Stephen Kim

Stephen Kim inquired about Toll Brothers' assumptions regarding the active adult buyer segment, including the breakdown of move-down buyers and age demographics. He also asked how these trends influence current land purchasing decisions, particularly for future move-down buyer needs.

Answer

Douglas Yearley, Chairman and CEO of Toll Brothers, stated that active adult buyers, representing about 17% of revenue, are performing well due to their affluence and existing home equity. He noted that the first-time buyer age is approaching 40, and the average buyer age is nearing 60, consistent with Toll Brothers' customer base. Yearley emphasized a disciplined approach to land acquisition, focusing on strong gross margin and IRR, with current purchases setting up 2027-2028 revenue. Gregg Ziegler, CFO, added insights on cash flow conversion.

Stephen Kim inquired about Toll Brothers' assumptions regarding the active adult buyer segment, including age breakdown and trends influencing land purchasing decisions for future use.

Answer

Chairman and CEO Douglas Yearley explained that active adult buyers, representing about 17% of revenue, are outperforming. He noted that the first-time buyer is approaching 40 and the average buyer 60, consistent with Toll Brothers' affluent customer base. Yearley also detailed the disciplined and conservative approach to land acquisition, focusing on 2027-2028 revenue, and mentioned seeing good deal flow without competition from other large builders. CFO Gregg Ziegler added that cash flow from operations is expected to be modestly lower in 2026, with cash flow conversion in the 60% range.

Stephen Kim of Evercore ISI inquired about Toll Brothers' year-to-date cash flow from operations and the specific components driving expected construction cost declines. He also followed up on the expected order cadence for Q4 versus Q3.

Answer

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.

Stephen Kim from Evercore ISI inquired about the specific number of completed and in-progress spec homes and the company's target for units under construction relative to its closing run rate.

Answer

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.

Stephen Kim inquired about the significant increase in inventory, the strategy behind spec home levels, and the company's potential pivot on production and land spending if the 'mixed' spring selling season persists.

Answer

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.

Stephen Kim questioned the fiscal 2025 operating margin guidance, which appears lower than the previous two years, asking about embedded assumptions for mortgage rates and potential market disruptions.

Answer

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.

Stephen Kim, along with Aatish Shah, inquired about Progressive Roofing's sales contribution for the quarter and its trajectory towards the full-year incremental sales target. He also sought more details on the strategic rationale behind the recent acquisitions of Insulation Fabrics and Diamond Door Products, specifically questioning if they indicate a deeper move into manufacturing or why these products weren't integrated into existing facilities.

Answer

Rob Kuhns (CFO) reported Progressive Roofing's sales contribution at approximately $92 million for the quarter, adjusting the full-year expectation to around $205 million due to project delays, though still anticipating low single-digit growth for the back half. Robert Buck (President and CEO) clarified that Diamond Door Products involves assembly and fabrication, not manufacturing, and is a value-added bundle for metal building insulation customers. He explained Insulation Fabrics enhances insulation accessories distribution, leveraging talent and customer relationships, with some products already part of their offerings.

Stephen Kim, along with Aatish Shah, inquired about Progressive Roofing's sales contribution and its full-year trajectory. Kim also sought further details on TopBuild's recent acquisitions, specifically Diamond Door Products and Insulation Fabrics, questioning the strategic intent behind these additions and whether they signal a deeper move into manufacturing or simply complement existing distribution offerings.

Answer

Rob Kuhns, CFO, clarified that Progressive Roofing contributed approximately $92 million in sales for the quarter, with a revised full-year expectation closer to $205 million due to project push-outs. Robert Buck, President and CEO, explained that Diamond Door Products involves assembly and fabrication of insulated steel door systems, serving as a value-added bundle for metal building insulation customers rather than manufacturing. He added that Insulation Fabrics expands distribution offerings of insulation accessories, leveraging existing product lines and customer relationships.

