Thank you for standing by and welcome to the PulteGroup's Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I'd now like to turn the call over to Jim Zeumer, Vice President of Investor Relations. You may begin.

Great. Thanks, Rob. I want to welcome everyone to PulteGroup's earnings call to discuss our strong financial performance for our second quarter ended June 30th, 2024. Here to review PulteGroup's Q2 results are Ryan Marshall, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; Jim Ossowski, Senior Vice President, Finance. A copy of our earnings release and this morning's presentation slides have been posted to our corporate website at pultegroup.com. We'll post an audio replay of this call later today. 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 Marshall. Ryan?

Thanks, Jim, and thank you to everyone joining today's call. PulteGroup delivered another quarter of strong financial results, which reflect an approach to the business in which we seek to balance price, pace, and investment over the long-term to generate superior returns. Consistent with this strategy, our financial results continue to show the power of capitalizing on the value of each lot and home we sell. Our divisions work extremely hard to secure, entitle, and develop our land assets and work equally hard to generate exceptional profitability while still turning our portfolio at an appropriate rate. Specific to our second quarter performance, we realized a 2% increase in average sales price, an 8% increase in closings, and a 30 basis point gain in gross margin, which in aggregate, helped drive a 19% increase in earnings to a second quarter record of $3.83 per share. Another quarter of overall strong financial performance, highlighted by our double-digit earnings growth, resulted in PulteGroup generating a return on equity of 27.1% for the trailing 12-month period. Obviously, a key driver of our strong financial results and high returns on invested capital continues to be the company's outstanding gross margins. As Bob will discuss, gross margins in the period benefited from a favorable mix of closings, but I would also highlight the pricing strength evident in our numbers. In Q2, product options and lot premiums averaged $104,000 per home and represented approximately 19% of our average sales price of $549,000. As I'm sure you can all appreciate, options and lot premiums are high-margin dollars and an important contributor to PulteGroup's outsized margins relative to peers. I know how hard our employees work to deliver such outstanding results, and I want to thank our entire organization for their efforts. As good as our second quarter numbers are, it's fair to say that as we navigated through the period, demand was a little less consistent than we experienced in the first quarter of 2024. On our Q1 earnings call, we noted buyer traffic had slowed in the first few weeks of April. While subsequent Wall Street channel checks confirmed a change in short-term demand, the fact remains that we are operating in a housing market that has been underbuilt relative to population, immigration, and household formation for more than a decade. The resulting housing deficit of several million homes is likely a structural reality for years to come, given the zoning challenges we face in most municipalities. Our country's underlying new home supply issue has been exacerbated by the lock-in effect caused by the dramatic rise in interest rates over the last two years. What the market continues to experience is existing homeowners who are unwilling or more likely unable to give up the low rate mortgages originated several years ago. As a consequence, the inventory of quality existing homes remains below long-term averages in many markets. The supply imbalance is one of the reasons that I am confident in the long-term demand trends for housing in this country, but I appreciate that buyer demand will fluctuate from quarter to quarter. For example, the bump in interest rates in the second quarter caused some buyers to become more cautious, while others saw affordability stretched beyond their financial capacity. While many cities are facing a limited supply of homes for sale, we have seen an increase in existing and new home supply in select markets in Florida and Texas. These markets are now in the process of finding the new clearing price needed to work down any excess inventory. Maybe more impactful than rates and inventory, the feedback we are getting points to a lack of confidence among some consumers that now is a good time to buy. High prices, higher interest rates, and the resulting high monthly payments are making potential buyers more cautious in purchasing a new home. To the degree that this lack of confidence among consumers reflects affordability concerns, this isn't new, and in fact, it's something we address on a market-by-market, even community-by-community basis every day. It was more than a year ago that you first heard me say that delivering high returns requires that we turn our assets and that we won't be margin proud. In an environment where market conditions are more competitive, we have worked to ensure that our products, prices, and incentives are clearly meeting buyer needs. Consistent with this focus on turning our assets, we continue to build a more efficient and faster turning land pipeline. In the quarter, lots controlled via option increased to 53% of total lots. We are successfully building on our historic base of lots option directly with the land sellers by increasing our use of third-party land bankers. To-date, we have entered into transactions representing almost 13,000 lots and $1.5 billion of capital. As with all land-related activities, we are being disciplined in how we expand this part of our portfolio, but we are making steady progress in assembling a more efficient land pipeline. As we sit here at the midpoint of 2024, I would say that it is shaping up to be a very good year for Pulte. Relative to our expectations coming into 2024, not only did we raise our initial closing guide by 1,000 homes, but we are clearly on a gross margin path well above our initial guide. For various reasons, market conditions got a little tougher in the second quarter, but we continue to actively manage price, pace, and starts to drive the best business outcome. Based on the current demand conditions and construction cycle times, we continue to start homes at a pace consistent with closing 31,000 homes this year, as well as positioning the company to grow 5% to 10% in 2025, consistent with the multiyear outlook we have discussed previously. Through the first few weeks of July, traffic to our communities has been solid, but depending on how demand conditions and absorption paces evolve up or down in each market over the balance of the year, we will adjust our starts pace as needed. Now let me turn the call over to Bob for a review of our second quarter results.

