PulteGroup Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

• James P. Zeumer, Vice President, Investor Relations and Corporate Communications
• Ryan R. Marshall, President and Chief Executive Officer
• Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer

Analysts

• John Lovallo, UBS Group AG
• Michael Rehaut, JPMorgan Chase & Co.
• Carl Reichardt, BTIG Research
• Stephen Kim, Evercore ISI
• Matthew Bouley, Barclays PLC
• Alan Ratner, Zelman & Associates
• Michael Dahl, RBC Capital Markets
• Truman Patterson, Wolfe Research
• Asher Sohnen, Smith Barney Citigroup
• Susan Maklari, The Goldman Sachs Group, Inc.
• Joseph Ahlersmeyer, Deutsche Bank Aktiengesellschaft
• Alex Barron, Housing Research Center
• Rafe Jadrosich, Bank of America Co.

Presentation

[Operator]

Good morning, ladies and gentlemen. My name is Abbie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup Incorporated Second Quarter 2023 Earnings Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. And I will now turn the conference over to Jim Zeumer, Vice President of Investor Relations. You may begin.

[James P. Zeumer, Vice President, Investor Relations and Corporate Communications at PulteGroup]

Thank you, Abbie. Good morning, and thank you for joining today's call to discuss PulteGroup's exceptional second quarter operating and financial results. Along with affirming the ongoing desire for homeownership and the strength of overall buyer demand, our second quarter numbers demonstrate the strategic value of PulteGroup's balanced and disciplined approach to the business.

Joining me on today's call to discuss our Q2 results are Ryan Marshall, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; Jim Ossowski, Senior VP of 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 inform everyone on today's call that today's discussion includes forward-looking statements about the Company's expected future performance. Actual results could differ materially from those suggested by our comments. 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?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Thanks, Jim, and good morning. As you read in this morning's press release, Q2 was an outstanding quarter for PulteGroup as we posted strong financial results throughout our P&L, balance sheet and cash flow statement. In fact, our second quarter revenues, gross and operating margins and net income were at or are approaching all-time highs for our second quarter. Our record financial performance in turn drove strong cash flows that helped raise our cash position to $1.8 billion, while dropping our net debt-to-capital ratio to almost 0% [Phonetic]. I am really proud of our homebuilding and financial services teams for delivering these great results, which are even more impressive given the variable market conditions we've operated in for the past 12 months. Within these complicated market dynamics, I believe PulteGroup's operating and financial success reflects the balanced and disciplined approach we take in running our homebuilding business.

We continue to successfully implement both a build-to-order model that serves our move-up and active adult buyers in combination with a spec-based model, primarily within our first-time buyer communities. Our spec production is most heavily weighted toward our Centex branded communities, which operate under a managed spec production model. In other words, homes are started to spec that we have aligned the starts cadence with our sales pace. Given Centex' focus on serving the needs of first-time buyers, our long-term plan is to maintain a spec-build model in these communities. By being more balanced across build-to-order and spec production, we maintain a more consistent cadence of home starts, meet buyer demand more effectively, and we achieved the critical objective of turning our assets in support of higher returns.

You can see the practical application of this managed approach in our Q2 numbers that specs totaled 36% of units under production at quarter end. Of these units, we averaged just over one finished spec per community, which is in line with our stated goal. Along with being balanced between our build-to-order and spec production, we are appropriately diversified across all the buyer groups consistent with our long-term goal of having 40% first-time, 35% move-up and 25% active adult. Why is this important? The different financial profiles associated with each buyer group can mean different responses to changing market dynamics, such as today's rising rate environment, which may hinder first-time buyers, but be less of a headwind among active adult consumers. Being balanced across build-to-order, spec and buyer groups is also an important underpinning to the extremely high gross margins we've been able to maintain.

