelf space was gained and will come online in Q2, with more white space opportunities still available, particularly internationally.

Rafe Jadrosich asked if the company could maintain its 27% gross margin range if the current absorption pace continues and inquired about the drivers for SG&A leverage in the second half of the year.

Answer

Executive Chairman Douglas Yearley affirmed the current guidance assumes the mixed market persists. He stated that if the market were to soften further, the company would intelligently balance pace and price rather than rigidly holding onto a margin target. He explained that SG&A leverage in the second half is driven by higher revenue, projecting $6.6 billion in H2'25 versus $6.0 billion in H2'24.

Rafe Jadrosich inquired about the assumed gross margin for spec homes in Q1 and the rest of the year, and asked for commentary on regional market strength and weakness.

Answer

Executive Chairman and CEO Douglas Yearley explained that spec margins typically run about 200 basis points below the company average, but the spread was wider in Q1 due to higher incentives. He noted broad strength, with the Boston-to-D.C. corridor being 'incredibly strong' and Dallas and Houston recovering. He expressed caution for Phoenix due to inventory and identified Florida as the most cautionary market, also due to inventory and prior price appreciation.