Thanks, Ryan, and good morning. PulteGroup generated second quarter home sale revenues of $4.4 billion, which represents an increase of 10% over the second quarter of 2023. The increase in revenues for the period was driven by an 8% increase in closings to 8,097 homes, in combination with a 2% increase in our average sales price to $549,000. On a year-over-year basis, the increase in our ASP reflects modest price increases in our first-time and active adult communities, while prices in our move-up communities were consistent with last year. The increase in our average sales prices for the quarter also reflects the impact of mix, as we recorded higher closings within our move-up business, which at $650,000 carried much higher prices than our first-time and active adult business. Broken down by buyer group, closings in the second quarter consisted of 40% first-time, 37% move-up, and 23% active adult. This compares with the mix of closings in the second quarter of last year, which was 41% first-time, 34% move-up, and 25% active adult. Reflecting the headwinds caused by higher rates and other market dynamics, our 7,649 net new orders were down 4% from last year's exceptionally strong results. In particular, I would highlight that last year's Q2 orders benefited from Del Webb grand openings and built-for-rent sales that are lumpy in nature. As has been well reported, operating conditions in select Florida and Texas markets got more competitive in the second quarter as interest rates rose during the month of April. On our first quarter earnings call this year, we indicated that buyer traffic had slowed during the first few weeks of April, and this slowdown did ultimately impact orders as we moved through the period. For the second quarter, our average community count was 934, which is an increase of 3% over the same period last year. The resulting absorption pace of 2.7 orders per community per month in the quarter is above the pre-COVID average but down from the 2.9 we generated last year. More granularly, our net new orders in the second quarter decreased 3% among first-time buyers, increased 4% among move-up buyers, and decreased 17% among active adult buyers. While we continue to see strong demand among active adult buyers, we did report a larger year-over-year decrease in their second quarter orders. That decrease primarily reflects lower community count in the current year and some impact from the timing of openings and closings of several of our Del Webb communities. Adjusting for the impact of these dynamics, our net new orders at stores that were operating consistently in both periods show an order decrease of only 3%. Consistent with our overall order results, on a unit basis, our quarter end backlog was down 4% to 12,982 homes, although backlog value was down only 1% to $8.1 billion. Turning to production, we started at approximately 8,100 homes in the second quarter and ended the quarter with a total of 17,250 homes under construction. Of the 17,250 homes under construction, approximately 6,900 or 40% of spec, including an average of 1.3 finished specs per community. These levels are in line with our targets of 40% and one finished spec per community and put us in a position to meet our delivery targets over the balance of the year. As always, we are prepared to adjust our cadence of spec starts up or down in response to sustained changes in overall higher demand. Based on the units we have under construction and their stage of production, we currently expect to close between 7,400 and 7,800 homes in the third quarter and continue to expect to close approximately 31,000 homes for the full year. As noted, we realized an average sales price of $549,000 in the second quarter, which is consistent with our prior guide for pricing of $540,000 to $550,000. Looking ahead, we expect closings in the third and fourth quarters to be in that same range of $540,000 to $550,000. While our average price and backlog are higher than our guide, we have a lot of homes left to sell and close this year, most of which will be spec production with our first-time buyer communities where pricing is lower. We reported second quarter gross margin of 29.9%, which represents an increase of 30 basis points over both the second quarter of last year and the first quarter of this year. As in Q1 of this year, our reported gross margins reflect a favorable mix of closings and a generally supportive pricing environment for many of the spec sales we closed in the quarter. Second quarter gross margins also benefited from opportunities we've taken in prior quarters to improve net pricing in a number of communities across our portfolio. Consistent with such actions, incentives on closings in the second quarter was 6.3% of the selling price, which is down from 6.5% in the first quarter of this year. While recent macro data has sparked optimism about the potential for Fed rate cuts, we don't factor such expectations into our guidance. What we do know is that rates remain elevated, affordability is stretched, and our delivery mix will be less favorable in the back half of the year. As we discussed on our Q1 earnings call, in the third and fourth quarters, we will be closing more homes in our West region, where homes carry a lower relative margin profile than we did in the first half of the year. These factors, combined with our need to be price competitive to turn assets, point to an expected gross margin of approximately 29% in the third quarter and 28.5% to 29% in the fourth quarter. As stated previously, we still have homes to sell and close to meet our full-year delivery guide of 31,000 units. So, demand conditions over the next few months can have an impact on the results built. In the second quarter, our reported SG&A expense was $361 million, or 8.1% of home sale revenues. Reported SG&A includes a $52 million pre-tax insurance benefit recorded in the period. In Q2 of last year, our reported SG&A expense was $315 million, or 7.8% of home sale revenue, which includes a $65 million pre-tax insurance benefit. Excluding the impact of the insurance benefits recorded in the first two quarters of this year, we continue to expect SG&A expense for the full year to be in the range of 9.2% to 9.5% of home sale revenues. Turning to our financial services operations, we reported pre-tax income of $63 million in the second quarter, which is up from $46 million in the same period last year. The 36% increase in pre-tax income reflects strong financial performance across all business lines, including mortgage, title, and insurance. Our performance also benefited from an increase in capture rates across all business lines, including a mortgage capture rate of 86% in the quarter, up from 80% last year. In total, reported pre-tax income for the second quarter was $1 billion, which represents an increase of 10% over last year. Our tax expense in the second quarter was $239 million, with an effective tax rate of 22.8%. Our effective tax rate for the quarter includes the benefit of energy tax credits and a $13 million benefit related to the favorable resolution of certain state tax matters. For the remaining quarters this year, we continue to expect our tax rate to be in the range of 24% to 24.5%. Taken altogether, we reported net income of $809 million or $3.83 per share. This compares to prior year reported net income of $720 million, or $3.21 per share. On a per share basis, we continue to benefit from our ongoing share repurchase program, which on a year-over-year basis reduced shares outstanding by 5% from last year. Capitalizing on our strong cash flows, we continue to support the future growth of our business as we invested approximately $1.2 billion in land acquisition and development in the second quarter. This brings our year-to-date land spend to just over $2.3 billion, keeping us on track to invest approximately $5 billion in land acquisition and development for the full year. For both the quarter and the first six months of 2024, the allocation of land spend was 60% development and 40% acquisition. At the end of the second quarter, we had approximately 225,000 lots under control, of which 53% were held via option. Given the strength of our land pipeline, we continue to forecast community count growth of 3% to 5% in the third and fourth quarters of this year over the comparable prior periods last year. Consistent with our capital allocation priorities, we are also continuing to return capital to shareholders. In the second quarter, we repurchased 2.8 million common shares at a cost of $314 million, or an average price of $113.79 per share. This brings our year-to-date share repurchase activity to a total of 5.1 million shares repurchased at a cost of $560 million or $110.58 per share. In addition to repurchasing stock, we also completed a tender offer for $300 million of our senior notes in the second quarter. As a result, our debt-to-capital ratio is now just 12.8% and our notes payable have decreased to $1.7 billion, which represents the lowest level since before we acquired Del Webb in 2001. After spending more than $1.8 billion during the quarter on land investment and the purchase of our equity and debt, we ended the quarter with more than $1.4 billion of cash. Adjusting for our cash position, our net debt-to-capital ratio at the quarter end was 1.8%. I'm also pleased to report that in acknowledgment of our improved operations, strong cash flow generation, and outstanding balance sheet, Fitch recently upgraded our debt to BBB+, while Moody's upgraded its outlook to positive. Now, let me turn the call back to Ryan for some final comments.