More directly, we have enough production to meet buyer demand, but not so much that we are no longer selling from a position of strength. I think we've achieved the right mix as we increased orders and closings, all while two-thirds of our divisions were still able to raise prices in the quarter. Along these same lines, we continue to see pricing opportunities within our core build-to-order business that primarily serves our move-up and active adult buyers. In our most recent quarter, options and lot premiums exceeded $100,000 per home. These are high-margin dollars that are not as prevalent among first-time buyers and certainly were an important driver of the strong 29.6% gross margin we reported in Q2. While the market started slowing in 2022, I said that we couldn't be margin proud, but rather we had to find price and turn our assets. Delivering 24% growth in Q2 orders, and as Bob will detail, guiding to margins of 29% or better for the remainder of the year, we are achieving both high margins and high asset turns, which drove our 32% return on equity.

Beyond the Company's specific benefits we are realizing from how we run our business, we appreciate the favorable supply/demand dynamics resulting from the limited stock of existing houses available for sale. National Association of Realtors data for June showed seasonally adjusted existing home sales of 4.2 [Phonetic] million, which is down a staggering 1 million homes from June of last year. As has been well reported, there are millions of existing homeowners who are sitting on low rate mortgages established before the most recent cycle of Fed rate hikes. I recently saw an FHA graph that showed that more than 50% of current mortgage holders have a rate below 4%. I haven't seen any rate forecast that show the country getting back to 4% mortgages anytime soon. So it's likely that existing homes remain in short supply for the foreseeable future. FHA data, along with mortgage rate forecasts, suggest that there may be an extended period during which mortgage rates stay above 5%, which likely prevents an oversupply of existing homes being released into the market. Through the first six months of 2023, we generated $1.3 billion of net income and $1.5 billion of cash flow from operations.

As a result, we increased our cash position by almost $700 million while returning almost $500 million to shareholders through share repurchases and dividends. I think these numbers clearly demonstrate the powerful results our Company is delivering. With the backlog of $8.2 billion worth of homes to be built, improving cycle times and a solid land supply, we are well positioned to deliver even stronger performance over the remainder of 2023.

Now let me turn the call over to Bob for a detailed review of the quarter. Bob?

[Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer at PulteGroup]

Thanks, Ryan, and good morning. Our second quarter numbers speak for themselves in terms of demonstrating the strength of our operations and in turn, overall housing demand. So I'll just dive right in. Our second quarter home sale revenues totaled $4.1 billion, an increase of 8% over last year. Higher revenues for the quarter were driven by a 5% increase in closings to 7,518 homes in combination with a 3% increase in average sales price to $540,000. Our ability to meet stronger demand in the period with available spec inventory allowed us to slightly exceed our prior closing guidance. For the quarter, our mix of closings was comprised of 41% first-time buyers, 34% move-up buyers and 25% active adult buyers.

The breakdown of our business remains in line with our stated targets of 40% first-time, 35% move-up and 25% active adult. In the second quarter of last year, our closing mix was 36% first-time, 38% move-up and 26% active adult. Our net new orders in the second quarter increased 24% over last year to 7,947 homes. The double-digit increase in our orders benefited from the overall strength of market demand in the period along with our ability to capture this demand through a 14% increase in our average community count to 903 neighborhoods. The strength of consumer demand is also evident in our cancellation rate. Cancellations as a percentage of beginning period backlog was 9% in this quarter, which is down almost 350 basis points on a sequential basis from the first quarter.

The 24% increase in our second quarter net new orders reflect an increase in our absorption pace to 2.9 homes per month, up from 2.7 homes per month last year and resulted in higher net new orders across all buyer groups. In the period, net new orders from first-time buyers increased 28% over the prior year to 3,150 homes. Orders for move-up buyers increased 33% to 2,897 homes, and orders from active adult buyers increased 7% to 1,900 homes. The year-over-year increase in first-time buyer orders shows that our homes continue to offer a compelling value and meet the affordability requirements of this buyer group. At the same time, our higher net new orders among move-up and active adult buyers is a positive development and attests to the broadening strength of housing demand. Consistent with our prior guidance, we expect year-over-year community count growth of 5% to 10% in the third and fourth quarters each as compared to the comparable prior year period.

