Stephen Kim • Evercore ISI

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Gregg Ziegler, SVP - IR & Treasurer, estimated year-to-date cash flow from operations at over $400 million, expecting a Q4 acceleration to meet the full-year target. Douglas Yearley, Chairman & CEO, noted that construction cost relief is broad-based from trade and supplier negotiations, not from specific materials. Regarding Q4 orders, Martin Connor, CFO, and Mr. Yearley expressed optimism for better-than-historical performance due to strong community count growth and moderating interest rates, noting August deposits were trending flat to Q3, compared to a typical seasonal decline.

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CFO Martin Connor provided precise figures, stating there are 1,028 completed spec units, approximately 2,400 in progress, and permits for another 1,000-2,000. Executive Douglas Yearley added that the company is comfortable with these levels but is strategically slowing new spec starts in the current environment. He noted that strong Q2 spec sales, achieved with manageable incentives, contributed to the revenue beat and that the blend of spec and build-to-order margins supports their full-year guidance.

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CFO Martin Connor attributed the higher inventory to having more spec homes at a further stage of completion to meet annual delivery guidance. Executive Chairman Douglas Yearley added that the spec strategy is seasonal, designed to meet peak summer demand, and that they are managing starts on a community-by-community basis. Yearley confirmed that if the mixed market continues, overall land spend would decrease as the company leverages its strong existing pipeline.

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Executive Chairman and CEO Douglas Yearley stated that while they are hopeful for moderating rates, the company's success is not dependent on them, as proven in Q4. He noted they are already reducing incentives and are not anticipating major disruptions. CFO Martin Connor affirmed the company's comfort with a long-term operating margin in the 17-18% range and projected 2025 cash flow to be similar to 2024's ~$1 billion.

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EVP, CFO & Director Michael Miller attributed the positive mix to two main factors: stronger relative performance from regional and local builders, which carry a higher average job price, and solid growth in complementary products. Miller noted that complementary product gross margins improved by 100 basis points, driven by focused team efforts and increased penetration in the multifamily market via their CQ management group.

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CFO Michael Miller quantified the impact of the lost selling day at $10-12 million, which is not expected to be recovered. He estimated the net weather impact was an additional $10-20 million. Mr. Miller noted that the recovery of this revenue will be slower than usual due to broader job site delays and will likely be spread throughout the second and third quarters.

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CEO Jeffrey Edwards described significant expansion opportunity for the CQ multifamily model into new geographies, estimating 10 or more major markets. CFO Michael Miller added that this strategy will likely make IBP 'over-indexed to multifamily' over time. Regarding SG&A, Miller clarified that G&A is seeing leverage and typically grows with overall inflation, running at about $105-$110 million per quarter.

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CFO Michael Miller quantified the margin impacts, noting that production builder and other products business grew at twice the rate of their counterparts. He specified that weakness in spray foam pricing had a sub-100 basis point impact on gross margin, while internal sourcing start-up costs were about $1 million. CEO Jeffrey Edwards addressed the political question, stating IBP relies on gradual, local energy code adoption rather than federal mandates and expects labor management to be 'business as usual' regardless of administration.

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CFO Todd Fister explained the negative mix in Insulation was due to project timing in Q2 and is not considered an ongoing dynamic. CEO Brian Chambers stated that Roofing mix is stable, with steady component attachment rates and no material impact from including nonwovens, as its margin profile is similar to the overall business.

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CFO Todd Fister detailed that a gross tariff exposure of $50 million in Q2 is expected to be reduced to a net impact of approximately $10 million, primarily in the Doors business. Mitigation strategies include pre-purchasing inventory, negotiating with suppliers, and re-sourcing supply away from China. He projected a potential net tariff impact of 1-2% of COGS for the second half of 2025.

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CFO Todd Fister responded that North American technical insulation utilization is healthy, while Europe has excess capacity but has been managed well for cost, positioning it for strong incremental margins upon market recovery. He clarified that the D&A for the transferred glass plants is similar to the legacy Composites business, and while nonwovens has higher D&A from recent investments, its ongoing capital needs are lower.

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CEO Brian Chambers stated the hurricane impact is estimated at $8-10 million in Q4 manufacturing costs, with potential demand benefits materializing in 2025. He emphasized that the Kansas City investment was based on long-term fundamentals, and the potential for HUD code changes was not a factor in the decision, as the company believes the underlying need for housing is strong regardless of policy shifts.