Thanks, Bob. During the first half of 2024, traffic to our communities was good and absorption pace ran slightly above historic norms. So, I feel good about our opportunities in the back half of the year. To the degree that the Fed actually cuts interest rates in the coming months, I think that will provide a powerful tailwind both financially and psychologically as we enter 2025. Before turning the call back to Jim, I would draw your attention to a release we issued a couple of weeks ago about one of our newest community openings and our first in Utah in more than 20 years. Along with representing PulteGroup's reentry into my home state, Utah is the seventh greenfield new market entry we have initiated over the past few years. Through the first half of 2024, we increased home sale revenues by 10% and grew reported earnings per share by 25% over the last year. Over the same period, we increased our land investment by 31% to $2.3 billion, while increasing year-to-date share repurchases and dividend payments by 37% to $645 million. We also retired $300 million of debt. PulteGroup has executed extremely well, and with expectations of closing 31,000 homes for the full year, we are in excellent position to drive strong results going forward. And finally, before opening the call to questions, I want to briefly address the press release we issued yesterday announcing our CFO succession plans. After a truly impactful 13-year career with PulteGroup, Bob O'Shaughnessy has initiated a transition toward retirement at the end of 2025. Step one in this process is that Bob will relinquish his title as Chief Financial Officer effective early February of next year. I'm pleased to say that Bob will then remain with us for another 10 months as Executive Vice President. During that time, he will support a smooth transition of CFO responsibilities, as well as continue to oversee our financial services business, our strategic partnerships, and our asset management committee. Since its founding, PulteGroup's greatest strength has always been the talented people who work here. Reflecting this depth of exceptional people, I'm proud to announce that Jim Ossowski, currently Senior Vice President of Finance, has been named as the company's next CFO. Jim has had an outstanding 22-year career at PulteGroup, during which time he has served as VP of Finance and Corporate Controller, VP of Finance, Homebuilding Operations, Area VP of Finance and Director of Corporate Audit. In his current role as SVP of Finance, he manages our critical asset management committee and FP&A function. Jim has been promoted to Executive Vice President and CFO effective February of 2025. At that time, Jim will report directly to me and will have responsibility for our accounting, tax, audit, risk management, and treasury functions. In announcing these changes now, we ensure having plenty of time to implement a seamless transition of responsibilities. Now, let me turn the call back to Jim.