Stephen Kim of Evercore ISI asked about Progressive's 'business system' for achieving superior margins, the M&A pipeline in mechanical/industrial, and the company's current stance on staffing levels after recent market softness.

Answer

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.

Stephen Kim of Evercore ISI asked about the company's pricing power dynamics, contrasting the benefit from high manufacturer capacity utilization with the advantage of its scale when utilization is lower, and sought an outlook given new capacity announcements.

Answer

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.

Stephen Kim sought clarification on management's remarks about making "strategic price and volume decisions" and "conscious decisions around labor." He also asked if improved builder market conditions are a prerequisite for fiberglass price increases and requested details on how technology is being used to aid operational decisions.

Answer

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.

Stephen Kim of Evercore ISI asked for confirmation of an extra selling day in Q3 and Q4. He also questioned if the delays in Commercial & Industrial (C&I) projects are now longer than previously expected and what this implies for C&I activity in 2025.

Answer

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.

Stephen Kim asked about Masco's outlook for paint pricing in the new year, considering competitor actions and the company's unique relationship with The Home Depot. He also inquired about the longer-term impact of tariffs on plumbing margins, given that price actions are expected to mostly mitigate tariff costs.

Answer

Jon Nudi, President and CEO, stated that Masco has a strong, 40+ year relationship with The Home Depot, aiming for price-cost neutrality. He noted some upward pressure on paint input costs but did not expect significant pricing changes in the coming year. Rick Westenberg, VP and CFO, and Jon Nudi explained that Masco is actively mitigating the $270 million annualized tariff impact through sourcing footprint changes, supplier concessions, cost reductions, and pricing, with the objective to offset dollar costs and margin implications over time, aiming for further mitigation in 2026.

Stephen Kim asked about the influence of a competitor's January 1 price increase on Masco's Decorative Architectural pricing outlook, particularly given its relationship with The Home Depot, and the longer-term impact of tariffs on plumbing margins.

Answer

President and CEO Jon Nudi stated that Masco's unique, 40-year relationship with The Home Depot is essentially price-cost neutral, and with only slight upward pressure on paint input costs, significant pricing increases are not expected for paint in the coming year. Regarding tariffs, Jon Nudi and VP and CFO Rick Westenberg explained that Masco is aggressively mitigating the $270 million annualized impact through sourcing footprint changes, cost reductions, supplier concessions, and pricing, aiming to offset dollar costs and restore margins over time, with a large part mitigated in the current year.

Stephen Kim of Evercore ISI asked about potential pre-buy activity in the Plumbing segment ahead of price increases and questioned the long-term DIY paint demand dynamics, specifically the consumption habits of millennials versus baby boomers.

Answer

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.

Stephen Kim questioned the drivers behind the weakness in DIY paint, asking if it could be related to consumer stockpiling ahead of tariffs. He also explored the concept of price elasticity, asking if lower-end weakness could create a richer mix and how dynamic Masco can be with its pricing strategy in an unpredictable environment.

Answer

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.

Stephen Kim asked for details on the inventory timing benefit in the Decorative Architectural segment, its impact on Q4 margins, and its expected headwind in Q1 2025. He also inquired about Masco's M&A strategy, including target segments and the role of technology.

Answer

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.

Stephen Kim inquired if the lighter consolidated pre-tax margin outlook for Q1 anticipates seasonal softness in rental, Forestar, or financial services, or other factors below the homebuilding gross margin line. He also asked if the 80-100% free cash conversion target remains consistent with D.R. Horton's go-forward expectations.

Answer

SVP of Communications Jessica Hansen explained that rental operations are expected to be softer in Q1, with deliveries back-half weighted, which will impact the consolidated operating margin. She also noted less SG&A leverage due to lower homebuilding closings volume. CFO Bill Wheat confirmed expectations for more consistent cash flow conversion, aiming for 10-11% of revenues, aligning with the current guide.

