PulteGroup, Inc. ($PHM)

Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup Inc. Q1 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to James Zeumer, Vice President of Investor Relations. Please go ahead.

Thank you, Kelvin, and good morning. I want to welcome everyone to today's call to review PulteGroup's operating and financial results for our first quarter ended March 31, 2026. Joining me on today's call are Ryan Marshall, President and CEO; Jim Ossowski, Executive Vice President and CFO; and David Carrier, Senior Vice President, Finance. In advance of this call, a copy of our Q1 earnings release and this morning's webcast presentation have been posted to our corporate website at pultegroup.com. We will also post an audio replay of this call later today. I would highlight in today's presentation includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now I'm going to turn the call over to Ryan. Ryan?

Thanks, Jim, and good morning. At last week's quarterly operations review meeting, I made the following statement to the senior leaders of PulteGroup's homebuilding and financial services operations. In a quarter that grew increasingly more complicated, you delivered exceptional results, both operationally and financially. I offer the same thoughts to open this call in a period that saw every aspect of our consumers' lives impacted by domestic and global events our disciplined focus and proven business platform allowed us to deliver another quarter of strong business performance. Financially, our $3.3 billion in home sale revenues, 24.4% gross margins and lower share count all contributed to driving earnings of $1.79 per share. Supported by the ongoing strength of our operations, we positioned the company for future growth by investing $1.3 billion in land acquisition and development, while returning $360 million to shareholders through share repurchases and dividends. After having allocated $1.7 billion to these activities, we ended the quarter with $1.8 billion of cash and a net debt-to-capital ratio of effectively 0. Operationally, we were successful in growing our community count, which was an important driver of our 3% increase in net new orders. And as shown in this morning's release, our results benefited from 18% order growth in Florida as our diversified business platform and exceptional land positions continue to deliver strong results. As pleased as I am with the growth in orders, I'm even more encouraged with the fact that many of these homes are build-to-order homes. In the first quarter, build-to-order homes accounted for 43% of net new orders up from 40% in Q1 of last year. On our last earnings call, we outlined our plans to shift our business back towards our historic mix of 60% build-to-order and 40% spec. This quarter was just the first step in a process that will take several quarters to complete, but I am encouraged by such early success. And finally, I would highlight the progress we continue to make on lowering our spec inventory, particularly our finished inventory, reflecting actions taken by our field teams, we ended the quarter with an average of 1.4 finished specs per community which is inside our target range of 1 to 1.5 finished specs per community. This level of spec inventory allows us to effectively serve those homebuyers needing quick move-in homes while supporting our strategic shift back to selling more build-to-order homes. Overall, I would say that the first quarter developed as a typical spring selling season with orders increasing sequentially as we move through the months. It is difficult to determine what impact global events may have had, but appreciate consumers were facing higher rates and costs in March. During the first few weeks of April, demand conditions have remained on track with typical seasonal trends. Still in the quarter, we experienced strong buyer traffic to our communities and sold more than 8,000 homes, which says consumers remain actively engaged in homebuying. And once again, our diversified business platform allowed us to capture the strongest segments of the business, namely the move-up and active adult buyers. Economic reports talk to the K-shaped economy and how lower and middle-income families are struggling much more than those in upper incomes. Housing demand over the past 2 years has been consistent with these dynamics. We saw this play out again in our first quarter results with both relative demand strength in our move-up and active adult businesses and option and lot premium spend that continues to average over $100,000 per home. However, on the lower leg of the K, first-time buyers continue to struggle with the challenges of stretched affordability and fear of job loss. Our ability to offer low fixed rate mortgages and other incentives is certainly helping solve the affordability riddle for some. But this comes at a price as incentives in the quarter reached 10.9% of gross sales price. Even at this level, I think we have done an excellent job of balancing the need to sell homes, particularly finished spec homes and turn our inventory while maintaining higher margins in support of delivering strong returns on invested capital. Our critical support to this balance has been our ongoing willingness to adjust our starts pace in alignment with core demand. We again demonstrated such discipline as we started approximately 6,500 homes against orders of 8,000 homes in the quarter. This approach helped us to clear excess inventory and allow our communities to more easily sell from a position of strength while still providing sufficient production to achieve expected closing volumes for the full year. Well, there is uncertainty about how events will develop over the next few quarters. I remain optimistic about long-term housing demand and confident about the strength of our business model. I could drop a long list of our strengths, but would highlight the following three key points: we control approximately 230,000 lots, including 35,000 owned and finished lots. So we have a land pipeline that we believe can meet current sales and accelerate as buyer demand improves going forward. We have a strong market presence across the major markets and an unmatched ability to serve all buyer groups. We are benefiting currently from having 60% of our business among more affluent Pulte and Del Webb buyers, but we fully appreciate the importance of maintaining the presence of our Centex brand among first-time buyers. And finally, we have a culture that is committed to delivering superior build quality and buyer experience into raising that bar every day. Thank you. And let me turn the call over to Jim Ossowski for a review of our first quarter results. Jim?