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. Thank you. And I'll ask Rob to again explain the process and we'll open the call for questions.

Thank you. We will now begin the question-and-answer session. Your first question comes from the line of Stephen Kim from Evercore ISI. Your line is open.

Yeah. Thanks very much guys. Congrats on the results and congrats to Jim and Bob. I'm glad to hear that we got a great transition going. So, congrats to everybody. Wanted to ask a couple of questions. If I could start off just by talking about your gross margin outlook. You indicated that you're going to be doing more in the West, I think, which is a little bit lower margin. And you also talked about, on a longer-term basis, increasing your land banking initiative. I was wondering if you could give us a sense. If you were to isolate the land banking, the increased use of land bankers, I know that this is going to take a little time to kind of flow through all your results. But once that has happened and you reach the targeted level that you think land banking is going to represent in your mix, how much of a margin impact overall do you think that, that alone would represent relative to where you are today?

Thank you for the question, Stephen. Regarding the margin for the remainder of the year in relation to the West, we've seen improved performance compared to previous periods, particularly with a stronger mix of West Coast closings. As a result, those margins are somewhat lower. This has been included in our margin guidance for Q3 and Q4, where we believe the margins will remain exceptionally strong. On land banking, we are making significant progress towards our goal of increasing from 50% to 70% in land options. This additional 20% will come from our land bankers, and we're consistently working towards this target. In terms of the balance between margin and return, we focus on the transfer of risk. Typically, we observe a trade-off of about 200 to 300 basis points between margin and return, though each deal has its unique aspects, so it’s difficult to generalize. Lastly, it's important to reiterate that our primary focus is on return, as it ultimately drives shareholder value, not just margins.

Absolutely. That's very helpful. That 20% increase in the 200 basis points to 300 basis points, which is also pretty standard across the industry. So, that's helpful. Wanted to talk about cycle times because also when you talk about returns being able to build more quickly and therefore more efficiently also helps you in your return goals. Can you update us on where your cycle times sit today relative to, let's say, a pre-pandemic kind of a situation? And if you think there's additional opportunities there and wrapped up in that, can you give us an update on ICG? It's been a while since we've kind of heard you talk about it. You've had it now for over about four years, I think. Just give us a sense for sort of where that fits into the overall cycle time progression?

It's a great question, Stephen. So, cycle time days in the quarter on closings were 123 days. So, that's a pickup of about a week from where we were in Q1. I would say, today, we've got a number of divisions where the cycle times are at or below kind of that 100-day target that we've set for ourselves. But we do still have some divisions where it's elevated. I see trade availability is probably what's holding some of those divisions back. Looking forward, as we look to the end of the year, we'll probably be slightly elevated over that 100-day target that we set. But we're working hard and we think we can get there in the first half of '25.

Stephen, it's Ryan again. I'll take the ICG question. We're pleased with how ICG is performing. We've got two active plants, both located in the Southeast part of the US. They do a mix of our business, along with other single-family homebuilder businesses. And we have a decent amount of commercial business that runs through those plants as well, predominantly in the frame package for apartments. If there was a part of the ICG business that's lagging, it would be that commercial business with the slowdown in new apartment development or new apartment projects starting. We do have a physical location secured and owned. Actually, more than secured. We own a location for our third ICG plant. We have not started construction on that yet. We're just finalizing some of the design parameters for that new location. So as we have more details on that, we'll be sure to share it. We're pleased with not only the cycle time benefits that we get out of ICG, the quality pickups, better safety. We also think we get better cost just in the way that we're able to buy, particularly lumber as it flows into the ICG plant. So happy with how that business is performing.

Okay. Great. Appreciate all the color, guys.

Your next question comes from the line of John Lovallo from UBS. Your line is open.

Good morning, guys. Thank you for taking my questions as well. You spoke about the uptick in inventory on the existing home side in certain markets like Southwest Florida and I think, Texas, you mentioned. Are these levels concerning to you? Are there any markets where that inventory is concerning? And are you seeing more of an impact on your move-up business versus your entry level? Or how would you kind of characterize that?