Stephen Kim asked for clarification on the lighter consolidated pre-tax outlook for Q1, questioning if it anticipates seasonal softness in rental, Forestar, or financial services, or other factors impacting profitability below the homebuilding gross margin.

Answer

Jessica Hansen, SVP of Communications, confirmed expectations for a softer rental quarter, with rental operations being more back-half weighted for the year. She also noted that lower homebuilding closings volume would result in less SG&A leverage, impacting the consolidated operating margin. Bill Wheat, CFO, affirmed that D.R. Horton expects to maintain consistent cash flow conversion, projecting it to be in the 10%-11% range of overall revenues, aligning with the current guide.

Stephen Kim of Evercore ISI questioned the drivers of the strong SG&A control in the quarter, the viability of a mid-7% long-term target, and the potential pressure from declining average selling prices. He also asked about long-term balance sheet strategies, particularly regarding inventory, rental operations, and Forestar, to enhance ROE and cash flow conversion.

Answer

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.

Stephen Kim of Evercore ISI asked about SG&A control, its long-term target, and the impact of lower average selling prices. He also questioned the long-term strategy for improving ROE and cash conversion, probing for potential balance sheet changes related to inventory, rental operations, or Forestar.

Answer

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.

Stephen Kim of Evercore ISI asked about the shift in D.R. Horton's primary corporate metric away from sheer volume, questioning what investors should now focus on, and also inquired about the recent increase in the SG&A rate.

Answer

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.

Stephen Kim of Evercore ISI questioned the relationship between cash flow from operations and shareholder returns, and also asked about the company's long-term target for net debt to capital.

Answer

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%.

Stephen Kim asked for a breakdown of the fiscal 2025 revenue guidance, specifically the assumptions for rental revenue and average selling price (ASP), and questioned the drivers behind buyers remaining on the sidelines, seeking to differentiate between affordability issues and psychological factors like election uncertainty.

Answer

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.

Stephen Kim asked for a breakdown of financial incentives within the reported 8.2% of revenue, specifically regarding forward purchase commitments, and whether the closing average sales price (ASP) is expected to align with the lower order ASP.

Answer

CFO Glenn Keeler clarified that approximately one-third of the incentives were financing-related. EVP and CMO Linda Mamet added that forward purchase commitments constituted a very small portion (under 1%), as customers often prefer design studio personalization. Glenn Keeler confirmed that closing ASP is likely to align with order ASP, primarily due to a shifting mix towards Central and East regions which typically have lower ASPs.

Stephen Kim followed up on incentives, asking for a breakdown of financial incentives, including forward purchase commitments, and questioned if the declining order ASP suggests a future trend for closing ASPs.

Answer

Glenn Keeler, CFO, confirmed that approximately one-third of the 8.2% incentives were financing-related. Linda Mamet, EVP and CMO, clarified that forward purchase commitments are primarily for advertising and represent less than 1% of incentives, as customers prefer design studio personalization. Glenn Keeler also agreed that closing ASPs might trend towards order ASPs due to a mix shift towards Central and East regions.

Stephen Kim asked for details on the $11 million inventory impairment charge, the status of the 'watch list' for at-risk communities, monthly absorption trends during Q2, and the rationale for not tightening the full-year gross margin guidance.

Answer

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.

Stephen Kim asked about TRI Pointe's absorption rate, which was below 3 per community in Q1, and whether the company is willing to recalibrate its target. He also questioned how to reconcile the 120 basis point increase in order incentives with only a 50 basis point guided decrease in Q2 gross margin.

Answer

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%.

Stephen Kim asked for details on Tri Pointe's full-year 2025 guidance, questioning what factors would lead to the low end of the gross margin range and whether the implied operating margin was a sustainable long-term target. He also inquired about the consistently high Q1 SG&A guidance, which the company has historically beaten.

Answer

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.

