Good morning, and welcome to the Q1 2021 PulteGroup, Inc. Earnings Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to James Zeumer. Please go ahead. Thank you, Sarah, and good morning. I want to thank everyone for joining today's call to review PulteGroup's operating and financial results for our first quarter ended March 31, 2021. While it has only been a year, our Q1 2021 earnings call will obviously be a very different discussion than we had this time last year. I'm joined on today's call by Ryan Marshall, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior Vice President of Finance. A copy of this morning's earnings release and the presentation slides that accompany today's call have been posted to our corporate website at pultegroup.com. We will also post an audio replay of this call later today. Before we get started, let me highlight that in addition to reviewing our reported first quarter results, we will also discuss our adjusted results, which exclude both a $61 million pre-tax charge associated with a debt tender completed in the quarter, and a $10 million pre-tax insurance benefit recorded in the period. For purposes of comparison, we will also discuss the prior year's Q1 earnings adjusted for a $20 million pre-tax goodwill impairment charge. A reconciliation of our adjusted results to our reported financials is included in this morning's release and within today's webcast slides. We encourage you to review these tables to assist in your analysis of our business performance. As always, I want to alert everyone that 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 slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now, let me turn the call over to Ryan. Ryan?

Thanks, Jim, and good morning. As detailed in this morning's release, our financial results show exceptional first quarter performance for PulteGroup. From double-digit growth in signups, revenues, and earnings to enhanced liquidity and a $1 billion expansion of our share repurchase authorization, we posted a tremendous start to 2021. Beyond company-specific gains, our first quarter results reflect the ongoing strength of homebuying demand throughout all segments of our business. It is worth highlighting that I believe the strength of the market is due in part to a significant housing shortage in this country. That shortage has been years in the making and will take years to correct. I think the first two sentences from a recent Wall Street Journal article aptly summarize the current state of housing supply in the U.S. The U.S. housing market is 3.8 million single-family homes short of what is needed to meet the country's demand according to a new analysis by mortgage finance company Freddie Mac. The estimate represents a 52% rise in the nation's home shortage compared with 2018, the first time Freddie Mac quantified the shortfall. Beyond this long-term structural shortage, COVID-19 has also resulted in a growing desire for single-family living and has changed what homebuyers want and need from their homes. We believe these new wants and needs are often best met through the floor plans and features available on new construction. Add these dynamics to supportive demographics, low interest rates, and an improving economy, and you have the tremendous demand environment we're experiencing today. The strength in demand is reflected in our strong order growth for the quarter. In total, our net new orders were up 31% over the last year, while our absorption pace was up 37%. On a unit basis, this was the highest first quarter performance we've reported in over a decade and at $4.6 billion our highest reported quarterly sales value ever. I would highlight that the strong demand we experienced in the first quarter of 2021 has continued into the first three plus weeks of April. We continue to see high traffic volumes in our communities and buyers anxious to purchase a new home. Working within the strong demand environment, we continue to improve our operating and financial performance. Our pricing strategies and disciplined business practices helped us to generate a gross margin of 25.5% and an adjusted operating margin of 14.6% in the quarter. The resulting cash flows were then available to fund the future growth of our business and an increase in our ongoing return of excess capital to shareholders. At a very basic level, this is the model that we have been refining for the past decade. It starts with running a higher performing homebuilding operation, seeking to capture incremental gains in all areas of the business. It also includes investing in high quality projects and increasing our use of land purchase options to improve cash flows and overall asset efficiency, while delivering consistently strong returns on investment and equity. Having built a homebuilding operation that we believe can routinely generate strong returns and cash flows, we then allocate capital to support our long-term success and reward our shareholders. As we have highlighted many times, our highest priority is investing in our business through the acquisition and development of land assets that can generate required risk-adjusted returns. To that end, since 2016, we have invested $14.6 billion in land acquisition and development and have done so while building a more efficient land pipeline. To clearly demonstrate the progress we have made, at the end of 2016, we owned 99,000 lots, while controlling an additional 44,000 lots via option. Today, we actually own 5,000 fewer lots than five years ago and have more than doubled the lots we hold via option to 100,000. This significant and continuing change in the composition of our land pipeline has allowed us to increase the returns we generate while also helping us to reduce land-related market risk. As you know, we've also made the return of funds to our shareholders an integral part of our capital allocation. Over the past five years, we’ve returned approximately $3 billion to shareholders through dividends and share repurchases, including $154 million of stock repurchased in the first quarter. On that front, I am happy to note this morning's announcement that our board approved an increase of $1 billion to our repurchase authorization. And finally, as you saw in the first quarter, we were also prepared to allocate capital with a view towards further strengthening our balance sheet and reducing our financial leverage. By paying down $726 million of debt in the quarter, including the successful tender for $300 million of our nearest dated outstanding debt, we were able to lower our debt-to-capital ratio on a gross basis to 23.3%. To be paying down debt and returning significant funds to shareholders while targeting a 30% increase in our land acquisition and development in 2021 says a lot about our expectations for the earnings power and the financial strength of this business. I think it also reflects a more return-oriented shareholder-friendly approach toward operating our business. In fact, I think there is an ongoing maturation of the broader homebuilding industry in terms of its ability to generate higher returns with reduced risk. Given changes in the industry's operating and return profile, we believe investors can grow increasingly comfortable about investing in the sector over the entire housing cycle. With the opportunity for sustained high levels of housing demand, I believe PulteGroup's unique operating strategy has us well positioned to compete and continue to grow our business. Beyond the financial strength that I discussed, I believe that our size and diversity provide important advantages. For example, a key driver to our order growth in the first quarter was the ongoing recovery in demand among active adult consumers. A year of being separated from their kids and grandkids has been more than enough for this buyer group. With vaccinations now moving into high gear, our active adult buyers are anxious to get on with their lives, including moving into a new Del Webb community. In conclusion, 2021 has gotten off to an excellent start for our company. With ongoing strong demand that exceeds available supply, a backlog value of $8.8 billion and our tremendous financial strength and flexibility, I am excited about what we can accomplish this year. Let me now turn the call over to Bob.