It's a good question. The market that is higher than we would ideally like to see is Southwest Florida. There, we've observed resale inventory levels approaching about nine months, while the benchmark for equilibrium is around six months. So, we are slightly elevated, but I wouldn't consider it worrying. This market has been robust for a long time and remains a highly desirable location for retirees and second homeowners. It has experienced unprecedented price appreciation, which is part of the reason for the elevated inventory levels. The market will undergo some adjustment and will find a clearing price; I expect inventory levels to return to a more normal range. A few markets in Texas, particularly Austin and Dallas, are in a similar situation, having also seen remarkable growth in population, jobs, and corresponding home price increases. Aside from the nine months of inventory in Southwest Florida, I wouldn’t characterize anything as concerning.

One thing I might add is that when someone sells a home, they are often also a buyer. This means it doesn't really add to the net supply in the market. It can affect pricing as much as anything else. Retail has always been our largest competitor. We currently have the advantage of being able to offer rate incentives to buyers. Given the demand, we are an appealing option, especially in relation to that resale inventory.

Okay. That's helpful. And then just on the cash flow, is $1.8 billion still the cash flow guide for the full year? You guys did, I think, $246 million of buybacks in the first quarter, another $314 million in the second quarter. How are you kind of thinking about that cash flow in the back half and the ability to repurchase more shares?

Well, certainly, our cash flow guide is still current. And I think we've historically not given a view as to how much we're going to be repurchasing in the forward periods. We've let our kind of actions speak for themselves. You can and should expect to see us continue to be in the market.

Okay. Thank you, guys.

Your next question comes from the line of Anthony Pettinari from Citigroup. Your line is open.

Good morning and congratulations to Bob and Jim. You indicated your guidance doesn't anticipate lower rates. And I'm just wondering, if benchmark mortgage rates were to fall 50 bps or 100 bps, is it possible to quantify what that would do to gross margin holding all else equal? And then maybe kind of a harder question to answer, do you get a sense that there's meaningful group of prospective buyers that are kind of on the sidelines until we get a move in rates?

Yes. It's an interesting question and I wish I had a perfect answer for you, but a lot of it will depend on what is prompting that decline in rates, right? We've talked about this before. If the economy is healthy, lower rates are good because it means that the consumer's wallet is still healthy and they still have a job and the lower interest rate environment allows them to save some money. I think in that environment, we would expect to see margins a tailwind because our incentive load likely goes down. If it is in concert with that, we're worried about recessionary impacts, GDP, not healthy jobs, not as solid as they are today. That has another influence. The other thing that factors into this is supply, right? We talked about it in some markets. It's a little bit more competitive. And so there could be a scenario where we've made it clear we want to sell homes, and we're going to find the price that's going to get there. While we may be able to save a little bit of money on the incentive for the financing, we may be in a position where we're giving some of that in some other form of incentive. So like I said, I don't know, Ryan, if you want to comment, but the broader environment is important to that is just what happened to rates. We've always said rates are interesting, but they are only one element of the consumer equation.

Okay. That's helpful. And then sorry if I missed this, but in terms of stick and brick costs in the quarter and then what your maybe second half gross margin guidance assumes or contemplates, can you just give us kind of color on those trends?

So the stick and brick costs in the second quarter were $80 per square foot. That's flat with the first quarter of this year. As we look ahead, we expect inflation to be manageable maybe low single digits over the balance of the year backing us.

And that's incorporated into the guide that we've provided.

Maybe worth highlighting I think Jim's referencing primarily vertical. The land costs, we've talked about kind of high single-digit increases through '24 also embedded in that guide.

Okay. That's very helpful. I'll turn it over.

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

Thanks. Good morning, everyone, and I also want to offer my congrats to Bob and Jim. First, I wanted to circle back to the comments around the shift of the business over time to more lot optioning and just wanted to kind of clarify the comments earlier, you said that when you kind of move from a regular perhaps owned land position to a lot bank land position. I just want to make sure we understood that right, that it kind of shifts 200 to 300 basis points of gross margin, take that out of gross margin, but shifts it into return on equity, if we heard that right. And if we're talking about a 20% shift of the business, effectively 200 to 300 bps times 20%, we're talking about 40 to 60 bps impact of moving from gross margin to ROE. Just want to make sure that we're understanding that correctly. And if there's any other factors that we should consider in that longer-term move to more lot optioning and land banking?

Hey, Mike, it's Ryan. I think the way you've articulated is accurate. So I think you're understanding it right. I would reiterate that the 50% that we have in our business today of land options. Those are land options with the underlying seller and that's been the case for the last seven or eight years. So that's not a change. And going forward, we'd expect that to remain in that kind of 50-ish percent range. So the incremental optionality taking us from 50 to 70, that's the piece that will have more land banking in it.