Our backlog at the end of the second quarter was 13,588 homes with a value of $8.2 billion. In the second quarter of last year, our backlog stood at 19,176 homes valued at a record peak of $11.6 billion. We ended the second quarter with a total of 16,740 homes under construction, of which approximately 6,000 homes or 36% were spec. We continue to closely manage spec production as total specs under construction at quarter end were down 11% from last year. Finished specs are also consistent with our historical carrier rate as we ended the quarter with about one finished spec per community. In the second quarter, we started approximately 7,400 homes, which is up 41% compared to the first quarter of this year.

Given the strength of PulteGroup's year-to-date orders and deliveries, coupled with the status of our backlog and production universe, we're establishing a full year 2023 delivery target of 29,500 homes. Of this total, we would expect to deliver between 7,000 homes and 7,400 homes in the third quarter. Our third quarter and full year delivery targets are benefiting from improved home construction cycle times as our operations are realizing meaningful improvements in cycle times on homes they are starting today. Based on the mix of backlog homes we expect to deliver in the third and fourth quarters coupled with the anticipated spec closings, we are protecting in those periods, we expect the average sales price on the third quarter and fourth quarter closings to be approximately $540,000.

Turning to margins. Our reported gross margin in the second quarter was 29.6%. The improvement in our margin as compared to our previous guide was due to improved pricing on spec sales and increased closings from our higher-margin markets each as compared to our prior estimates. In addition, as we discussed on our prior earnings call, our aggregate gross margins are benefiting from our move-up and active adult business where profitability is holding up better. Based on current market dynamics, we expect to maintain this strong margin position throughout the remainder of '23 and expect our gross margin to be in the range of 29.0% to 29.5% in both the third and fourth quarters of this year.

As we experienced in the second quarter, the actual mix of deliveries, both in terms of geography and buyer groups, may impact our reported numbers. Our reported SG&A expense in the second quarter was $315 million or 7.8% of home sale revenues and included a $65 million pretax insurance benefit recorded in the period. In the second quarter of last year, our SG&A expense was $351 million or 9.3% of home sale revenues. Based on our delivery targets for the remainder of the year, we expect SG&A expense to be in the range of 9.0% to 9.5% of home sale revenues in the third quarter and in the range of 8% to 8.5% of home sale revenues in the fourth quarter. Second quarter pretax income generated by our financial services operations increased 16% over last year to $46 million. Pricing conditions remain highly competitive in the mortgage industry, but quarterly earnings benefited from improved profitability within our title and insurance operations.

Capture rate in the second quarter improved to 80% compared with 78% last year. Our reported tax expense in the second quarter was $233 million or an effective tax rate of 24.4%. We expect our tax rate for the remainder of '23 to be 24.5%. On the bottom line, our reported second quarter net income was a record $720 million or $3.21 per share. This was up from last year's reported net income of $652 million or $2.73 per share. Capitalizing on our outstanding financial results and resulting cash flows, we repurchased 3.7 million common shares in the quarter at a cost of $250 million for an average price of $68.31 per share. Through the first six months of '23, we have used $400 million to repurchase 6.4 million shares or 2.8% of our common shares outstanding. We also invested $370 million in land acquisition and $523 million in related development during the quarter.

In total, our land sale in the period was $893 million, which is down from $1.1 billion in the second quarter of last year. On a year-to-date basis, this year, we have invested $1.8 billion in land acquisition development, which keeps us on track to invest between $3.5 billion and $4 billion for the full year. At the end of the second quarter, we had 214,000 lots under control, of which 51% were held via option. The total number of lots we control and the percentage of lots we controlled via option both increased from Q1 of this year as we are working to rebuild our option lot supply after exiting positions in the back half of 2022. We also ended the second quarter with $1.8 billion of cash and a gross debt-to-capital ratio of 17.3%. Given our large cash position, our net debt-to-capital ratio is now below 3%.

Looking briefly at our full year results, on a year-to-date basis, we have generated net income of $1.3 billion, growing the book value of our stock by 12% and returned $472 million to shareholders. At the same time, our financial performance has permitted us to reduce our financial leverage to historic lows, and we have generated a return on equity for the trailing 12 months of 32%.