Thank you, Ryan, and good morning. I look forward to providing a detailed review of PulteGroup's solid first quarter operating and financial results. On a year-over-year basis, the first quarter net new orders increased 3% to 8,034 homes with a value of $4.6 billion. Our net new orders of period benefited from a 9% increase in average community count to 1,043 while absorption paces decreased by 5% to 2.6 homes per month. I would highlight that the growth in our net new orders was driven by the ongoing strength of our Florida operations. I am pleased to report that orders increased in every Florida market and were up 18% statewide. In addition to gradual improvements in Florida's new and existing home inventories, our strong performance reflects PulteGroup's superior land positions, our ability to serve all buyer groups and our outstanding leadership teams. Our cancellation rate as a percentage of starting backlog in the quarter was 13% compared with 11% last year. The percentage increase in our cancellation rate reflects the smaller starting backlog we had entering the period as unit cancellations are actually slightly down in the quarter relative to last year. In the first quarter, net new orders among move-up in active adult buyers were higher by 3% and 14%, respectively, over the first quarter of last year. Net new orders among first-time buyers decreased by less than 1% from Q1 of last year. By buyer group, net new orders in the first quarter consisted of 38% first time, 39% move-up and 23% active adults. In the first quarter of 2025, our net new orders were 39% first time, 40% move-up and 21% active adult. Net new orders benefited from land investments made in prior years as we grew community count across all buyer groups. Home sale revenues in the first quarter were $3.3 billion compared with $3.7 billion last year. Lower home sale revenues for the period were the result of a 7% decrease in closings to 6,102 homes in combination with a 5% decrease in average sales price to $542,000. ASP was down to mid-single digits across each buyer group, and reflects the generally competitive conditions and elevated incentives that exist in many markets across the country. By buyer group, closings in the first quarter break down as follows: 38% first time, 39% move-up and 23% active adult. This compares with prior year closing mix of 38% first-time, 41% move-up and 21% active adult. Based on sales and closings in the period, at the end of Q1, our backlog was 10,427 homes with a value of $6.5 billion. We ended the first quarter with 14,090 homes in production, of which 6,349 were spec homes. As Ryan highlighted, and consistent with our stated objective, we lowered total spec inventory by almost 900 homes from the end of 2025. At quarter end, specs accounted for 45% of homes under construction. Of the specs under production, there were 1,515 finished spec homes, which is a decrease of nearly 500 homes or 24% in just the past 90 days. At this level, we are in our target range of having an average of 1 to 1.5 finished specs per community. Based on the homes under construction and their stage of production, we expect to close between 6,700 and 7,100 homes in the second quarter of 2026. This keeps us on track with our previous guidance on closings in the range of 28,500 to 29,000 homes for full year 2026. Consistent with the guidance provided on our last earnings call, given land investments made in prior years, we expect year-over-year community count growth of 3% to 5% in each of the remaining three quarters of 2026. Given competitive market conditions, and our belief that incentives will remain elevated, we expect the average sales price of second quarter closings to be in the range of $540,000 to $550,000. For the full year 2026, we reaffirm our previous guidance of ASP of $550,000 to $560,000 as we expect a higher mix of build-to-order closings in the third and fourth quarters. For the first quarter, we reported gross margin of 24.4%, which is down from 27.5% in the first quarter of 2025. The year-over-year decline in gross margin primarily reflects higher incentives, which were 10.9% of gross sales price in Q1 2026. This is an increase of 290 basis points last year and is up 100 basis points sequentially from Q4 2025. As we're getting the question more frequently of late, I would note that within our Q1 home sale cost of revenues is approximately $6 million or 20 basis points associated with land impairments. Based on quarterly testing, impairments were triggered in two communities and are reflective of today's competitive market dynamics in combination with our ongoing efforts to clear excess spec inventory, particularly finished specs. I'm pleased to report that thanks to a lot of outstanding work by our construction and procurement teams. Q1 house costs were down 5% from the first quarter of last year to $75 per square foot. Savings were led by lower lumber costs, but we have also achieved savings across a wide array of building products and services. Based on anticipated closing mix and current selling conditions, we expect second quarter gross margin to be in the range of 24.1% to 24.4%. I would note that we expect Q2 gross margins to be the low point for 2026. We are forecasting gross margins to recover in the back half of the year as we benefit from increased closings of higher-margin active adult and built-to-order homes. As such, we maintain our guide for full year 2026 gross margin to be in the range of 24.5% to 25.0%, although likely towards the lower end of the range. First quarter homebuilding SG&A expense of $380 million or 11.5% of home sale revenues compared with $393 million or 10.5% in Q1 of last year. On a dollar basis, our SG&A expense in the quarter was down $13 million from last year when we lost leverage given fewer home closings and revenues in the period. First quarter SG&A expense was in line with prior guidance, so we are maintaining our guidance for full year 2026 expense to be in the range of 9.5% to 9.7% of home sale revenues. Pulte's Financial Services operations reported first quarter pretax income of $13 million which is down from pretax income of $36 million in the first quarter of 2025. Financial services pretax income in the first quarter was impacted by lower homebuilding volumes and reduced capture rate along with lower net gains from the sale of mortgages. Mortgage capture rate in the period was 85% compared with 86% last year. First quarter pretax income for PulteGroup was $449 million. In the period, we recorded a tax expense of $102 million or an effective tax rate of 22.8%. Our Q1 tax rate reflects the benefits of stock-based compensation and federal tax credits. Looking out to the remainder of the year, we continue to expect our tax rate to be approximately 24.5%. Our expected tax rate does not take into consideration any discrete period specific tax events that might occur. PulteGroup's net income for the first quarter was $347 million or $1.79 per share. In the comparable prior year period, the company reported net income of $523 million or $2.57 per share. Earnings per share for the first quarter was calculated based on 193 million diluted shares outstanding, which is down 5% from the prior year. In the first quarter, we repurchased 2.4 million common shares for $308 million, which brings total repurchases for the trailing 12 months to 10.3 million common shares for $1.2 billion. In a separate press release we issued this morning, we announced that our Board authorized an additional $1.5 billion for share repurchases, which brings total availability to $2.1 billion. Along with returning capital to shareholders, we continue to prioritize investing in the growth of our operations. In the first quarter, we invested $1.3 billion in land acquisition and development which was evenly split between the two activities. We ended the first quarter with 229,000 lots under control, which is down approximately 5,000 lots from the end of 2025. We remain focused and disciplined in our land activities as we look for opportunities to grow our business while achieving acceptable risk-adjusted returns and managing overall portfolio risk. After 24 months of variable housing demand and limited opportunities for price appreciation, land inflation has started to ease. We are seeing land prices stabilize in many parts of the country, and even move lower in individual deals in a handful of markets. Every land deal is different and eight locations are still in demand, but we are finding more opportunities to negotiate improved land terms, be it the price, the timing or both. In the first quarter, we issued $800 million of senior notes, split equally in tranches of 5 and 10 years. We used approximately $600 million of the proceeds to repay existing notes, with the remaining $200 million to be used for general corporate purposes. Inclusive of these transactions, we ended the first quarter with a debt-to-capital ratio of 12.3%. Adjusting for the $1.8 billion of cash we held at quarter end, our net debt to capital ratio was effectively 0. Given current market dynamics and our expected 3% to 5% growth in community count, we are projecting land acquisition and development spend of $5.4 billion in 2026. Assuming this level of land spend and the expectation that house inventory will increase commensurate with an increasing level of build-to-order home sales, we would expect 2026 cash flow generation to be approximately $1 million. Overall, it was another very productive quarter for the company. Now let me turn the call back to Ryan.