Yes. Maybe just one point of clarification. I'd rather we're speaking to the IRR on the transaction as opposed to our return on equity. Like our equity gets influenced by lots of other things ultimately when you kind of get to the parent level. But on a deal-by-deal basis, banks versus non-bank, it is roughly a 200 to 300 basis point cost and margin and then a roughly 200 to 300 basis point benefit to the return on that transaction.

Right. That's very helpful. And I think it's important to clarify that. Secondly, maybe looking at the balance sheet, I believe you still are kind of running below your target levels, which, correct me if I'm wrong, I believe are the 20% to 30% debt-to-cap ratio, net debt more or less around zero the last several quarters. How should we think about the potential to maybe even getting that leverage back to your targeted range? What's the potential for that? I think as you're kind of entering perhaps even a more of a tailwind type of macro backdrop to the extent that rates start coming down, how should we think about the balance sheet and the ability, particularly as you're shifting more and more towards lot optioning? What is the right amount of leverage? And to the extent that there's a potential to increase share repurchase as we've been thinking about this with other companies. How should we think about that for Pulte in the next several years?

Yes, Mike, the way that I'd ask you to think about capital allocation is we look at the needs of the business first and foremost. And that starts with how much investment do we want to put into land? How much investment do we want to put into dividends? How much investment do we want to put into share repurchase and as evidenced in over the last couple of years, we've even been retiring debt. So we look at the collective needs of the business and then we think about how are we going to finance that. The business is performing incredibly well, and we've been generating great cash flow and that cash flow put us in a very favorable position where we haven't needed the levels of debt that we've historically used in the business. So I think we can all agree that having an appropriate amount of leverage in a business is advantageous and efficient from a return standpoint. That's part of the reason that we set kind of our target rate at 20% to 30%. But we're not going to let the tail wag the dog here. We look at how we want to run the business, think about the capital that we need for that and then we look at how we're going to finance it. And in the position that we're in, we're in a great position to have lower leverage, lower debt, and still do all of the things that we want to do strategically from an investment standpoint. So I take the position that we're in from an overall debt level any day of the week and twice on Sunday. Could the business absorb or handle more debt certainly but again, the number one priority is how do we want to run the business and then we go figure out how to finance it. Bob, anything else do you want to add to that?

No, other than that furthering Ryan's point, as we get a more efficiently on pipeline, i.e., more optionality, I think, we get to a point where our cash flows better match our earnings. So less of the cyclicality on the balance sheet and the impact on cash flows from inventory changes, which is that the environment we operate today is going to generate a lot of cash. So it's not likely that we would be levering from here.

Great. Thank you.

Your next question comes from the line of Rafe Jadrosich from Bank of America. Your line is open.

Hi. Good morning. Thanks for taking my questions. I just want to follow-up on some of the comments on Florida and Texas. Can you talk about what you would sort of attribute the slowdown and the higher inventory in those markets to? Like what's driving that? And then the comments on the price discovery process, where are we in that process? Have you seen prices correct already? Or is that something you would expect going forward?

Yes, Rafe, thanks for the question. I think what's created some of the increase in inventory is the unprecedented rise in price, which has caused some owners to become sellers for whatever reason. Those high prices have created a bit of an affordability challenge that prospective buyers are struggling to kind of digest at this point. So as I mentioned on one of the prior questions, I think what happens here, there'll be a little bit of a kind of price market clearing price adjustment process that will happen over time. I think it takes a terribly long time. But over the next probably three, six, nine months, I would expect that market to kind of work through some of the buildup of inventory. I'd point you to as an example, Austin. If you looked at the Austin market going back probably two years ago, a couple of years post-COVID unprecedented job growth, combined with an unprecedented rise in sales prices, all of a sudden, the market kind of came to a bit of a slowdown. We saw build in inventory. It took about six months for the market to kind of work through some of that inventory and it settled back into kind of a more normal run rate growth rate. So, my expectation would be probably for something similar to happen as it relates to Southwest Florida.

Thank you. That's really helpful. And then just on the gross margin guidance for the second half of the year, I think you were previously expecting sort of consistent 29% through the back half, the expectation for the change in the outlook for the fourth quarter for sort of the exit rate, is that driven entirely by mix? Or are there other factors that are changing that expectation for the fourth quarter?

Yes, it's essentially due to two main factors. One is the mix we've mentioned. We anticipated some of this, noting it was in the 29% range that we indicated at the end of the first quarter, and that trend has continued. We're seeing a larger mix now than we did 90 days ago. Additionally, we’ve observed that the market has become somewhat choppier, which suggests there may be increased incentives. We have homes to sell and close, and we're factoring that into our guidance as well. It's important to note that the range we've provided is slightly lower, but it still reflects the same point we made at the end of the first quarter. I don’t want anyone to misunderstand that we see a significant shift in the market; this is mainly driven by circumstances.