Thank you, and I'll turn the call back to Ryan for some final comments.

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Thanks, Bob. As we've commented, homebuyer demand in the second quarter was strong and continued to exceed the expectation we had coming into the year. In the overwhelming majority of our markets, local pricing dynamics are stable to positive, and we continue to find opportunities to modestly increase net pricing in many of our communities. Further, at an absorption pace of 2.9 homes per month for the period, sales pace for the second quarter was above last year and generally above our pre-COVID averages. Demand in the second quarter was fairly consistent from month to month. And as you would anticipate, with a 24% increase in orders, we generally saw positive demand across our markets, which has continued into the month of July.

That being said, on a relative basis, there are communities in our Western markets where we are still having to adjust pricing and/or incentives to entice buyers into our communities and ensure we continue to turn our assets. Given the higher interest rate environment, one of the changes we have seen in the slight -- is the slight increase in the number of cash buyers, particularly among our active adult customers. As this buyer group moves into our plans for retirement, they are making the decision to carry less mortgage debt given today's higher rates. At the other end of the price spectrum, final purchase decisions among first-time buyers are also being impacted by higher rates. As data suggests, some first-time buyers are opting to go with less square footage or fewer options and upgrades as buyers need to purchase a home in today's dynamic market environment is why our ability to offer a significant mortgage incentive nationally is such an effective sales tool.

With that said, our first-time buyers remain financially resilient as personal savings remain the primary source of down payment. At the same time, we continue to see millennials are getting self-support from parents if they need help making the move into homeownership. One final note as to buyer sentiment, recent feedback from our first-time buyers indicate that an overwhelming majority bought a new construction Pulte Home rather than an existing home because they felt it offered the best overall value. We've been extremely thoughtful about the home designs we are putting on the ground and the incentives we are offering to help ensure we are offering a compelling value to our customers. These comments in combination with our 28% increase in second quarter orders within the first-time buyer group indicate our efforts are meeting with success.

In closing, I want to thank the entire PulteGroup team for their efforts in delivering such outstanding operating and financial results. Beyond the numbers we show in our financial statements, we do continue to provide exceptional homes and home-buying experiences to our customers.

I will now turn the call back to Jim.

[James P. Zeumer, Vice President, Investor Relations and Corporate Communications at PulteGroup]

Thanks, Ryan. We're now prepared to open the call for questions. So we can get to as many questions as possible during the time remaining. We ask that you limit yourself to one question and one follow-up. Thank you. And I'll now ask Abbie to explain the process and open the call for questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] We will take our first question from John Lovallo with UBS. Your line is open.

[John Lovallo, Analyst at UBS Group]

Good morning, guys. Thank you for taking my questions. The first one is the 29% to 29.5% gross margins that you're expecting in the third quarter and the fourth quarter are clearly well above what we were forecasting. Just curious, are there any unusual items in there that we should think about? It sounds like mix is going to be a benefit. And what I'm really trying to get at is, what do you view as sort of the sustainable rate of margin? Is -- are we there? Is this sustainable? And if not, how quickly would you expect a reversion towards that more normalized rate?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Hey John. Good morning. It's Ryan. Thanks for the question. We're really pleased with how all of our consumer groups have been performing and certainly, how we saw the strength of sign-ups by consumer group in the most recent quarter. The mix of business, I think is very consistent with what you've seen from us over the past 12 months. And as we mentioned in some of our prepared marks, it's totally in line with kind of our stated goals. So really nothing there that I would highlight of note. And then in terms of kind of the forward kind of margin profile, we've given both a guide for Q3 and Q4, which I think what you want to read into that is that's where we see the business for the balance of the year. We're clearly not giving anything kind of beyond that at this point.