Thanks, Jim. Before opening the call to questions, I will offer a few additional comments on demand conditions in the quarter. Given everything that is happening in the world, demand has actually held up better than might be expected and could certainly improve if global tensions eased and interest rates came back towards 6%. This would be highly consistent with the increased buyer activity we saw developing early in the first quarter when mortgage rates dipped below 6%. Consistent with trends we experienced in the back half of 2025, the pockets of homebuying demand strength and softness didn't change dramatically. Home buying demand in our Northeast, Southeast and Florida markets generally remain positive. First quarter demand in the Midwest was more variable across the markets than we had been experiencing. That being said, the weather conditions were a bit more extreme. So we'll have to see how the trends progress over the next couple of quarters. As I highlighted earlier, our Florida teams continue to operate at a high level as we benefit from a strong land pipeline and experienced leadership teams. Looking now to our Texas and West markets, overall demand trends remained slower relative to the rest of the country, but I would suggest they may be finding more stable footing. Between ongoing pricing actions and incentives, the markets are finding clearing prices where transactions can happen. We still have work to do on clearing some final spec inventory in California and Washington, but I'm hopeful we are getting to the end of this tunnel. One final comment I would share on buyer demand, well-positioned communities that offer the right product and a compelling value equation to the consumer are selling homes. From Boston to Naples and Raleigh to San Jose, consumers are looking for the opportunity to buy homes that work for their stage of life and their financial capabilities. Our job is to make sure PulteGroup communities meet their requirements. Let me close by thanking the entire PulteGroup organization for the great first quarter operating and financial results the company delivered. I also want to recognize our team for their tireless efforts to deliver a superior home buying experience. I'm proud to report that our customer surveys are now showing PulteGroup's Net Promoter Score as measured 1 full year after the initial delivery of the home has risen to a score of 65. To put this in perspective, these results place PulteGroup among such well-known service leaders as Apple, Google and Chick-fil-A. It's this type of commitment to our customers and to each other that has PulteGroup again ranked among the Fortune 100 Best Companies to work for. This marks Pulte's sixth year on this prestigious list. Our ranking on this list has never been a goal, but rather an outcome of the tremendous culture we work hard to maintain inside of our organization. Now let me turn the call over to Jim Zeumer.