Thanks for all the color.

Thanks, Rafe.

Your next question comes from the line of Alan Ratner from Zelman & Associates. Your line is open.

Hey guys. Good morning. My congrats to Bob and Jim as well. So I'm actually going to take kind of the opposite side of the margin question because I actually think the guidance is pretty similar to your prior guide when you kind of consider the moving pieces with the upside this quarter, what seems like a bit of a mix shift in the back half of the year. And I guess I was hoping you might reconcile that a little bit with the comments on Texas and Florida because those two states are a pretty sizable part of your business, over 40% of closings. And it sounds like you're kind of bracing maybe for a little bit of an incentive war, that's probably too strong of a word, but in the back half of the year in order to generate some volume. So I guess, my question or interpretation of the guidance is it feels like you're not necessarily factoring in that much of an incentive headwind in the back half of the year. So can you just kind of talk through that a little bit?

Yes, Alan, I think Bob's prior answer to Ray's question help to address that. Now I'd combine that with the comment that I made that we're not going to be margin proud. It's important for us to turn our assets, the demand environment and specifically, consumer confidence and affordability has been a little bit choppier. So the combination of a little bit more West Coast mix with a few markets where we think we're going to have to add in a few incremental incentives. We've given kind of some incremental or some more kind of finite range and where we think margins fall in Q4. The guide for Q3, we left unchanged at approximately 29%, and we just put a range around the fourth quarter to accommodate for some of the things that I just described.

Okay. That's helpful. It seems pretty similar to the outlook from three months ago, although there appear to be some additional cautiousness in your outlook for those two states.

Well, Alan, I want to add one more point. We have 13,000 units in backlog, most of which are set to deliver within the next six months. So we could see a significant portion of that. Regarding the forward incentive load, we already have clarity on the incentives for those homes.

Got it. Okay. Got it. That's helpful. Second question is just a bit of a bigger picture, higher-level question. Some of your peers have kind of put out reset long-term absorption targets for the business and kind of raise that maybe from where the businesses have run historically. And those are for various reasons, maybe more of a spec mix, more entry level or just kind of just better efficiencies. I'm curious, as you look at your return focus and obviously the very strong margins, but the commentary about not being margin proud, is there an opportunity longer term to take the absorption run rate of your business higher compared to where it's run historically? And how much margin, if any, do you have to give up to achieve that?

Yes, Alan. I think the thing that I would probably reorient the focus would be around how difficult it is to have entitled land in this country. We're in an environment that is largely not in my backyard anti-growth environment both municipalities. So the land that we have entitled and we're able to develop become somewhat of a precious commodity, and we're treating it as such. And we're treating it as such and balancing pace and price to drive the best returns that we can because we fundamentally believe that's what creates shareholder value. And I think the last decade of performance from this company demonstrates just that. Growth is a very important part of our story. And it's part of the reason that in our last quarter, we laid out a multiyear growth target of 5% to 10% over a multiyear period. So for 2024, we're going to be at the higher end of that range for the business that we'll deliver in 2024. And then in my prepared remarks, I highlighted that for 2025, we'd expect to be kind of within that range. So the way we've been investing capital, the way that we've been thinking about kind of community level absorption and total volume deliveries out of the business are very much aligned with that 5% to 10% multi-year growth target. And I'd probably leave it there as opposed to going into by community absorption rates.

Makes a lot of sense. I appreciate the comments.

Thanks, Alan.

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

Awesome. Thanks so much, guys. One more question on Florida here. Just wanted to maybe hear your perspective or your latest perspective, I guess I should say, on the insurance market. You generally build houses that are further inland obviously, to the latest building codes. But are you finding that higher insurance rates across the state are also potentially a driver behind some of the buyer trepidation there? Just wanted your perspective on that.

Yes, Sam, I believe this is an issue that the entire country is facing, not just Florida. We've observed insurance rates increasing in several states, although the challenges appear to be more pronounced in Florida. Fortunately, we have our own insurance agency that does an excellent job. We maintain a high capture rate, allowing us to not only provide insurance coverage but also to do so at very competitive rates for buyers in our communities. Regarding our homes, they are constructed to the latest standards and are more resilient in handling rain events and rising water levels thanks to our effective land development and drainage management. While this situation shouldn’t be overlooked, it hasn't significantly affected our ability to sell homes. Additionally, many Florida buyers are already residents who are selling their homes and relocating, so they are accustomed to paying relatively higher insurance rates, which minimizes any shock. For out-of-state buyers, while they may face higher rates compared to where they are coming from, there are also advantages like lower property tax rates and no state income tax, along with other benefits such as avoiding snow removal. So, there are various factors to consider with insurance rates.