[John Lovallo, Analyst at UBS Group]

Okay. That's helpful. And maybe just one more question on margin. I think last quarter, you guys talked about the spread between active adult, move-up and entry-level sort of reverting back to historical norms. And I think that was sort of the quick move-in portion kind of going back a little bit on the lower end. Given where housing demand is today and the desire for many folks to move in quickly, are you expecting that sort of quick move-in portion to actually trend higher again?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah, John, we've actually seen that be pretty stable in terms of the number of orders that are coming from our spec production, which is part of the reason we spent quite a bit of time talking about that today. We like the investment community to understand that the way we're running our production machine is very specific and intentional by buyer group. Specifically, to your point with the first-time buyer group, that business is predominantly a spec business for us. The margins are lower to your point, which is a reversion to what we saw in pre-COVID kind of times that our first-time business was our lowest margin. We typically get a couple of hundred basis points higher out of our move-up and family business. And then our highest margins will come out of our Del Webb active adult communities. We're definitely seeing that today. That's the other point that I would really highlight for you in kind of the guide that we've given for margins for the balance of the year, a big part of our business or a big chunk of our business is from our first-time entry-level business, which is all incorporated into that guide.

[John Lovallo, Analyst at UBS Group]

Got it. Thank you, guys.

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Thank you, John.

[Operator]

We'll take our next question from Michael Rehaut with JPMorgan. Your line is open.

[Michael Rehaut, Analyst at JPMorgan Chase & Co.]

Great. Thanks so much. I guess, first question, just kind of asking the gross margins from a different perspective, and then I have a question on demand. When we think about the more challenged backdrop that the industry faced in the back half of '22, for builders that were more spec-oriented, you saw the more immediate impact of that higher promotional, not promotional, but incentives and pricing adjustments that many builders made. You saw that run through the income statement much more immediately. We were estimating for build-to-order builders that, that would have a more of a lag effect.

So can you kind of walk through the dynamics of how you've been able to maintain since the fourth quarter? You had some pullback from 2Q '22, but nothing to the extent of the more spec-oriented, perhaps first-time heavy builders. Perhaps the product mix is a factor, but how that higher promotional environment has impacted the financials and if there's offsets to that, that have allowed a much more modest decline and as well as for a build-to-order builder, a pretty nice element of stability going into the back half. So sorry for the long-winded, but just trying to understand perhaps what are the offsets to the higher incentive backdrop in the back half and the pluses and minuses there.

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah, Mike, I'll let Bob maybe give you a little more detail on kind of the discounts in the quarter, which we -- actually, we've seen kind of come down just a tab sequentially. So in terms of the discounts, we are effectively using -- we are effectively using our discount money toward mortgage rate buy-downs. It's particularly effective with that first-time buyer. I think the reports and some of the data that's out there on mortgage rate environment, which suggests the sweet spot for most buyers is somewhere around 5.5%. So for us, it's really been a reallocation of the incentive dollars away from things that buyers may have previously used those incentives toward, we're finding a lot of those incentives are being used in the mortgage rate environment.

[Michael Rehaut, Analyst at JPMorgan Chase & Co.]

And if, Bob, you can kind of weigh in on any of the pluses and minuses there? I mean it would seem that to the extent that you had any impact from the higher discounting or price adjustment, it would be in the back half of your full-year guide. And so just making sure there's no other "shoe to drop" here or we've kind of worked through some of the more challenging backdrop there. I guess, just -- yeah.

[Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer at PulteGroup]

Sorry. Yeah, there's no shoe, right? We have provided a guide. And so if you're focused on sales activity from the back half of '22, it has either closed or in somewhat limited circumstances will close over the next three months to six months. So it's in our P&L already or reflected in the guide that we have given. The relativity of our margins to the space, if you think about it, our margins didn't go up quite as much in '21 and into the beginning half of '22. And part of the reason for that was we didn't have as much spec production as others did. And so they were pricing product at the time it was completed, getting full value for it, whereas we were contracting often times three months and six months and nine months ahead of time. And so some of the price appreciation that went on in the market during the time we were constructing the home, we didn't feel the full benefit of that in our margin profile then.