Great. Thanks, Ryan. We're now prepared to open the call for questions. So we can get to as many questions as possible during the remaining time of this call, we ask that you limit yourself to one question and one follow-up. Kelvin, we'll now open the call to questions.

[Operator Instructions] Your first question comes from the line of John Lovallo of UBS.

The first one is, can you just help us with some of the moving pieces in the gross margin walk from roughly 24.4% in the first half to 24.5% to 25% for the full year. I mean it certainly seems like closing mix is going to be a good guy. Stick and bricks could be a good guy. land maybe a little bit better than it had been. And then the incentive load, are you still assuming sort of 10.9% carries throughout the year?

Yes, John, I think you've got all the right pieces there. We are assuming a higher incentive load, but we'd expect it to likely come down driven by a couple of factors. One would be more build-to-order and more move-up and adult business, where we tend to incentivize less. We've also cleared a lot of the finished spec inventory, which we're carrying higher incentive loads. So while we'd expect the overall environment to remain competitive and the elevated incentive load to stay the mix of product and consumers that we have coming through will bring -- could potentially bring the overall number down, which is why we're guiding to the full year staying kind of within our range. ou'll note that Q2 is going to be a low point for a couple of reasons. One of the big reasons in that is that a lot of the spec inventory that we sold in Q1 at a higher incentive load are closing -- some closed in Q1. You got a bunch more that are closing in Q2.

Okay. That's really helpful. And maybe just kind of echoing what you said, Ryan before. I mean, it seems like the spring has actually been reasonably good considering a lot of factors in the market, and most builders have reported orders that are up year-over-year, so indicating a little bit of a better spring despite this background geopolitical headwinds. The question is, I mean, if we do, in fact, get some kind of resolution here to the conflict in the Middle East, I mean, do you think we could still have a really good spring selling season. And on top of that, is there a chance that we could get extended a bit maybe into June just given shorter cycle times for many of the builders?

Yes. Hard to know whether it gets extended or not, John. I think ultimately, the consumer will have to decide that. But as I tried to highlight in my prepared remarks, when rates came down to 6%, maybe even a touch below 6%, things were moving along really well. Despite the things that are going on globally, it was still -- it's still, I think, a very good spring selling season, and we're pretty pleased with kind of what we've delivered and how it has set us up for the full year. I can promise you that we didn't have any of the current geopolitical disruption on our bingo card as we kind of laid out our full year guide and set expectations for how the year would play out. But as we look at the actual numbers for Q1, we're in line with kind of where we wanted to be, where we thought we were going to be, which is the big reason that we're reaffirming kind of our full year. So all things considered, John, I'm incredibly pleased with how we performed. I'm really pleased with how the consumer is behaving. And I think there's a bias to the upside if things can get resolved, rates were to come down a little bit, I think, yes, I think things could get even a little bit better.

Your next question comes from the line of Alan Ratner of Zelman.

Ryan, you alluded to this several times, but I was hoping to dig in a little bit deeper on the incentive trends. And specifically, what I'm curious about is, do you have data or can you kind of talk through the difference in incentives you offer both across price points as well as BTO versus spec? I mean I see, obviously, they were up sequentially and year-over-year across the averages. But I'm curious if there's any notable differences across those price points or BTO versus spec.

Yes, Alan, there's definitely more incentive on spec broadly. And then there's more incentive as a percentage on first-time spec and I tried to provide some nuance around that in my comments around the K-economy. And that first-time entry-level buyer, they're the most challenged by affordability, and that's where we try to lean in more in order to solve the affordability equation. And I think we've done it pretty effectively. And then when you move into the move-up in the active adult buyers, we're incenting there as well. The types of incentives vary. There's still a fair number of incentives that are going into a forward commitment program that's specifically targeted to dirt sales, so it's not as low as a 30-year fixed rate mortgage that we'd offer on a spec that's complete, but still in the kind of low to mid-5% range and materially below the current market. and it's locked in for the entire duration of the build cycle. So there's a lot of value that we think is being offered there, and there's a cost to that, but that's factored in the incentive load. So all things considered, Alan, as I said, we still expect incentives to remain higher. But given the mix shift in buyers as well as spec to build to order. We think the overall incentive load for us as a company will come down.

Great. I appreciate the detail there. Second, I was hoping to ask about your land book. I think land banking has become a bit of a hot button topic in the investment community over the last couple of months. And you've seen a nice uptick in your share of lots held off balance sheet, but I know that includes a lot of different things, traditional land options, land banking. So can you quantify for us your exposure to land banking? And I guess, just talk more broadly about how your land banking deals are generally structured? Are you making periodic interest payments? Are they more kind of on the back end in like a pick fashion? Any color you can give would be great.