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CEO Robert Buck attributed Progressive's success to a disciplined system for job selection, bidding, and project management, plus strong talent development. CFO Rob Kunins noted Progressive's helpful integrated job costing tool. Regarding staffing, Buck stated Q1 actions were appropriate, and Kunins highlighted the resulting 23% same-branch decremental margin in Q2.

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President and CEO Robert Buck affirmed this view, stating that new manufacturer capacity is favorable for TopBuild. He mentioned that while the company does not anticipate new industry-wide price increases in 2025, the field teams have been successful in holding current price levels, leveraging the value of the services and products provided. He emphasized the company's close partnership with manufacturers to navigate supply dynamics.

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CFO Rob Kuhns explained that strategic decisions include managing price on spray foam to drive volume and retaining skilled labor despite volume slowdowns, anticipating a future rebound. CEO Robert Buck confirmed that improved market demand would likely be necessary for any fiberglass price increases to gain traction in 2025. Both executives noted that the company's single ERP system provides critical real-time data for managing local pricing, labor, and productivity.

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CEO Robert Buck confirmed that some project delays have extended from a few months to a couple of quarters into 2025, particularly in verticals like EV and battery plants, but noted no uptick in cancellations. He anticipates this will lead to a bigger pickup in C&I capital projects in 2025, assuming a stable financing environment. CFO Rob Kuhns confirmed there was one extra selling day in both Q3 and Q4.

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CFO Rick Westenberg acknowledged a minor, non-significant pre-buy in Plumbing but stated channel inventories are healthy. CEO John Nudi attributed the current softness in DIY paint primarily to the three-decade low in existing home sales, rather than generational shifts, expressing confidence that demand will recover with the market.

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President and CEO Keith Allman discounted the idea of consumer stockpiling, attributing the DIY paint weakness to a long-term demographic shift from DIY-focused baby boomers to Pro-for-hire, and higher price sensitivity among the DIY consumer base. He acknowledged that while the premium consumer is resilient, a general trade-down is expected in tough times. Allman emphasized that Masco's strategy is a dynamic combination of pricing, cost-outs, and sourcing changes to maximize profitability.

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CFO Rick Westenberg confirmed the Q4 inventory timing provided a mid-single-digit top-line benefit that will reverse as a headwind in early 2025. President and CEO Keith Allman stated the M&A strategy remains focused on bolt-on acquisitions in paint and plumbing that offer strategic fit, leveraging Masco's channel or brand expertise, with technology being a key consideration.

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CEO Vic Grizzle noted that some inventory rebalancing occurred but inventories now seem stable, with no major impact factored into the back-half outlook. He positioned Temploc's competition as other building energy-saving solutions, not direct ceiling competitors. CFO Chris Calzaretta confirmed the expectation for positive organic top-line growth in both Q3 and Q4 for the AS segment.

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CEO Victor Grizzle explained that a slowdown in discretionary work, which often involves lower-AUV products, could provide a slight lift to the overall AUV mix. He clarified the impact is tied to smaller projects, not necessarily smaller customers. Grizzle also confirmed that the lower sales volume in the home center channel, which is a lower-AUV channel, did provide a modest benefit to the AUV mix in the first quarter.

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CEO Vic Grizzle reported that performance was consistent with recent quarters: healthcare, education, and transportation were positive, while the office vertical remained soft but stable. He noted that data centers also contributed positively but are a small part of the business. No significant shifts are expected in the near term.

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President & COO Paul De Cock identified weak carpet volumes as the primary driver of the slowdown, which was offset by strong performance in laminate and LVT, and confirmed the new high-end launch is progressing well. CFO James Brunk noted that mix was favorable but was offset by pricing pressure. Chairman & CEO Jeffrey Lorberbaum described the M&A pipeline as still limited due to compressed earnings but expects it to improve with the market.

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CEO Jeff Lorberbaum explained that while U.S. manufacturing capabilities have improved, super-premium products are still imported, and consumers will either pay more or trade down. Regarding a potential near-term benefit, he stated it's too early to tell as there's not enough information on how market prices will be implemented. Executive James Brunk added that higher costs from late last year are still flowing through, independent of tariffs.

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CEO Jeff Lorberbaum explained that some Q1 sales were for immediate jobs and may be permanently lost, with the main uncertainty being any long-term impact on customer relationships. Regarding product mix, he acknowledged current strength at the lower end but expressed confidence that postponed remodeling projects from existing homeowners will drive demand for mid-to-higher quality products, ultimately improving mix.