Stephen Kim questioned the downward revision in the year-end community count guidance and its cascading effect on 2025 and 2026 targets. He also asked if new communities are designed for higher absorption rates and about the expected decline in average sales price (ASP).

Answer

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.

Stephen Kim asked for a detailed breakdown of the 8.9% incentives, specifically the proportion of financial incentives (closing costs, rate buy-downs, forward purchase commitments) versus non-financial incentives (upgraded features), and how these are reflected in ASP or COGS. He also sought further detail on the proportion and usage rate of forward purchase commitments within financial incentives.

Answer

David Carrier (SVP of Finance, PulteGroup Inc.) clarified that all incentives reduce the gross sales price (ASP). Approximately one-third of total incentives are financial (e.g., financing incentives), while two-thirds are non-financial (e.g., design center discounts, spec home discounts). Mr. Carrier estimated that roughly 30% of consumers utilize forward commitments, and these might constitute about half of the total financial incentives, noting that financing incentives have historically been a common offering.

Stephen Kim asked for a breakdown of PulteGroup's 8.9% incentives, distinguishing between financial and non-financial incentives, how they are reflected in financials, and more detail on forward purchase commitments.

Answer

David Carrier, Senior Vice President of Finance, clarified that all incentives, whether financing or discounts, are a reduction in gross sales price (ASP). Financial incentives constitute about one-third of the total, with the remainder being discounts on design center options or finished spec inventory. He added that roughly 30% of consumers utilize forward commitments, which represent about half of the total financial incentives.

Stephen Kim of Evercore ISI asked for clarification on PulteGroup's strategy to grow market share, questioning if it involved increasing spec homes or owned land. He also asked management to address the perception that high margins are supported by legacy, pre-COVID vintage land.

Answer

President & CEO Ryan Marshall stated that the market share growth strategy is based on the strength of their land pipeline, which now controls 250,000 lots, an increase of about 25,000 year-over-year, with a higher mix of options, not owned land. He emphatically debunked the 'legacy land' theory, stating that with a land pipeline turn of about 3.5 years, the vast majority of their land is fresh and the idea that old land supports margins is 'simply not true.'

Stephen Kim of Evercore ISI questioned if the $1.4 billion operating cash flow guidance assumes a reduction in homes under construction. He also asked if the guided 1% tariff cost increase has been realized in negotiations or is a proactive estimate, and whether the current market has a robust core demand that is costly to expand.

Answer

CFO Jim Ossowski clarified the cash flow guide incorporates the necessary production for the full-year delivery target and adjusted land spend. An executive confirmed the tariff impact is a forward-looking estimate for Q4. CEO Ryan Marshall agreed with the market assessment, stating PulteGroup's model, with its bias toward gross margin, is well-suited for an environment with a strong but inelastic core of demand.

Stephen Kim of Evercore ISI questioned the 2025 gross margin trajectory, specifically if it includes benefits from new active adult communities, and asked about potential impacts from construction labor shortages and the strategic use of spec inventory.

Answer

CEO Ryan Marshall clarified that the margin benefit from new active adult communities will primarily be realized in 2026, as they begin opening in late 2025. He also stated that PulteGroup requires verified residency for all on-site labor and that the company's target spec inventory of 40-45% provides flexibility to manage potential supply shocks while balancing the benefits of build-to-order.

Stephen Kim questioned the timing of potential hurricane-related delivery spillovers into Q1 2025 and when the ramp-up of new active adult communities would begin impacting revenues. He also asked about the long-term target mix for the active adult segment.

Answer

President and CEO Ryan Marshall expressed confidence in the Q4 guide, noting any hurricane spillover is factored in, and stated that new active adult communities will begin opening in the back half of 2025, with closings showing up in 2026. Marshall clarified that the company's long-term strategy is to maintain the active adult business at approximately 25% of the total, meaning the current lighter mix in 2024 will normalize upwards as new communities come online.