Thanks, Ryan, and good morning. Jumping right into our operating results, home sale revenues in the first quarter increased 17% over last year to $2.6 billion. The higher revenues for the period reflect a 12% increase in closings to 6,044 homes, coupled with a 4% increase in average sales price to $430,000. While home closings for the period were up more than 12% over last year, deliveries came in slightly below our guidance with the shortfall resulting primarily from the severe weather in Texas. The 4% or $17,000 increase in average sales price realized in the quarter benefited from price increases across all buyer groups and was led by a 6% increase in ASP for our active adult closings. The buyer mix of closings in the first quarter is comparable with the prior year and included 33% from first-time buyers, 43% from move-up buyers, and 24% from active adult buyers. As Ryan mentioned, our net new orders in the first quarter were up 31% over last year to 9,852 homes. We experienced strong demand across all geographies and buyer groups with notable ongoing strength among our active adult buyers. In the first quarter, orders among our first-time buyers increased 39% to 3,303 homes, while move-up orders gained 18% to 4,040 homes, and active adult orders increased a robust 49% to 2,509 homes. The 49% year-over-year increase in active adult closings reflects the impact of the slowdown in sales in the last two weeks of March last year. But I would highlight that the 2,500 active adult orders this year represent a first quarter high dating back almost 15 years. I would also point out that buyer demand was consistently strong during each month of the quarter even when interest rates increased during the period. The 31% increase in orders could have been higher, but our divisions continued to actively manage sales in the quarter to match production rates and to help maximize project-specific returns. Along with raising prices in 100% of our communities to help cover cost inflation and moderate sales, all of our divisions used flat releases to more directly manage sales in some or all of their communities. For the first quarter, we operated from an average of 837 communities, which is down 4% from last year's average of 873 communities. The year-over-year decline in community count is consistent with our prior comments and reflects the impact of our decision to slow land spend when the pandemic first hit in March of last year along with the accelerated closeout of communities resulting from the ongoing elevated pace of sales. Consistent with the overall strength of the market, our cancellation rate in the quarter declined by more than 500 basis points from last year to just 8%, and we ended the quarter with a backlog of 18,966 homes, which is an increase of 50% over last year. On a dollar basis, our backlog increased 58% to $8.8 billion. On a year-over-year basis, we increased the number of homes we started in the quarter by 25% to 8,364 homes, which helped raise our total homes under construction by 22% to 14,728 homes. Of these homes, 1,798 or 12% were spec units, which on a percentage basis is down slightly from the fourth quarter of last year. Given market conditions, we have continued to work with our trade partners to further increase productions and expect to increase overall starts to at least 10,000 homes in the second quarter of this year. This would be an increase of at least 20% over the first quarter of this year. Based on the stage of construction for the 14,728 homes currently under construction, we expect deliveries in the second quarter to be in the range of 7,400 to 7,700 homes. At the midpoint, this would be an increase of 27% in deliveries over the second quarter of last year. Based on the ongoing strength of buyer demand and with almost 19,000 houses in backlog, we are raising our guidance for full-year closings to 32,000 homes. This is an increase of 7% from our prior guide of 30,000 homes and represents a 30% increase in deliveries for the year versus the prior year. The strong pricing environment has helped to lift the average sales price in our backlog by 5% over last year to $465,000. Given the backlog ASP and the anticipated mix of deliveries, we expect our average closing price in the second quarter to be in the range of $440,000 to $445,000. For the full-year, we now expect our average closing price to be between $450,000 and $455,000. Our homebuilding gross margin for the first quarter was 25.5%, which is an increase of 180 basis points over the prior year, and a sequential gain of 50 basis points for the fourth quarter of 2020. The increase in gross margins, which exceeded our prior guidance, benefited from the exceptionally strong pricing environment for sold and spec homes, and for the mix of homes closed in the period. In addition to the 4% increase in year-over-year ASP, our gross margins also benefited from lower sales discounts of 2.5% in the quarter, which represents a decrease of 110 basis points for the same period last year, and a decrease of 50 basis points for the fourth quarter of last year. As has been well reported, material and labor costs continue to move higher being led by lumber prices, which now seem to reach new highs every day. While we now expect our house costs, excluding land to be up 6% to 8% for the year, the strong demand environment is allowing us to pass through these costs in the form of both higher base sales prices and lower discounts. Given these cost-price dynamics, we expect gross margins to move higher throughout the remainder of 2021. As a result, we expect to realize sequential gains of approximately 50 basis points in each of the three remaining quarters this year, which would leave us in the range of 27% for the fourth quarter of 2021. In the first quarter, our reported SG&A expense was $272 million or 10.5% of home sale revenues. Excluding the $10 million pre-tax insurance benefit recorded in the period, our adjusted SG&A expense was $282 million, or 10.9% of home sale revenues. This compares with prior year SG&A expense for the quarter of $264 million, or 11.9% of home sale revenues. We are adding people to handle our higher construction volumes, but we still expect to realize sequential overhead leverage with the second quarter SG&A expense in the range of 9.9% to 10.3%. And for the full-year, we now expect adjusted SG&A as a percent of homebuilding revenue to be approximately 9.8%. As Jim noted, we did record a $61 million pre-tax charge in the period relating to the cash tender offer for $300 million of our senior notes that we completed in the first quarter. Turning to Pulte Financial Services, they continue to report outstanding financial results with pre-tax income more than tripling to $66 million, which compares to $20 million in the first quarter of last year. The large increase in pre-tax income reflects favorable competitive dynamics in the market, as well as higher loan production volumes resulting from the growth in our closings, and a 150 basis point increase in capture rate to 88%. Tax expense for the first quarter was $90 million, which represents an effective tax rate of 22.8%. Our effective tax rate for the quarter was lower than our recent guidance, primarily due to benefits related to equity compensation recorded in the period. We continue to expect our tax rate to be approximately 23.5% for the balance of the year, including the benefit of energy tax credits we expect to realize this year. In total, for the quarter, we reported net income of $304 million or $1.13 per share. Our adjusted net income for the period was $343 million or $1.28 per share. In the first quarter of 2020, the company reported net income of $204 million or $0.74 per share, and adjusted net income of $219 million or $0.80 per share. Turning to the balance sheet, we ended the quarter with $1.6 billion of cash. On a gross basis, our debt to capital ratio at the end of the quarter was 23.3%, down from 29.5% at the end of the year as we used available cash to pay down $726 million of senior notes in the first quarter. Our net debt to capital ratio was 5.5% at the end of the quarter. Along with paying down debt during the quarter, we repurchased 3.3 million common shares at a cost of $154 million for an average price of $46.11 per share. As Ryan mentioned, given the strength of our business and expectations for continued strong cash flows, and with our existing repurchase authorization down to approximately $200 million at the end of the quarter, the Board of Directors approved an increase of $1 billion to our repurchase authorization. The return of excess capital to our shareholders remains a priority, and as such, we expect to remain a consistent and systematic buyer of our shares. In the first quarter, we invested $795 million in land acquisition and development, including the lots we put under control through these investments, we ended the first quarter with approximately 194,000 lots under control, of which 94,000 were owned and 100,000 were controlled through options. With 51% of our lots now controlled via option, we have surpassed our initial target of 50% owned and 50% optioned, and expected that the percentage of optioned lots can move even higher. Consistent with our outstanding financial results, I am pleased to report that earlier this month, Standard & Poor’s upgraded PulteGroup’s debt to investment grade. This means that our senior notes are now rated investment grade by Standard & Poor's, Moody's, and Fitch. It's been a long process, but I'm extremely proud of the improvements we've been able to achieve in our credit metrics. Now, let me turn the call back to Ryan.