And so you saw kind of the really spec-heavy builders capturing every dollar of value. Now against the next -- if you think about the back half of '23 and -- sorry, of '22 and into '23, they were once again pricing at market. They had the full cost of a heavy lumber load, honestly, and an inflationary environment influencing their cost structure and prices weren't running quite as quickly, particularly in that entry-level. So I think their reversion reflected the underwriting of land that they bought and the timing of their construction. Ours, again, for that spec business, we are fully engaged now on that. Again, that is -- you're seeing that in our margins today. It's always worth it to highlight we typically play at a little bit higher price point in that entry-level business, a little bit closer in. And so it's not quite apples-to-apples with some of our competitive set. So I don't want to sound defensive, but there's nothing really unique in this quarter's margin or we would have called it out. There's nothing unique that's coming in the next couple of quarters and the margin is going to stay pretty strong.

[Operator]

We'll take our next question from Carl Reichardt with BTIG. Your line is open.

[Carl Reichardt, Analyst at BTIG Research]

Thanks. Good morning, guys. Ryan, you mentioned that two-thirds of your divisions had raised prices over the course of the quarter. I just -- could you expand on that a little bit? Does that mean net average order prices were up? And then can you talk about how that mix and price change, was that reduction in incentives, increasing base prices, options upgrades, lot premium, just want to get a little more color on the price increase activity you're actually putting into the mix right now?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah, Carl, two things there. We did see price increases in some of our communities and two-thirds of the division. So it wasn't every division, it wasn't every single community. But we are seeing pockets of strength where we're able to, to your question, I'll answer being affirmative, it is a net increase in net pricing and it's coming through all of the options that you listed. So there are modest increases. And those are -- I would note that those are off of what we would consider adjusted kind of current cycle floor pricing. So we feel like we've seen a bit of strengthening in the overall sales environment, which allowed us to modestly increase pricing.

[Carl Reichardt, Analyst at BTIG Research]

Okay, thank you, Ryan. And then to drill down on the first-time buyer Centex spec business, what kind of backlog conversion rate do you sort of target in that business specifically? And then can you mention maybe a little bit more color on cycle time improvement, where you have been, where you are now and where you think you can go with sort of more normalized supply chain over the course of the next couple of three [Phonetic] quarters? Thanks.

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah, Carl, I don't have a specific number for you on backlog conversion of that specific buyer group. We could follow up with you offline on that. The things that we're really monitoring there, we're running a -- with that spec business, specifically, we're running a predictable and consistent monthly start rate. And we've worked to match that start rate to what we believe our monthly sales rate has been, is and will be. And so it's part of what you heard me talk about in my prepared remarks around getting our start rate matched to the sales rate, which we think we've effectively done. And then the second question...

[Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer at PulteGroup]

Cycle times.

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Cycle times, Carl, yeah, we're starting to see those come down very much in line with our anticipated improvements throughout the year. It's not been easy. It's been a lot of hard work by our procurement teams, our construction managers and certainly our trade partners that have helped us to reduce those cycle times. So we're seeing at least a couple of weeks come out of the cycle times and certainly starts that are going in the ground today, we'd expect to maybe even get a little bit more by the time that those deliver. That's been a big contributor to our success, not only in Q2, but to the updated and increased guide for full year closings that we've provided today.

[Carl Reichardt, Analyst at BTIG Research]

Thanks, Ryan.

[Operator]

We'll take our next question from Stephen Kim with Evercore ISI. Your line is open.

[Stephen Kim, Analyst at Evercore ISI]

Great. Thanks very much, guys. Great job. Beats go on. Nice to see. I guess I had a question about -- just to touch on the volume side of the story. Can you give us a sense for what kind of rate of growth in community count, the current level of land spend that you're allocating here? What kind of growth in community count can that support? It's a general question looking out not specific to 3Q necessarily. And can you also -- regarding volume, can you give us a sense for what the absorption rates? What the dispersion looks like across your three major segments?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah, Stephen. I -- I'm reluctant to answer your first question because we haven't provided any view beyond the third and fourth quarters. And so I'm going to pass on that one. And then in terms of the absorption paces, we haven't provided that level of detail. What I can tell you is that in the current operating environment, the quickest growing part of the business is move-up right now, interestingly enough. So absorptions there grew faster. We had absorption growth across all three demographics. And so we had highlighted 28% growth in the first-time, 33% in the move-up and 7% in the active adult. But on a per store basis, all of them were up. The richest contributor to that actually was the move-up space.