Stephen Kim inquired about the sequential decline in order average selling price (ASP), seeking clarification on whether it was primarily mix-driven and how it relates to gross margins. He also asked about the impact of recent mortgage rate declines on demand and KB Home's strategy for balancing price versus volume in response to stronger demand.

Answer

Rob McGibney, President & COO, explained that the ASP decline was largely mix-driven, with more deliveries from the Southeast and less from the West, and emphasized the focus on margin. Jeffrey Mezger, Chairman, President & CEO, added that the company's reaction to increased demand would be community-dependent, balancing volume and price, and highlighted the unique built-to-order model with a one-time float-down option for mortgage rates.

Stephen Kim asked about the sequential decline in order average selling price (ASP) and how it reconciles with stable or increasing community prices, seeking an outlook for Q4 and next year's ASP. He also inquired about the demand response to lower mortgage rates, specifically traffic conversion to sales, and whether KB Home would prioritize price or volume if demand strengthens.

Answer

Rob McGibney, President and Chief Operating Officer, explained that the ASP decline was largely mix-driven, with more deliveries from the Southeast and less from the West, including ramp-ups in lower ASP markets like Boise and Seattle. He emphasized focusing on margin and cost reduction. Regarding demand, McGibney noted steady traffic but not a significant uptick in orders despite improved affordability from lower rates, suggesting buyers might be in a 'wait-and-see' mode. He stated that the strategy to push price or volume would depend on the specific community, leveraging the built-to-order model's one-time float-down option.

Stephen Kim asked about the sequential decline in KB Home's order Average Selling Price (ASP), seeking reconciliation with comments on stable or increasing community prices, and the outlook for ASP. He also inquired about the impact of recent mortgage rate declines on traffic and sales conversion, and whether KB Home would prioritize price or volume if demand strengthens.

Answer

Rob McGibney, President and Chief Operating Officer, and Jeff Mezger, Chairman and Chief Executive Officer, explained that the ASP decline was primarily mix-driven, with more deliveries from the Southeast and less from California, and ramp-ups in lower ASP markets like Boise and Seattle. They emphasized focusing on margin and cost reduction. McGibney noted that the strategy for pushing price versus volume would depend on the community type. He observed steady traffic and good orders but no significant uptick yet from lower rates, suggesting buyers might be in a 'wait-and-see' mode. McGibney highlighted KB Home's built-to-order model with a one-time float-down option as a competitive advantage.

Stephen Kim of Evercore ISI asked for clarity on the robust fourth-quarter closing outlook, questioning whether it would be driven by a very high backlog turnover ratio or a significant increase in Q3 orders. He also requested more detail on the community opening delays and their impact on Q2 order pace.

Answer

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.

Stephen Kim asked for clarification on trade labor conditions and a quantification of direct cost reductions. He also questioned whether the company's shift from 'pocket incentives' to transparent base pricing represents a permanent strategic change.

Answer

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.

Stephen Kim asked about the primary drivers for the increasing backlog turnover ratio and the outlook for sales absorption rates in 2025, questioning if new communities would yield stronger results.

Answer

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.

Stephen Kim followed up on the $7.5 billion revenue target for 2025, seeking clarity on the interplay between absorption rates and community count growth. He also asked about the company's long-term operating margin potential now that past headwinds have subsided.

Answer

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.

Stephen Kim asked about the anticipated duration of Lennar's planned slowdown in sales production, questioning if it's a short-term pause (one to two quarters) or a more lasting recalibration to a lower overall volume level. He also sought clarification on the framework for margin leverage, specifically how lower mortgage rates impacting buydown costs and slowing volume improving pricing power might affect gross margins.

Answer

Stuart Miller, Executive Chairman and Co-CEO, stated that the strategy remains focused on volume and supplying market needs, viewing the current adjustment as a temporary 'breath' in a marathon, not a permanent slowdown. He affirmed that the pieces of Mr. Kim's margin leverage framework (lower buydown costs, improved pricing power) are correct, but cautioned that the timing of their impact will be a 'rocky road' and not directly translatable.