Thanks, Bob. Before opening the call to questions, there are two final topics that I want to quickly review. First, as one of the nation's largest homebuilding companies, we recognize and accept the important responsibilities we have to continue advancing sound ESG policies. In today's world, success is judged not just by what we do, but also considers how we do it. As such, along with actively working to improve how we operate, we're advancing our associated environmental, social, and governance reporting. To that end, along with all of our other accomplishments in the first quarter, we launched a new section of our website called Pulte Cares. In addition to housing information on our efforts to run a sustainable business that supports the communities we serve, the site also contains our reporting against the sustainability accounting standards board’s standards for our industry. This is the first year reporting against the SASB standards, and we look forward to showing our progress in future updates we'll be posting to the site. Finally, I would like to give a big shout out to the entire PulteGroup family for being ranked on the Fortune 100 list of Best Companies to work for. Since the founding of our company, we have viewed our culture as a critical and competitive advantage. The Fortune 100 list is built on an analysis conducted by the Great Place to Work organization, which is based on employee surveys from thousands of companies. In our case, they surveyed 100% of our employees. To make the Fortune 100 list is an accomplishment, but to make it for the first time when we are operating in a global pandemic is a clear and resounding statement about our people and the culture they have built inside of our organization. I truly could not be prouder of our company and specifically of our field leaders who do so much to support our people, and help them to be engaged, especially during these challenging times. My heartfelt thanks to all of you. Let me turn the call back to Jim.