[Operator]

And we'll take our next question from Matthew Bouley with Barclays. Your line is open.

[Matthew Bouley, Analyst at Barclays]

Hey, good morning, everyone. Thank you for taking the questions. I guess I'll just go back to the gross margin side. Maybe just to put a finer point on it. I think I heard you say that the, I guess, mix of sort of incentivized build-to-order product from end of '22 sales has largely worked through at this point. So what exactly would be, I guess, a worse headwind in the gross margin in the third quarter relative to the second quarter? Is it entirely mix of entry-level -- or excuse me, first-time buyer spec or what exactly is the greater headwind to cause that sequential step-down in margins? Thank you.

[Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer at PulteGroup]

Yeah, it's a couple of things. One, we are in an inflationary environment. Our land is more expensive, labor is more expensive, materials is more expensive. You can see lumbers trending up, given the faster cycle times, some of that is going to come into our production in the back half of the year. And then certainly, the mix on a geographic basis matters. And so we'll see some contributions from some margin communities that we've had to adjust as we've gone through the year. It's normal. So I know it's a non-answer, but mix always matters in that conversation.

[Matthew Bouley, Analyst at Barclays]

Got it. Okay, that's helpful. Thank you for that, Bob. And then, I guess, secondly, just back on that last point around the improvement in move-up, obviously, looking at the second quarter of last year, I mean, the comp is a little bit easier, but clearly, a nice step-up there. Any finer detail? I mean you gave a lot of color at the top around just what's kind of locking in existing home sellers at this point, but you are seeing this nice tick-up in your move-up business. So kind of what do you think is sort of driving that? And do you expect it to continue relative to entry-level? Thank you.

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah, Matthew, I think that's the biggest driver is there's just such a shortage of supply and fewer options for that move-up buyer to choose from. And so as a percentage of the available choices that are out there, new homes have become a much bigger piece of that. And I think you're seeing our move-up business benefit from that. I would share that we've got great communities. We've got excellent designs. The quality of the homes that we're building, I think are really speaking to that move-up buyer that's looking to add more space or get a newer, more energy-efficient, more technological advanced homes.

So I think those things are working to our advantage as well. And in this higher interest rate environment, our ability to offer our national mortgage rate incentive program to the move-up buyer is meaningful as well. That's a tool that we're able to effectively leverage that the resale market is not at the same degree. So I think a number of factors there with the headline being there's just less inventory out there.

[Matthew Bouley, Analyst at Barclays]

Got it. Thanks, Ryan. Thanks, Bob. Good luck, guys.

[Operator]

And we'll take our next question from Alan Ratner with Zelman & Associates. Your line is open.

[Alan Ratner, Analyst at Zelman & Associates]

Hey guys, good morning.

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Hey Alan.

[Alan Ratner, Analyst at Zelman & Associates]

Thanks for taking the questions. First, I'd love to drill in a little bit on the topic from Steve's question about land spend. If you look at your closing guide, it's gone up about 20% for this year since the start of the year. And your land spend guide hasn't really changed, still kind of in that $3.5 billion to $4 billion range. And I know that's a big range. So maybe the answer is you're coming in closer to the high end versus the low end. But I'm just curious, as you think about the next few years, I mean, $3.5 billion to $4 billion probably is pretty close to a replacement level of land, maybe a bit below. But as you think about the land market today and what you're seeing there, is that an area where you feel like at some point, you're going to have to put pedal to the metal and get more aggressive on land spend to drive future growth? And I guess, alternatively, is there risk of a similar dynamic unfolding from a few years ago, where if demand stays at these levels and you don't see the opportunities in the land market, do you start to limit sales again and do things to kind of keep a lid on that to prevent gap-outs?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah, Alan, thanks for the question. It's Ryan. A couple of things. Maybe I'd start with there. For starters, we actually did increase our projected land spend number about a quarter ago. So when we went into the year, I think we were right around $3.2 billion to $3.3 billion. We've moved that up with the high end in as high as $4 billion, certainly down from last year, and that was intentional. When we look at our controlled lot supply, we've got 215,000 lots plus or minus under control. Over half of those are controlled via options. So we feel pretty good about kind of what's in the pipeline and -- what's in the pipeline and what that will mean for the business.