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Executive James Brunk confirmed no shares were repurchased in the quarter and quantified the volume impact on sales. Chairman and CEO Jeff Lorberbaum stated that share gains in North America were broad-based, resulting from a more aggressive approach to gain volume, though it came at the expense of some price/margin. President and COO William Christopher Wellborn added that the company's ceramic technology, led by its Italian business, is making great strides in areas like porcelain slabs and provides a competitive advantage globally.

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CFO Glenn Keeler explained the impairment was for a single, long-challenged Bay Area project and that the watch list process begins when margins approach 10%. COO Tom Mitchell noted the watch list is not significantly growing. CEO Douglas Bauer described Q2 absorptions as peaking in May before a seasonal decline in late June. Keeler attributed the wide margin guidance to the choppy environment and the number of homes yet to be sold for Q4.

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CEO Douglas Bauer stated that a new absorption target of 2.5 to 3 per community seems appropriate given the choppy market, emphasizing that the company will not chase volume by increasing incentives on its well-located land. CFO Glenn Keeler and EVP & CMO Linda Mamet addressed the margin question, explaining that the impact was mitigated by a favorable mix of home deliveries and the strategic use of incentives in the high-margin design studio, where margins exceed 40%.

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Chief Financial Officer Glenn Keeler explained that hitting the low end of the gross margin guidance would imply that elevated incentive levels of around 6% persist. He stated that the implied 8.5% operating margin is low for the long term and should improve with scale. Keeler attributed the high Q1 SG&A guidance to lower seasonal revenue, noting that past beats were driven by revenue outperformance and savings in sales and marketing.

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CFO Glenn Keeler clarified the revision was due to some early community closeouts and a strategic decision to shift some openings into the Q1 2025 spring selling season, providing updated guidance for 2025 (150-160 communities) and 2026 (170-180). CEO Douglas Bauer added this was a measured approach to maximize profitability. Keeler noted new communities target a standard 3-4 absorption pace and that any ASP decline would be due to geographic mix changes.

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CEO Phillippe Lord explained that while pricing is set to gain momentum at new communities, it does not automatically mean lower margins, as it is market-dependent. Regarding cross-selling, he described it as a core strategy to leverage realtor relationships, noting that salespeople are no longer tethered to specific sites, making the practice widespread. He confirmed that some competitors are beginning to adopt similar models.

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CEO Phillippe Lord explained that community count growth will be weighted towards the second half of the year and is the primary driver of the full-year guidance, more so than assumptions of market improvement. He also estimated that sales to investors have consistently remained around 5% of their business and have not increased recently, with build-to-rent activity having slowed.

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CFO Hilla Sferruzza confirmed a new JV partnership for off-balance sheet land financing, starting with a pilot in California. CEO Phillippe Lord explained their confidence in long-term margins stems from their land underwriting discipline; the recent pressure is due to temporary, elevated incentives driven by high interest rates, not a structural change in land profitability.

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CEO Phillippe Lord stated that the backlog conversion target is now north of 125%, closer to the recent 145% performance, with a cycle time goal of around 120 days. CFO Hilla Sferruzza clarified the Elliott acquisition will be margin accretive with no acquired work-in-progress (WIP) and that a material off-balance sheet land financing structure will be finalized in Q4 and detailed on the next earnings call.

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SVP Jessica Hansen stated the SG&A beat was due to higher closings volume and the long-term target remains in the 7-8% range. EVP & CFO Bill Wheat added that the company is focused on improving inventory efficiency to drive consistent cash flow and that achieving a higher ROE depends on a strong cash flow yield and efficient inventory turns.

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SVP Jessica Hansen credited the SG&A beat to higher-than-expected closings volume and affirmed a long-term target in the 7-8% range. EVP and CFO Bill Wheat stated the company is focused on improving inventory efficiency to drive consistent cash flow and support a higher ROE, expecting homebuilding cash flow conversion to be near 100% for the fiscal year.

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President and CEO Paul Romanowski, along with EVP and CFO Bill Wheat, explained that the company is prioritizing a returns-based business model focused on consistent operating cash flow. EVP and COO Michael Murray added that while they aim to remain the largest builder long-term, short-term decisions will maximize returns. Regarding SG&A, Bill Wheat attributed the increase to strategic investments in expanding their market and community count for long-term growth, not a change in their cost-conscious culture, and expects the rate to decline over time with increased leverage.