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

Thank you. Our first question comes from Mike Dahl with RBC. Please go ahead.

Good morning. Congrats on those accomplishments on the results. My first question is on active adults, it's good to see that buyer group continuing to rebound. I'm curious, you know, as you look at the buyers that are coming in the door today, is there any change in buyer profile that you're seeing kind of post-COVID now, whether it's where these buyers are coming from? What features are they looking for in the homes? What amenities are they looking for in the community? Is there anything that you're seeing that may or may not be different? It would be great to hear.

Thanks for the question, Mike. And just to clarify your question about buyer profile, is it specific to the active adult consumer or about all consumers?

Specific to active adults.

Yeah, really no change, Mike, in the makeup of that buyer group, the places they're coming from, and the things that they're asking for, I think largely remain the same as what we've experienced over the last, four to five years.

Got it. Okay. My second question is around the margins. That's a great trajectory through the year and I was hoping, you know, when we think about the cost inflation guide relative to the margins, if you could give us a sense of how that cost inflation trajectory looks, because it would seem like, you know, by the time you get to the fourth quarter, you may, maybe this isn't going to peak, but you may be at kind of peak cost inflation yet you're guiding to a gross margin north of 27%. And maybe you can just give a little bit more color on that trajectory of costs alongside the pricing and margin curve to give us a better sense of that.

Yeah, Mike, just to clarify, you know, if you add the sequential 50 basis points per quarter, that would get us to around 27, not north of 27 in terms of the margin. And certainly what we have seen is an acceleration in cost, lumber being the primary driver of that. I think everybody is well aware it's at all-time highs. You know, we're hopeful that supply will come to that market, and that pricing will wane somewhat. You know, we've been waiting for that and haven't seen it yet. But, you know, we have updated our guide in terms of what the inflationary aspect of the sticks and bricks is. You know, we've been at or near 5% to 6%, we're now at 6% to 8%. And depending on what lumber does, that could move a little bit even higher than that. Having said that, you know, we've got a really strong pricing environment right now. It's accelerated through the year. And so as we look at the production and our build-out for the year, we see being able to cover those cost increases enough, obviously, to lead to that 50 basis point kind of sequential movement in margin through the year.

Our next question comes from Alan Ratner with Zelman & Associates. Please go ahead.

Hey, guys, good morning. Congrats on the great results. You know, Ryan, I'd love to drill in a little bit more, in terms of your expectation for starts to accelerate to over, I think you said 10,000, in the second quarter. It's certainly encouraging because I think that there's probably a view out there that the only thing really limiting orders at this point is production. And, you know, recognizing there's some seasonality in that start number. You know, if you just kind of annualize that, it would seem like you're gearing the business up to produce a lot more homes than you're going to deliver this year. So, I'm curious if you could talk a little bit more about, you know, how you're getting that starts growth, you know, that 20% sequential improvement? Are these new labor relationships that you're forming? Is it just the trades, ramping up hiring and production from that standpoint? Is it anything related to the, you know, the vertical integration that's perhaps improving your efficiency there? And then just tying in cycle times, and how those have been trending into that discussion, as well would be great.

Yeah, Alan, good morning. It's Ryan, I appreciate the question. We are proud of the quarter and we're very excited about how the balance of the years is shaping up. We've been working hard on the production environment for the last, two to three quarters, as we always do. But you know, certainly in this period of time, when we've got unprecedented demand, the production machine becomes more important than ever. We do believe that the size of our business, the way we run our business, the relationships that we've nurtured and fostered with our trade partners over the years are really paying dividends for us. And that's the, you know, Alan, that's the primary driver. This led us to the point where we can make the 25% plus increase in production in Q2, you know, moving from Q1 rather, and then moving to almost 10,000 units in Q2. So, we're very pleased with how the production machine is moving. It's not without its challenges, and Bob's highlighted some of those on the cost front. We're certainly seeing some challenges, you know, with certain commodities, windows, appliances, a few things like that. But, you know, our procurement team has done just an outstanding job in managing some of those minor speed bumps in the road. The last part of your question Alan about cycle time, we are seeing in certain markets, you know, some incremental days being added to the overall cycle time because of some of those supply chain constraints, but we believe we've factored all of those into the guide that we've given for not only Q2 closings, but also, you know, Q2 start rates.

Great. And on that point, you know, I know you guys are not, you know, huge spec builders, but I'm just curious if you've changed your sales approach at all given, you know, those cycle times extending, given the cost environment. Are you, you know, perhaps waiting more until the home is framed or started before selling homes, or are you still, you know, kind of in the mix of your business, perhaps is it still a lot front-loaded before the home is started? Just trying to get some insight into whether you're concerned about visibility into costs and things like that when you're starting the sales process?