No, that helps. And then just maybe switching gears and touching on land really quickly here. And this is more of a clarification question. It sounds like you're talking to more of a high single-digit increase in land costs this year. At least that's what's hitting your P&L and flowing through the gross margin. First of all, I just want to make sure I'm hearing that correctly. And then does that represent any change from your earlier commentary? Because I believe the original expectation was for that to be closer to, let's call it, mid to high single-digits. Just want to make sure we're thinking of that correctly. Thanks.

Yes. Apologies if we weren't clear. We haven't changed our cost estimates for land. I may be guilty of saying high single-digits versus mid to high single-digits. It means the same thing. And I apologize, it's somewhere between 5% and 10%.

Got you. That helps. Thanks so much. I'll pass it on.

Your next question comes from the line of Mike Dahl from RBC Capital Markets. Your line is open.

Good morning. Thanks, and congrats, Bob and Jim. Bob, I guess you're not free of us all quite yet.

Not quite yet.

Sometimes. A couple of quick ones from my end. You characterized the July traffic as solid. Obviously, some moving pieces around rates over the past month and then normal seasonality, I would flow. I think your absorption would typically be down kind of mid-teens quarter-on-quarter in the third quarter. Just given all the kind of attention from investors and analysts like can you give a little more clarity on kind of how the beginning of 3Q has looked? And are you trying to characterize this as kind of against what was choppy, solid is consistent with what you'd expect that are worth. How would you further clarify that?

Yes, Mike, it's always tricky when we're giving qualitative descriptions about three weeks of traffic in July. So we try to choose our words carefully. The second quarter, I think, you've heard from us and you've heard from others that have reported. It was choppy throughout the quarter. But things in early July, three weeks in, have been solid, and we're pleased with kind of how the business is performing. And probably the biggest thing that I'd want you to focus on is kind of our reaffirmation of how we view the business for the entire year, our start rate, what we believe we can deliver and kind of how that sets us up for kind of 2025. So certainly, three weeks of kind of data in July, I know they're important. I know there's a lot of focus on it. But I think the bigger picture of what's the full year of '24 are going to look like, how are we thinking about 2025. Those are the things that I think are probably more important.

Yes. Okay. Understood and fair. And then just sorry to keep going on kind of the Florida and Texas stuff, but just as kind of a level setting exercise. If we look at the orders, your Florida orders were down 9%, your Texas down 8% in the quarter. Is there any way you could give us some additional perspective on in those challenged markets in Southwest Florida and Austin, Dallas? How was the order performance in those markets, specifically in the quarter?

Yes. Mike, the only thing that I'd probably kind of point to there, Bob talked about in his prepared remarks, some of the Del Webb impact in the quarter. Both of those markets are big markets for Del Webb. So beyond some of the community count transition, the community count transition that we're having with some closing and new Del Webbs opening, I wouldn't really go any more granular than that.

Okay. Got it. Thank you.

Your final question comes from the line of Susan Maklari from Goldman Sachs. Your line is open.

Good morning, everyone. Thanks for squeezing me in. My first question is, you mentioned in your comments that the consumer is a bit more unsure, a bit more cautious. How would you generally characterize the health of them as you come into the third quarter and think about the back half? And what do you think is causing that increased caution? Is there anything that you're hearing from your salespeople on the ground that seems to be a more motivating factor in there for them?

Yes, good morning. Thank you for the question. I believe it's primarily related to two factors: consumer psychology and confidence. When interest rates increased in early April, it significantly affected consumer confidence regarding whether it was the right time to make a purchase. We conduct surveys on our website with potential buyers, asking them if they feel it is a good time to buy, and we noticed a distinct change in responses during that period. Some of this shift can be attributed to the recent rate changes and the news people are consuming, while the impact of affordability is also a factor. It's challenging to determine how much of the change is due to one factor over the other. I think the possibility of rates decreasing later in the year could positively influence consumer confidence and buyer psychology.

Okay. That's helpful. And then you also mentioned that you recently reentered Utah. As you think about your current geographic footprint and hitting that 5% to 10% growth target over time, how do you think about the current markets that you're in, are there more markets that perhaps could fit your profile for some of the products that you offer? And anything else that's interesting to you out there from a market or geographic perspective?

Yes, we continuously assess population trends and explore potential growth cities that may present new opportunities for us. With the seven markets we've entered in the past two to three years, I believe we are currently in all the markets necessary for our strategy. While there could be future opportunities, I don't see any major growth cities we need to target right now. Regarding the cities we are currently in and our growth objectives, we are satisfied with their performance. They are relatively smaller businesses at this time, and our outlook for growth in these new markets is incorporated into our 5% to 10% growth rate.

Okay. Thanks for the color and good luck with everything.

Thanks, Susan.

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. Thank you. And I'll ask Rob to again explain the process and we'll open the call for questions.

This concludes today's conference call. Thank you for your participation. You may now disconnect.