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CFO Bill Wheat confirmed the general expectation is to return the substantial majority of operating cash flow to shareholders via buybacks and dividends, suggesting the combined guidance of $3.1B to $3.3B is a good proxy for expected cash flow. Executive Jessica Hansen clarified the long-term consolidated leverage target is at or below 20%, which translates to a net debt-to-capital ratio of approximately 10%.

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EVP & CFO Bill Wheat stated that the guidance assumes relatively flat rental revenues year-over-year and a stable ASP, subject to market conditions. President & CEO Paul Romanowski added that buyer hesitation is a mix of rate volatility and election noise, not a structural demand problem, and confirmed the company's guidance does not assume that mortgage rates will decline.

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President & COO Robert McGibney attributed the confidence in the closing outlook to improving build times, which are returning to pre-pandemic levels and allow for higher backlog conversion. He noted the sales needed in the second half are less than what was achieved in the prior year under tougher conditions. McGibney also confirmed that municipal delays were significant in Q2, likely costing a couple hundred sales, and that the company is enhancing its processes to better forecast and manage these issues.

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COO Rob McGibney quantified direct costs as down approximately 1% sequentially and 3% year-over-year. He clarified that they have not seen any significant trade labor shortages related to immigration policy changes. CEO Jeffrey Mezger confirmed the shift away from pocket incentives is a 'permanent move' back to the company's core strategy of presenting the best value to the customer transparently.

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EVP and CFO Jeff Kaminski explained that the improved backlog conversion is driven primarily by significantly shorter construction cycle times, with a minor contribution from an increased mix of quick move-in homes. Chairman and CEO Jeffrey Mezger added that while they forecast an overall absorption pace similar to 2024, newly opened communities typically have a stronger initial sales pace, which could provide an upside.

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EVP & CFO Jeff Kaminski reiterated that detailed 2025 guidance would be provided in January but acknowledged there is room for absorption improvement, especially in a lower rate environment. Regarding long-term margins, Kaminski explained that increased scale offers upside potential for the operating margin, and a reduction in incentives could directly boost the gross margin, indicating a goal to improve profitability.

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Chairman and CEO Jay Sugarman noted their existing JV partner is the go-to for large-scale new deals, and that the team is exploring other partnerships using the existing portfolio. CFO Brett Asnas confirmed there are no restrictions on selling assets and that any such transaction would be structured thoughtfully to create value for stakeholders, considering the cash flows, inflation protection, and UCA.

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Executive Stuart Miller explained that while a precise figure isn't set, normalized operating margins will be 'significantly higher' once current, elevated incentive levels of 13% return to a more normal 5-6%. He and CFO Diane Bessette confirmed that current SG&A and corporate expense levels are not the long-term norm and will see efficiency gains post-Millrose spin. Regarding volume, Miller stated the company believes the market remains fundamentally undersupplied and that they can adjust production levels within one to two quarters if their market view changes. Co-CEO and President Jonathan Jaffe added that the operating model is built to adapt quickly.

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Executive Chairman Stuart Miller and CFO Diane Bessette confirmed Kim's margin math was 'pretty right on,' while noting the guidance is conservative and that Q1 margins are seasonally low. Regarding the closings target, Miller explained it assumes 'a little bit of both' improved sales efficiency and faster cycle times. He acknowledged immigration policy as a 'wildcard' but expressed confidence that strong trade partner relationships and product simplification would help mitigate potential disruptions.

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Executive Chairman Stuart Miller stated that Lennar is targeting a '10% steady-state growth rate,' driven by its asset-light strategy and the opportunity to address the national housing shortage. Regarding operating margins, Miller acknowledged the current focus on volume during the company's transformation but expressed confidence that margins will grow as the asset-light model becomes fully operational and drives greater efficiencies, rather than just being in the implementation phase.

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Executive Chairman Stuart Miller stated that Lennar is targeting a steady-state 10% volume growth rate, enabled by its asset-light model and the national need for more housing. On operating margins, Miller explained that the company is currently focused on embedding operational efficiencies as it grows volume and transitions its business model, and he expects margins to grow as the new asset-light approach becomes fully normalized.

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CFO David Barry attributed the Q4 sales guidance to continued consumer POS softness, noting that investments to combat this trend began late in Q3 and a full turnaround is not yet predictable. CEO Nicholas Fink confirmed the issue with low-quality, false-claim competition is much more prevalent in the online channel where there is less scrutiny. CFO David Barry added that digital products over-index in online sales compared to the company's mechanical products.

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