Yeah, Alan, we're certainly concerned about the cost increases and that, you know, I think Bob's answer to the prior question highlighted that, you know, we've – it's part of the reason that we've moved our guide in terms of expectations on cost increases up, because, you know, things are getting more expensive. We are in certain consumer groups, most notably, in the lower price points, we are waiting to sell those homes later, starting them with specs, and we're waiting to sell those as they get later into the production cycle. You know, it's really allowing us to do two things— we're getting kind of current day sales prices, and we've got a better understanding of the delivery timing, and you know, what the cost of those homes are? The other thing I would add, Alan, it was a question that was part of your first question, and that's around our start rate, and whether or not you know, we're ramping up for more deliveries, and it's really about our spec inventory. We've historically run around 25% to 30% of our total production volume as spec; you heard in Bob’s prepared remarks that we're running at 12% today. And so part of the incremental start rate will be to rebuild that spec pipeline that we'd like to carry.

Our next question comes from Michael Rehaut with JPMorgan. Please go ahead.

Thanks. Good morning, everyone, and congrats on the results. The first question I had was just on some of your comments around April and how to think about the current demand backdrop. You mentioned that you're seeing continued strength into the month, and you have many builders right now that are managing pace that could be selling stronger than they allow for, but obviously, you have still often managed pace with production. So, I’m curious, in terms of the strength that you've seen into April, if the first quarter's pace is something that, given what you're seeing in the marketplace, you think might be sustainable because typically you do have a 5%, roughly 5% decline in sales pace into Q2 due to seasonality. I'm wondering if your comments on April and just the overall demand backdrop, suggest we should be expecting the current sales pace of nearly four per month to continue into the second quarter.

Yeah, Mike, it's Ryan. Good morning. And where we typically see seasonality in Q2 is into the May and June part of Q2. April generally tends to be fairly in line with March. We've seen, as I highlighted in my prepared remarks, we've seen the first three weeks of April continue in a very strong fashion. So, you know, time will tell what kind of seasonal adjustment we see in May and June. We're not giving any kind of a forecast on that. I think you've heard from us and a number of other builders that have recently reported that demand is really strong, and we've had to limit sales in nearly every community, either via lot release or price increases or in most cases, both. So, you know, we'll have to see how the back two months of the quarter play out when you take into consideration unprecedented demand, along with, you know, what's been a historical or slightly seasonal fall off. But, you know, all things, all other things being equal, Mike, the business environment right now is incredibly strong for a number of reasons. And you know, it's a good time to be a homebuilder.

Great. No, I appreciate that. Second question, you know, on all the progress with the gross margins, obviously very impressive. You know, the 27% exit rate this year would, you know, start to match your prior peak gross margins from the last cycle, if you were to annualize it. You know, it's certainly one of the concerns that we hear from investors around, you know, maintaining this level of profitability over the next couple of years, if, to the extent that demand moderates at all. I was wondering if you have any comments around, you know, if there's any perhaps structural improvements that, you know, or other changes to the business model perhaps that make you a little more comfortable that this higher level of profitability in gross margins can be sustained over the next couple of years?

Yeah, Mike, thanks for the question. You know, we haven't given any kind of a guide for forward periods beyond what we've done in 2021. You know, as for your question about structural changes in the business, I think we have made some real structural changes in the way that we operate our business. We've talked a lot about those, and we talked a lot about them in this current release. You know, I would continue to reiterate and remind everybody that we are running a business that's focused on generating return. That's what we believe creates value for our shareholders. So while the gross margins are nice, and we're certainly enjoying a very rich margin right now, that's not the number one or the only thing that we focus on when we're managing land investment, when we're managing risk, when we're managing capital allocation in a way that allows us to not only grow our business, but to take that excess cash that's being generated by the business, and we're returning that to shareholders. And I think what you're getting out of that story, Mike, is a, you know, a very attractive return on equity profile that, you know, we're proud of, and I think our shareholders are very happy to have.

Our next question comes from Truman Patterson with Wolfe Research. Please go ahead.

Ryan, Bob, Jim, thanks for taking my questions. Appreciate it. First, on active adult demand, clearly very robust. How sustainable do you think that is? You know, does it remain one of the better-performing segments throughout 2021? And if so, you know, absorptions in the segment for you all, you know are clearly elevated, just given the 49% growth. Just how repeatable is this performance? You know, your Del Webb—when we think about the legacy communities, generally larger communities—can you just run those a bit harder than your other communities? Just wanted to get your take there as to how sustainable that performance is.