Stephen Kim inquired about the potential magnitude of margin leverage, considering lower mortgage rates reducing buydown costs and slowing volume improving pricing power.

Answer

Stuart Miller, Executive Chairman and Co-CEO, agreed that the components of Stephen Kim's framework are correct. However, he cautioned that the timing of these impacts would not be directly translatable and would likely involve a 'rocky road'.

Stephen Kim inquired about the duration of Lennar's planned slowdown in sales production, asking if it's a short-term pause (one to two quarters) or a more lasting recalibration to a lower volume level. He also sought confirmation on a framework for margin leverage, considering the impact of lower mortgage rates on buydown costs and improved pricing power from slowing volume.

Answer

Executive Chairman & Co-CEO Stuart Miller stated that the adjustment is not a permanent change in strategy, reiterating Lennar's focus on volume and meeting market needs. He described it as taking a 'breath' in a marathon. Miller agreed that the framework for margin leverage, considering lower buydown costs and pricing power, is correct in its pieces, though the timing of translation will be a 'rocky road.'

Stephen Kim asked about Lennar's long-term normalized operating margin, the path to reducing SG&A, and how long the company will tolerate lower margins before reconsidering its high-volume strategy.

Answer

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.

Stephen Kim sought to deconstruct the Q1 gross margin guidance, calculating an implied margin of around 18% for newly sold homes and asking for confirmation. He also questioned the FY25 closings guidance, asking whether it relies more on higher new orders or an accelerated backlog conversion rate, and raised concerns about potential cycle time impacts from immigration policy.

Answer

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.

Inquired about Lennar's long-term volume growth targets beyond the Millrose spin-off and asked for an explanation for why Lennar's operating margin is lower than its large-cap peers and if this is the expected long-term level.

Answer

Management is targeting a steady-state 10% annual volume growth, enabled by their asset-light strategy and the national need for more housing supply. They believe operating margins will grow over time as they fully implement and gain efficiencies from their new asset-light operating model.

Stephen Kim asked about Lennar's long-term volume growth targets post-Millrose, noting that peers have moderated to a 5-10% range. He also questioned why Lennar's operating margin is below some large-cap peers and whether the current level is indicative of its long-term profitability.

Answer

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.

Stephen Kim asked about Lennar's appropriate long-term volume growth rate post-Millrose spin-off and questioned why the company's operating margin guidance appears to be below that of its large-cap peers.

Answer

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.

Stephen Kim inquired about the specific drivers behind the improvement in customer and product mix, asking which end markets and customer types were responsible. He also sought clarification on the factors contributing to the margin improvement in complementary products.

Answer

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.

Stephen Kim of Evercore ISI asked for a quantification of the revenue impact from weather and one less selling day in the quarter, and inquired about the timeline for recovering the weather-related lost sales.

Answer

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.

Stephen Kim asked for details on multifamily growth plans, particularly the expansion of the CQ business, and questioned if higher-than-expected SG&A was due to specific factors.

Answer

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.

Stephen Kim asked for a breakdown of the factors impacting margins, including the shift to large builders, non-insulation sales, and internal sourcing start-up costs. He also inquired about the potential effects of a new presidential administration on energy efficiency codes and labor availability.

Answer

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.

Stephen Kim asked for clarity on product mix, questioning why Insulation saw negative mix despite strength in higher-value non-residential, and what the mix trends are in Roofing, including any impact from the nonwovens reclassification.

Answer

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.

Stephen Kim's associate, Atish, asked about the company's tariff exposure and the specific mitigation efforts planned for Q2 and the second half of the year.

Answer

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.

Stephen Kim asked about utilization rates in the technical insulation business and requested details on the D&A and margin profile of the glass plants being moved into the Insulation segment.

Answer

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.