Yes. Sure, Alan. Happy to go into it. I'm going to ask Jim to give you some of the specific details. But before he does, philosophically, the way we've structured our land book for the better part of 6 or 7 years, we want as many lots as we can possibly control with underlying land sellers. And today, that represents well over 50% of our controlled land is controlled with options with underlying land sellers. In our move to go from 50% controlled option to 70, we knew we were going to need to incorporate some element of land banking, and we've done that. We've maintained a diversified book of land banking partners which I'm very pleased with the number of partners and the alignment that we have with those partners. And then our overriding focus has been we want risk transfer. So we're looking for the ability to walk away in the event that things go sideways on a single individual transaction. So this overarching idea of risk transfer risk mitigation is the entire foundation of our land banking portfolio. With that, I'll have Jim share a few more details with you.

Sure. Thanks, Ryan. Alan, I'll fill in a couple of things. So as it relates to land banking, of the 229,000 lots that we control, we have about 18,000 with land bankers. So it's about 8% of the book of business. To Ryan's point, what we really want to do is we would love to get underlying optionality with land sellers directly. And what I'd tell you of the 127,000 lots that we have under option, over 85% of those with underlying land sellers. So again, it's the vast majority. That's what we task our teams do. Let's go for that first and foremost. If we can supplement it with banking, we will, but we'd love to get a deal with people on the ground first.

Great. That's really helpful. And Jim, if you have it, of those 18,000 lots with land bankers, can you give a little bit of detail on how those are structured either in terms of average deposit, what the kind of carry is, et cetera? cetera?

Yes. I'd tell you that most bankers that are out there today, it's usually about a 15% deposit that they request on those. and then rates will be in the low double-digit range typically for those. To give you context, our deposits as a percentage of future purchases is only about $7,000 per unit for the whole company. So -- or I'm sorry, 7.5% for the whole company. So the vast majority are at very low deposits with underlying land sellers, but the bankers carry a little bit richer mix.

Your next question comes from the line of Stephen Kim of Evercore ISI.

Appreciate all that color, particularly on the land side, so that's great to hear. I wanted to talk a little bit about your free cash flow guide. I believe you said about $1 billion now the way I'm modeling things, it seems like your net earnings are going to be much higher than that. And so I was wondering if you could talk about the free cash flow conversion and what do you see as being offset to the net income this year? Is it that you anticipate to end with a meaningfully higher owned land supply than you currently have? Or is there something else going on? Just some color there would be helpful.

Yes. Great question, Stephen. So there isn't an assumption that we have any significant increase in our own land supply. We've certainly been working down our house inventory in recent quarters as we talked about as we moved our spec down -- but there's an anticipation there'll be a little bit more build-to-order that's going to come in, in the back half of the year as we set ourselves up for 2027. So it's really on the house side, we'll see a little bit of an incremental increase.

I'll take that as a real positive, obviously, because it suggests that this is just kind of a temporary thing and the free cash flow conversion should improve once you get over this build of BTO. So first, I guess I would just ask, is that, in fact, the way you see things? And where do you see the BTO mix of, let's say, orders or maybe closings, finally reaching your 60% level? Is that something that would you think could be reached by the end of this year? Or is this something that is going to take well into next year, you think, to accomplish?

Yes, Stephen, so maybe starting with the cash flow, cash -- the conversion of net income into cash flow is a big focus for us. We believe it's a very meaningful and powerful driver of value for shareholders. So I think Jim provided some nice bread crumbs in terms of kind of where we're going and why it's at $1 billion. Hopefully, there's a slight bias to the upside this year, but it is as we rebuild that home inventory on build-to-order. I agree with you. That's a good thing. It means we're selling homes and we're selling homes that are dirt. In terms of -- and I do think it is a kind of temporary situation that as we move into next year, you'd see kind of better, more normal conversion rates from us. And then as it relates to build-to-order target mix is 60-40. We made great progress in Q1. I'd expect that to continue as we move through the year. The fact that we were able to reduce so much spec inventory in Q1 is also a powerful driver in that journey. I think it might take a tad longer than the end of this year, but not much beyond Q1 of next year. So we'll keep you updated as we move, but we're going to do this in a measured, balanced way, but we're also not going to drag it out forever.

Your next question comes from the line of Anthony Pettinari with Citi.

You talked about stick and brick costs, I think down around 5%, and it sounds like lumber was a good guide there. I guess those lumber has been coming up for the last, I guess, 1.5 months. Can you just remind us the lag in which you'd see that? And then maybe a related question with the conflict in the Middle East, it seems like we're seeing metal prices, petchem-based building material price hikes out in the market. What would be the lag that you would maybe see some of that in your stick and brick costs?