Yeah, Truman, it's a good question. One of the things that – and we just, we looked at, I looked at it yesterday that the traffic, foot traffic through the door of our Del Webb communities continues to be very strong through the first three weeks of April. So, you know, we're very pleased with that. We like the way that that brand is operating right now. You know, over the last kind of 5 years to 7 years, we've made some shifts in the way that we build those communities, the way that we monetize them, and the way that we create the lifestyle. And, you know, as I think most of you appreciate, the most important thing with our Del Webb brand is the lifestyle that we offer; in this post-COVID environment, I think what we're seeing is consumers really value the ability for outdoor lifestyle-type activities and events that allow you to be connected with other people, but still maintain some level of social distance. The Del Webb communities offer that, and so, you know, we made reference to the fact that after a year of being kind of locked inside, that buyer group is ready to kind of get on with life and get on with retirement. And so, you know, we're happy with that. The other thing, you know, that I'd highlight Truman that's an important part of our story and our diversified consumer offering is, we've got a big move-up business, and that move-up business remains very strong. And so that, you know, typically what happens is that active adult buyer, when they're selling their home, it's going to a move-up buyer, which allows them to go do a lot of things and gives them great flexibility moving into the Del Webb community. So, you know, the tight supply environment on the resale side of the business, I think is a very good forward indicator of how strong the Del Webb business will continue to be.

Okay. And then just on, you know, some of your larger, I'll just call them battleship Del Webb legacy communities, do those allow for higher absorption bases or are they kind of too small to necessarily move the needle?

Yeah, Truman, so, you know, we’ve got— we're down to about six, five or six of those really large battleship Del Webb communities. There's a good land pipeline in all of those communities, and we are seeing very high absorption rates out of those legacy communities. You know, we've said for a long time that, you know, if the market came back in such a way, we could let the volume in those communities run a little more wide open given the land runway, and we're certainly doing that right now. It’s a smaller percentage of the overall business, so, you know, while it moves the needle, it's not going to move the needle as much as maybe what it once would have.

Our next question comes from Steven Kim with Evercore ISI. Please go ahead.

Yeah, thanks, guys. Exciting quarter, fun times. A couple of your competitors last week talked about conducting a stress test on their backlog and kind of concluded that mortgage rates could rise to like 4.2%. And they still wouldn't really see much of an impact to their backlog. I was wondering whether or not you had done a stress test like that. And then following up on Mike's question about peak margins, you know, we've also been hearing a lot of people talking about peak margins. And, you know, I've been pushing back, and I just love to have you weigh in on some of the things that more specifically that we pointed out to see whether you agree or disagree. We pointed out, you know, virtual tours and appointment scheduling drives reduce selling costs. You know, you have input cost inflation that is depressing your 2021 margins, actually, and so whenever that begins to moderate, you should get a benefit next year. You have lower interest costs, you know, it's accentuated by your recent debt pay down. And I would imagine you're probably also moving into some larger communities designed to run at a somewhat higher rate of absorptions. And so all of these things should theoretically be structural margin improvements. I was wondering if you agreed with that.

Alright. So to the first of your two questions. Steven, you know, did we do a stress test? I'm not sure what a stress test is on your backlog. We are always working with our backlog, though. You know, we actively manage them through the build cycle. And I would tell you that there are many things that can and might happen in a rising rate environment, and we would work with those consumers. You know, there are different products that can be offered. So yeah, I would agree that the strength of our backlog with 750 FICO scores, rising interest rates like that would not put our buyers in jeopardy. To your question on peak margins, you know, there's so much that goes into that. What's the demand environment? What's the land environment? What type of product are we building? Having said that, I think your points are valid, whether they support higher margins or not structurally over time, I think they benefit the business. So, you mentioned virtual tours or selling costs. Yes, that's an enhancement interest. Certainly, we will get a benefit through time. You know, the $726 million that we paid down this quarter is $34 million in interest cost, which will ultimately come through as lower cost of sales. It'll take a little while because we capitalize it. So, there are a number of things that will benefit us through time. But they will be determinants of our margin, but so will the land cost, so will the vertical construction costs, and so will our selling prices. So, to Ryan's earlier comment, you know, we underwrite against return; you guys have heard that from us a bunch. We obviously seek to maximize the margin that we are able to achieve. And we've got some tailwinds, but we've got some headwinds too in the form of lumber, etc. So, you know, Ryan said it's a good time during the homebuilding business; it is. You know, we're enjoying very good margins. And we see them expanding through the year. So, I think that's a real positive.

Yeah, absolutely, it's encouraging. And thanks for the guidance out to Q4, that I think was really helpful. You have a business that you acquired a year ago, the ICG business, which operates a little more indoors, perhaps than, I guess you can call it indoors, a lot of air ventilation. I was curious as to whether you could comment on the degree to which ICG has already begun to improve or aid your ability to ramp starts? Or perhaps, was that business a little bit more impacted by, you know, COVID restrictions? I know they're in Florida, so maybe not, but just wonder if you could provide a little bit more insight into how ICG is contributing.

Yeah. So, Steven, we're very pleased with the ICG acquisition. We highlighted that, you know, on our Q1 or our Q4 call last quarter. You know, it highlights that the business that we bought really only impacts our Jacksonville kind of North Florida business. And so, it's pretty small in terms of the overall impact of the company, but it has had a meaningful impact on our Jacksonville business. And so, we like the fruits of what the fruits that we're getting off of that tree, I think are really good. And it's part of the reason that we're excited about getting close to announcing the location of the second plant. We've got, you know, we're down to kind of a final couple of sites that will be the location for that. And, you know, in short order, we'll be able to make a bigger announcement on that. And it's all part of kind of the vision and the strategy that we had for ICG. And how do we see that playing out for our business over the next six to eight years, and we think there's a lot of benefits that will be generated for this company based on that platform.