Stephen Kim from Evercore ISI asked for a quantification of the financial impact from recent hurricanes on the Q4 outlook and questioned if a potential change in political administration could risk the HUD energy code mandate, thereby altering the calculus for the Kansas City insulation expansion.

Answer

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.

Stephen Kim asked for clarification on the home center inventory recovery from Q1 and its potential impact on AUV. He also inquired about the competitive landscape for Temploc's phase-change material technology and sought confirmation on the quarterly cadence for Architectural Specialties organic growth in the second half.

Answer

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.

Stephen Kim of Evercore ISI asked about the potential AUV and margin impact from a decline in discretionary projects and whether smaller customers would be disproportionately affected. He also questioned if the Q1 softness in the home center channel had a positive effect on AUV.

Answer

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.

On behalf of Stephen Kim, an analyst asked for a breakdown of market performance by vertical for the Mineral Fiber segment in Q3 and whether any shifts are anticipated.

Answer

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.

Stephen Kim asked which product categories drove the volume slowdown in Flooring North America, requested an update on a recent high-end product launch, and inquired about the M&A pipeline.

Answer

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.

Stephen Kim asked about the import mix of higher-end products and whether tariff-related price hikes would crimp demand. He also explored the possibility of a near-term price/cost benefit due to Mohawk's FIFO accounting versus competitors' earlier price increases.

Answer

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.

Stephen Kim questioned why missed sales from the Q1 system outage might not lead to a sales rebound in Q2 and explored a theory that a housing recovery might not bring the typical positive product mix if it's concentrated at lower price points.

Answer

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.

Stephen Kim asked for housekeeping items on share repurchases and the volume benefit to sales by segment in Q3. He then delved into the drivers of market share gains in Flooring North America, questioning if it was broad-based and what was driving the advantage in ceramic visualization technology.

Answer

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.

Stephen Kim of Evercore ISI questioned whether new communities typically open with lower margins and requested statistics on the company's cross-selling strategy, including competitor adoption.

Answer

CEO Phillippe Lord explained that while pricing is set to gain momentum, opening with lower margins is not a standard practice and is market-dependent. He described the cross-selling model as a core strategy to deepen realtor and customer relationships, noting that salespeople are no longer tethered to specific communities. He acknowledged that some competitors are adopting similar tactics but believes Meritage's fully mobile sales force is unique.

Stephen Kim of Evercore ISI questioned whether new communities typically open with lower margin profiles and asked for details on the company's cross-selling strategy, including its adoption rate and whether competitors are replicating it.

Answer

CEO Phillippe Lord explained that while pricing is set to gain momentum, it's not standard practice for new communities to have lower margins. He described the cross-selling strategy as a core initiative to deepen realtor and customer relationships, noting that salespeople are no longer tethered to specific communities, making the practice widespread. He acknowledged that some competitors are adopting similar tactics but highlighted Meritage's untethered salesforce as a key differentiator.

Stephen Kim asked for more detail on the timing of new community openings and how they support the full-year closings guide, and also inquired about the percentage of sales to investors.

Answer

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.

Stephen Kim asked for an update on the company's long-term land strategy, particularly regarding off-balance sheet JVs. He also questioned why management's long-term margin outlook remains stable despite recent industry-wide profitability pressures.

Answer

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.

Stephen Kim asked about Meritage Homes' long-term operational targets, including backlog turns, specs per community, and cycle times, following the company's strategic pivot. He also requested modeling details for the recent Elliott Homes acquisition and an update on potential new land financing structures.

Answer

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.

Stephen Kim from Truist Securities asked about the level of interest from potential new JV partners and whether they would focus on new or existing deals. He also questioned if any restrictions would prohibit asset sales that could decrease the CARET pool size.

Answer

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.

Stephen Kim questioned the discrepancy between the Security segment's mid-single-digit POS decline and its high-single-digit sales decline guidance for Q4. He also asked where the low-quality competition is most prevalent.

Answer

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.