Sure. Great question. I guess, first, what I'd tell you is, as we did -- you hit on it, we had a really good first quarter. Our procurement teams have done a great job. They were down 5% year-over-year. As we look out over the balance of the year, we want to reaffirm our -- we said that our house costs would be flat to slightly down. We still believe that, and that's baked into our guide. On your question on lumber, when will we see that? It's usually two quarters out because the way that we buy the lumber today, those are going to turn into closings two quarters out from now. It has inflected higher in recent weeks. The other thing that we're keeping an eye on our fuel cost, we're monitoring that. At this point in time, we've done a good job. You'll hear things like fuel surcharges, we've combated those so far. But in recent weeks as the cost of fuel has started to come down a bit from the highs, we're keeping an eye on it. But again, I'll go back to what I said, Q1 was a really great one. And even with some of these headwinds for lumber, we still believe we can be flat to slightly down for the remaining quarter.

Yes. And Anthony, in terms of kind of the metal and some of the other related costs, we'd see that being later in the year before we would see an impact. One of the things that our procurement teams have worked with our suppliers and trade partners on is let's just take a of patience here. We are in a conflict. If it continues, there will be real cost increases, but we're not going to overreact to kind of the whip sign of markets up, markets down based on kind of what's happening on a day-to-day basis from the conflict.

Okay. That's very helpful. Just one quick one on incentives. Without cutting it too finely, were incentive levels fairly steady for the 3 months of the quarter and maybe the exit rate into April? Or was there any kind of increase or decrease that you caught there?

They're fairly steady across the quarter. It really got down to a community-by-community basis of what we had to offer to move specs, but again, pretty consistent through the quarter.

Your next question comes from the line of Michael Rehaut of JPMorgan.

Just a clarification actually on the incentive question, Jim, when you said kind of stable throughout the quarter. was that on closings or orders? And when we think about a slight dip down in 2Q gross margins, I believe you're saying that was kind of from the fuller impact of the reduction of spec maybe that was transacted 3, 4, 5 months ago. So just trying to get a sense of how incentives are still impacting 2Q gross margins from prior conditions and if the comments you just made were more on current market conditions on orders.

Yes, Mike, no offense, but I think you made things up there. I think what we talked about is in Q1, there were spec sales. What I said is there were spec sales in Q1 that had elevated incentives. Those -- some of those closed in Q1, some of those are going to close in Q2, which is impacting the guide that we're providing for Q2. It's part of the reason that we're saying that's the low point, and we'd expect it to go back into the range that we've guided to for the full year. In terms of kind of how -- whether it was closings or sign-ups, it's probably slicing it a little too thinly, Mike. We report the incentives on closings. That's -- I think the -- that's the approach that we've been taking. We're going to stay consistent with that. And then the incentive load on future backlog, future closings, all that is embedded into our guide. But as I've said a couple of times, we're actually optimistic that while the overall incentive environment will stay elevated, we can see incentives come down because of buyer mix and brand mix.

Okay. No, that's great, Ryan. I'm sorry if I wasn't clear. I thought I implied the same thing that the bigger impact of the sale of specs would be more felt in the second quarter or that's really what's flowing through. So I think we're on the same page there. Shifting to the strength that you saw in Florida, I'd really love to dive into that a little bit. Obviously, it was a bright spot for you this quarter. And really get to understand across your major markets, obviously, you benefit from a good amount of diversification and in your consolidated numbers had the relative strength and move-up in active adults from the order sign-up side. But I'd love to understand what's going on in Florida from a broader market perspective in terms of inventory both on new and existing homes? And how much do you think that contributed to the stronger results that you saw this quarter?

Yes, Mike, we're very happy with what we -- most of what we're seeing out of Florida, and this has been the third or fourth quarter in a row where we've highlighted the strength of the Florida market. If you went back a year ago, I think we were an outlier outperforming the market that was arguably a little tougher. And Florida has continued to get better over the last 12 months. And it's at the best point that we've seen it in a while. In addition to that, the strength of our communities, the positioning of our communities, the expertise of our teams there has allowed us to outperform what is a pretty strong health -- a pretty healthy market there right now. So we're happy about Florida. It's not without its challenges. Insurance costs are high, affordability is stretched there just like it is in a lot of other places. There's been some recent headlines about affordability in Florida. And I think that's because Florida historically was very affordable. There are some attributes of Florida that aren't changing. It's a pro-growth, pro-business kind of a state that's got a lot of great jobs and more diversified economy than it's ever had. Low taxes, no taxes, no income tax anyway, no state income tax. So I think there's a lot of reasons why people still want to go to Florida. But I can also understand appreciate why it's maybe not the best fit for others. But maybe just to sum it all up, Mike, we love our Florida business. And I think this quarter's results are a good demonstration of that.