Our next question comes from Matthew Bouley with Barclays. Please go ahead.

Good morning, everyone. Thanks for taking the questions and congrats on the results. Ryan, you made a comment in your prepared remarks that the homebuilding industry can generate, I think you said higher returns at reduced risk. And if I take that in tandem with your other comment that Pulte's option land position can move higher than 50%, I would just love to hear elaboration on both of those points, just why the industry is structurally improved, if it is simply the option market opening up, or what else you meant by that, and specifically for Pulte, how to think about where your option mix can go? Thank you.

Yeah, Matt, good morning. I appreciate the comment. And really, you know, what we believe has happened, and so what we know has happened inside of our own company, and what we believe has happened inside of the industry is there is a better balance of risk that's being taken onto the company's balance sheet. And most notably, a more disciplined approach to capital allocation. If you go back a decade, 15 years in this industry, you know, it was very boom and bust; all of the free cash flow in an upcycle was put into land. And then that land was harvested over the following years. And sometimes you got caught in a cycle with the capital allocation philosophy that you're seeing from Pulte, and I think you're seeing elements of it from the entire industry. There's less owned land on the balance sheet, there's more options, there's more free cash being generated. Dividends are being paid, there are share repurchase programs in place, there's less debt. All of those things, I think warrant a much different, kind of look from the investment community than I think how the industry has historically been viewed.

Got it? No, interesting. That is helpful color. And then the second one, I wanted to drill down into the cancellations actually. I know you set it down to 8%, which is a nice downtick, but, you know, on an absolute basis, depending on how they're performing, it's still a big enough number to move the needle. My question is, in this market, are you finding that you're actually able to price higher on those canceled homes and perhaps realize a higher margin? And I imagine that that's a typical, but what if anything from that is contemplated in your gross margin guidance? Thank you.

You know, candidly that's not a big determinant in our forward guide because there is very little of it. I mean, at 8%, that is as low a cancellation rate as I can recall in 10 years in the business; it's down sizably from last year, and even for those recent sequential quarters. And I think what it shows is the strength of the market; people who are under contract want to close because they know how hard it is to find something else to buy if they weren't to buy from us. But to your point, yes, if somebody fell out of contract, you know, halfway through the process with us, at least today, we would be able to sell it for more than we had sold it to them for, but that's not a big driver of our margin guide at all.

Our next question comes from Carl Reichardt with BTIG. Please go ahead.

Thanks. Good morning, guys. Thanks for taking the question. I wanted to ask about the general path of community count due to the balance of 2021 and maybe into 2022?

Yeah, Carl. Good morning. Good to hear from you this morning. Certainly, the increase in the business that we have guided to for 2021 has given us the opportunity to close out of some communities a little earlier than we expected. If you went back to the guide that we had previously given, we had indicated that our community count guide was going to be down in the 5% range. We'd update that today to suggest that on a quarter-over-quarter basis, this quarter this year versus the same quarter last year, our expectation is that we'll be down 5% to 10% for the balance of the year. So, for the second, third, and fourth quarter that would be our guide. We have not given any indications on 2022 at this point.

Alright, thanks. And then just on the active adult, and everyone is talking more about this, but the build times for active adults shorter or longer than the core product? Or if is contract to close shorter or longer? And then is part of the strength in the margin guide for the balance of the year, a mix shift in some meaningful way to higher margin active adults?

No real difference in the cycle time. And in terms of the mix shift, you know, what we'll actually see is more of a mix shift, and it's modest from move-up to first-time, an entry level. And so, you know, active adult will be pretty consistent year-over-year and for the balance of this year. So, it's really that mix shift to the first time that's influencing the margin.

Our next question comes from Deepa Raghavan with Wells Fargo. Please go ahead.

Hi, good morning. Thanks for taking my question. I'll tag along on that community count commentary. So, you raised your closing units within your guide, but you're lowering your community count guidance, suggesting community sizes have increased. Did I read that right, and if so, are you able to comment on the size of your communities now and compare it to historical? What I'm also trying to determine is how much of that increase in absorption pace you witnessed in Q1 is kind of driven by a larger community versus sheer sell-through?

Yeah, good morning. I think I understand most of the question. And, you know, the makeup of our communities are largely the same over the last three or so years other than our big Del Webb communities. Our average community count size is about 130 lots. So, we don't have, you know, other than a few of the legacy large Del Webb communities, we don't have, you know, massive communities where you can really choose the absorption rate. And then, you know, in terms of community count, the only other part of the question that I would offer there is that, you know, we have been very aggressive in the amount of incremental land spend that we're putting into the business, as we, you know, rebuild the land pipeline for 2022 and beyond. The only other thing that, you know is probably worth highlighting in terms of absorption paces is the mix shift of our business into entry level. And Bob highlighted in the prior question that we are seeing some of a shift from move-up into entry level. And you'll recall, you know, going back three to four years, four years now, 4.5 years when I came into the chair as CEO, we talked about shifting some of our move-up business into entry level. We've done that, and as you see that coming through on the closing side, those entry-level communities typically come with higher per community absorption paces.