And any comments on the inventory trends across the major markets? That would be very helpful.

Sure. We have seen inventory come down in certain locations, some of the more affordable parts of the state, Northport, Lakeland, they're still a little bit elevated, but we've been really pleased with both new and existing has come down in the places where we do business.

Last question from the line of Mike Dahl RBC Capital Markets.

I wanted to first ask about the -- just the mix dynamics in the back half of the year. Obviously, from an order standpoint, we kind of see that mix evolving in terms of the move-up and active adult outperforming first time. So in terms of what you're projecting on the margin in the back half, how much of that do you already have visibility on based on what you've sold over the past handful of months versus kind of an assumption of what's left to sell in the next several months and what that mix is going to look like?

Yes. I mean I would tell you, it's what we're seeing on the sales floor today, what we have out there, Ryan highlighted our Florida business has done really well. Our Northeast, our Southeast business, which carry a higher margin profile as well. So we're looking at what we sold in Q1 and kind of making predictions about what goes out over the balance of the year. But again, there's a lot of parts and pieces that go into it, but the build-to-order mix and the active adult are the 2 biggest components that will drive the increase.

Okay. And then relatedly, I guess, when you look at starts versus sales and your comments about you did a pretty good job taking down finished spec in the quarter. It sounds like there's a little left to go. In the current environment, if you're within that 1 to 1.5 per community band on finished spec, are you trying to get down to that lower end right now given what you're seeing in the market and how you think about optimizing profitability? And how does that kind of tie into how we should think about your prospective starts versus order pace?

Yes. The way I would probably guide you on that is that we're inside the target range we want for specs and we're very comfortable operating at the lower end. We're very comfortable operating at the higher end of that range. But we want to be inside that range. Beyond that, where we're at in the range will really be driven by specific community level decisions and the type of buyer we're going after and whether it's a true entry level or more of a move-up type community. So that's the reason I think we give a range on that. We've said we're not going to chase the volume. We're going to get our company back to a build-to-order model, which we're doing. We made excellent progress. We've reaffirmed kind of the full year number and that we were going to be matching starts to sales cadence. So the starts that you saw in Q1 were really reflective of the sales that we had in Q4. You'll see our starts in Q2 more closely matched the sale that we just had in Q1. So that's the kind of build that you want to see from us. And we're very comfortable with where we're at on the overall number of homes that we have in production, how many we started in Q1, what we will start in Q2 and kind of how that sets us up for the full year. I will note a big reason why we've been able to do it this way this year is because we've gotten build times, cycle times back down to pre-COVID cycle times of less than 100 days. So there's a lot of things that are working exactly the way that we've designed our operating model to work.

Your next question comes from the line of Sam Reid of Wells Fargo.

Wanted to drill down a little bit more on ASP. I believe in the prepared remarks, it sounds like ASP was down mid-single digits across all buyer cohorts, which would include move-up and active adult. And it did also sounds like based on your answer earlier in the Q&A that you might have stepped up some forward rate commitments to those move-up and active adult buyers. I just wanted to, though, understand, are you also making any surgical price cuts in move-up and active adult as well that we should be mindful of?

Yes. Sam, we look at pricing all the time and make sure that we're competitively priced. Discounts I think are an important thing psychologically for buyers today. So we try to have the right relationship between headline price and what incentives are. They're tethered together. There are some communities where we have taken price cuts and Jim highlighted in some of his remarks, that's been a big driver in the communities where we've had to take impairments. It's typically been the price cuts. Fortunately, it's just two communities, and it was a fairly small number. So hopefully, that's a bit indicative that we've made very few kind of top line major price reductions.

That's helpful. And maybe switching gears to the financial services line item. I noticed Financial Services pretax was lower. And I believe one of the reasons you called out were lower gains on mortgage sales. So just maybe curious the moving pieces behind that lower gain. And curious if it's also a function of perhaps a step-up in adjustable rate activity. So just wondering if that could be one of the drivers of the financial services pretax change year-over-year?

Sure, Sam. Great question. Let me start first off saying we're very pleased with the operating performance of our financial services organization. They do a great job supporting our homebuilding operations and supporting our customers. On the question on ARMs. ARMs were 9% of all closings in the first quarter versus 7% for all of last year. So a little bit higher, but nothing meaningful. When you look year-over-year, a couple of things I'll point out, and some of this is just timing, and we'll expect improvement over the balance of the year. But homebuilding volumes were down. We noted lower net gains on the sale of mortgages as rates kind of ticked up on us. We had lower value ascribed that's time that we do our rate locks -- and then as well, we had slightly higher expenses as we've invested in people and technology for the year. So again, I think they performed very well in the first quarter, and I'd argue it's a little bit of timing, and we'll continue to see improvement in that over the balance of the year.

Your next question comes from the line of Matthew Bouley with Barclays.