Got it. That's helpful. My second follow-up is on the state of pricing. Obviously, it's pretty strong now, but any thoughts going into next year? Obviously, do you expect to probably give back some of the price that you've gained from all the inflationary in pricing power that you're getting at this point in time? Just curious, you know, what are your expectations exiting the year, especially next year? And what are some of the drivers you'd point to as we try to assess how pricing is stronger or not to the rest of the year?

Yeah. We haven't given any guide on our expectations for pricing next year. You know, what I would share is that currently we're sitting at a guide of 6% to 8% on a year-over-year basis. We've, for the last three to four years prior to 2021, we were in the 1% to 2% year-over-year increase range. So, you know, we've seen unprecedented increases in cost. You know, my hope would be that, but that would start to temper. Certainly a big driver of this year's increases is lumber, and we're at kind of unprecedented highs for lumber. You know, our analysis suggests that there's plenty of raw material. The constraint really seems to be on the sawmills, and we are seeing some additional capacity start to come online. So, you know, if we can see, you know, some moderation in the lumber market. And the industry can kind of continue to run at pretty efficient levels that we're at today, my hope would be that, you know, we could see some pullback in overall cost increases next year, relative to where we've been sitting this year.

Our next question comes from John Lovallo with Bank of America Merrill Lynch. Please go ahead.

Hey, guys, thank you for fitting me in here. First question is, you know, lumber costs, as you mentioned have been very well telegraphed, and I think for structural panels as well. But you know, where else are you guys seeing inflation? We've heard cement availability and price has been becoming more of a problem. And I'm curious also, which you might be seeing on the labor front?

Yeah, well, cement is very local, right. Because the distribution ranges is pretty tight. And yes, where you've got markets where you've got activity, you're going to see pricing, and that's very consistent with what we typically see. You know, in terms of the labor market, you know, certainly it is a busy market out there. People have choices on where to work. Ryan mentioned earlier in the call, you know, we've obviously stepped up our production. You know, we've got good relationships with our trades, but it costs money to make people come to our job site today. And so that's built into that increase to the 6% to 8%. I wouldn't characterize it as hateful at the moment. You know, there is capacity out there. For some of the trades you have to pay to get them on the job site, though. But those are the, you know, as always, lumber and labor are going to be the two primary drivers of cost for us.

Got it. That's helpful. And then can you quantify the weather impact on Texas on closings? And was that the entirety of the miss in the quarter?

Yeah. Mike, the miss that we had relative to our guide was largely driven by the weather in Texas. It was unlike any winter storm that Texas has seen and it shut that operation down for the better part of two weeks. And so, you know, our expectation is that we'll work to get the majority of that back in the second quarter, John, and, you know, we think other than that, the production machine, as I'd indicated in one of the earlier questions, is running quite well. And we'd like the rate of upstarts that we're seeing out of the business.

Our final question comes from Alex Barron with Housing Research Center. Please go ahead.

Yeah, thanks, guys. And congratulations on the great job here. Hopefully, you could elaborate on the comment about active adults coming back, and it sounded like it was related to the vaccines, but, you know, just if you could elaborate on what you're hearing from the field on that topic?

Yeah, Alex, it's Ryan. Thanks for the question. We're really excited about what we're seeing out of the active adult performance. You know, I think anecdotally we're saying that we're seeing that buyer, you know, reemerge in all aspects of their life because of their confidence around the vaccine. So, I think that's certainly a positive. I highlighted, you know, a few questions ago that the strength of the move-up market is, we think also really helping that business because it's very easy for that active adult buyer to sell their home right now. They're selling it at very high prices. And so, I think that's given, you know, that buyer a lot of confidence and a lot of flexibility to go out and make the future investment that they want to make further for the retirement home, and that's benefiting that Del Webb business for us.

Okay, great. And sorry if I missed it, but did you guys give, sort of a breakdown of, you know, price increase per segment, per buyer segment? Which, you know, I'd like to know which ones are doing— which one is doing the best right now?

Yeah, we did that, but we can. So, first-time entry level was up 2% year-over-year, move-up was up 4%, we had mentioned in the prepared remarks, and active adult was up 6%. You know, it's interesting, because, you know, there's a lot of movement under the hood on that, right, you know, in terms of geographic closings. So, mix matters. You know, what I would tell you is the pricing environment is pretty strong. And, yeah, so, you know, underneath that, you know, where the closings came from the size of the product is important. So, but the headline numbers are two, four, and six for entry-level, move-up, and active adult.

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Zeumer for any closing remarks. Great, thank you, Sarah. Appreciate everybody's time this morning. We will certainly be available over the course of the day for any other questions, and we look forward to talking to you on our next earnings call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.