Maybe just to pull on the thread of the build-to-order mix. I think you said from an order perspective, it was maybe 3% higher in Q1 relative to last year. And my question is on sort of the gross margin. So I think you're implying in the second half, maybe the gross margin is up 75 basis points, give or take, relative to the first half. So I think the build-to-order closings mix would need to be fairly meaningfully higher if it's -- if that's kind of the main driver. So I guess what exactly is the expected build-to-order closings mix in the second half? And is there anything else that kind of supports that level of sequential margin improvement?

You'll have both the richer mix of build-to-order, but then as well as Ryan highlighted, I said in my prepared comments, as we've gotten more of that finished spec inventory off the books, that will be less influential as you get out to Q3 and Q4. So a little bit built to order and as well some of these finished specs that came through in Q1 and Q2 for us.

Yes. Matt, it's not as if we've got a gigantic chasm to cross from where we're at today to where we're going to be. Q1, we were at 2.4%. We're going to be in that same kind of ZIP code for Q2 with a heavy load of finished specs that came with heavy discounts and then to go back to our kind of full year targeted range of 24.5% to 25%. So it's not as if there's got to be colossal shifts in margin performance in order to be in the guide that we've given.

Okay. Understood. That's perfect. And then Secondly, you mentioned sort of easing land prices. So the question is, how do you think about kind of the timing of what you're seeing in the land market today for when it actually flows through your P&L? And is there kind of a rule of thumb or broad average for Pulte on kind of land costs versus development costs as it pertains to the final lot costs that you ultimately see on your cost basis?

General rule of thumb is 50-50. Some markets, it goes 60-40. But general rule of thumb, I think, is pretty good at 50-50. In terms of kind of timing from when we contract a piece of land to when you start seeing it flow through the P&L, it's typically in the kind of 18- to 24-month range depending on how lengthy the entitlement process is. So anything that we're contracting today at lower cost, it's -- you're well into '27 and late '27 and beyond before you're going to see the benefit of the lower land cost.

Due to our limited time, your last question will come from the line of Trevor Allinson of Wolfe Research.

First one is on your approach to share repo here. You've got the new authorization out. Your net leverage is close to 0. I think you mentioned earlier that the cash flow headwind from more BTO is somewhat temporary in nature. Just want to gauge your appetite for accelerating share repo here maybe ahead of your cash generation and then your views overall on leverage versus the roughly 0% you're at currently?

Yes, Trevor, this is Ryan. I'll take that one. I'd reiterate that we've been incredibly disciplined on capital allocation. Our focus is on investing in our business. That is -- that is our number one priority. It's what our shareholders care about. It's what they've entrusted us to do and that's how we're structuring the business. And then we're paying a dividend, and we're using the share buybacks as a way to return excess cash that's being generated by a really well-running business back to shareholders in a very tax-efficient way. So -- do we have the ability to do a levered buyback is what I think you're suggesting, well, sure. We've got the leverage capacity, you could do it. We don't think it's in the best interest long term of the company. And so what you're going to see us do as it relates to leverage, and we've talked about this for the better part of the year, a debt-to-cap ratio will be an outcome as opposed to a targeted goal. We're going to decide the cash needs of the business based on how we're going to grow it how much land we're going to buy, how much land we're going to develop, how much inventory, house inventory, et cetera. And we'll see how much cash we have. We'll see how much debt we need to go raise to do that. That's going to be the driver of kind of our debt-to-cap leverage ratios as opposed to saying, we want to be a set number if that makes sense.

Yes, it does. Very helpful. And then second one, just on the Midwest. It's been a bright spot for you guys the last couple of years. I think you mentioned some weather impacts there, maybe also some comp dynamics just given it's been stronger. But are you starting to see any change in relative performance in the Midwest? Is it not outperforming by as much as what you've seen in recent quarters? Or do you think that, again, it's more just a comp dynamic and a weather impact that you saw in the quarter?

Yes, we're still really happy with our Midwest performance. It's been great. It continues to be very good. There are a couple of markets that maybe didn't do quite as well as what they have been doing. But it wasn't widespread across the entire Midwest. So we're -- for the couple of markets that were maybe a tad slower than what they had been, we're going to keep watching them. The Midwest and Northeast for that matter, actually had a real winter for the first time in a long time. Boston, as an example, I think, had snow 4 or 5 times -- it's probably been at least 4 or 5 years since they've had a winter like that. So it was a tougher -- I think a tougher winter season than what we've historically seen. But our Midwest business does also tend to be more move-up and active adult, which, as I think we've highlighted quite a bit, continues to be one of the stronger consumer groups.

That concludes the Q&A session. With that, I will now turn the call over to James Zeumer for final closing comments. Please go ahead.

Thank you. Appreciate everybody's time this morning. I'm sorry we were unable to get through all the questions in the queue, but we'll certainly be available for the remainder of the day. And we will look forward to talking to you on our next earnings call.

Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect your lines.