Market share and growth are certainly part of our story and part of the things that we're trying to do with our strategy. To your question, Alan, around what are we seeing in the land market, I'd tell you that we're able to get deals done. It is a competitive market, and there certainly isn't anything that's being liquidated or fire-sold, but we are -- we are able to -- our land teams are doing a nice job finding good opportunities, and we've stayed consistent with our disciplined underwriting process, which has yielded the types of results and quarters that we've delivered over the last several years. So our plan is to stick with that to continue to stay very balanced and disciplined and running a good business and being really laser-focused on picking our spots with where we're investing more capital.

So to this point, I don't think we need to do anything along the lines of put the pedal to the metal. I think we're going to continue to be foot on the gas, but we're going to continue to focus on monetizing the 214,000 lots we have which -- we'll see what the market holds, but I think that will give us an opportunity to continue to run a very nice business that will grow the market.

[Alan Ratner, Analyst at Zelman & Associates]

Got it. And I really appreciate that. That's helpful. Second, I do have a question about Florida. You guys are pretty as large in Florida, and there's been a lot written of late about the issues with property insurance in the state and some pretty staggering increases there. And I know some of that can be certainly sensationalized. But I'm curious, a, are you seeing that become more of a concern among homeowners or potential homebuyers today in the state? And b, are you aware of anything that the industry might be doing to kind of deal with this issue because it seems like it could have some long-term ramifications?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah, Alan. We haven't seen it become a problem for buyers to make the decision to move into our Florida communities. And in fact, our Florida business has been one of our strongest best-performing regions. And we've got a very diversified business in Florida that ranges from entry-level to a heavy move-up business in Tampa and Orlando. And then when you get into South Florida, our active adult consumer and second-home buyers are very prevalent. We've got great businesses there. Part of our financial services operation, we have an insurance company. We aggregate and we talk about the numbers and the business that they generate as part of our overall financial service portfolio.

But we find that our captive insurance agency does a nice job helping to solve some of those problems. Florida is one of those places, Alan. And I think over the years, there's been an ebb and a flow of insurers that are in the market, they leave, they come back. Having lived in Florida personally for a long time, I saw that happened over the last 15 years with my own insurance companies, but they wouldn't renew, they'd leave for a few years and then inevitably, they come back and they want the business again. So we'll keep an eye on it. California is the other state that there's been a lot in the news media recently about a lot of insurance companies that have left the state due to large losses.

So certainly, things that we want to keep an eye on. I would highlight that there are -- there is a view that new homes performed better. They're in -- from a flood standpoint, they're up to spec out of the floodplain, higher than homes that have been developed in recent past. The drainage systems are more prevalent. They're built to current code. You've got new electrical, they're more energy-efficient. So there's an argument to say there's potentially less risk with newer constructed homes.

[Alan Ratner, Analyst at Zelman & Associates]

Thanks for the thoughts. Appreciate it.

[Operator]

We will take our next question from Mike Dahl with RBC Capital Markets. Your line is open.

[Michael Dahl, Analyst at RBC Capital Markets]

Good morning. Thanks for taking my questions. One more follow-up on the land side. Ryan, you mentioned you're not necessarily seeing like liquidation opportunities. The market is competitive. There were some thoughts or hopes that some of the regional banking fallout might shake some land to lose. Maybe you can comment on that? But then also in terms of successes that your land teams are having, given the competition out there, has it been more that you're getting to your underwriting box because your current pace and price has improved or has it been that buyers have also adjusted downward? I'm sure there's some land, but kind of on average, what do you think is helping more at this point? Is it that buyers -- that -- sorry, that sellers have actually adjusted or is it more that at current pace and price, more things hit the box?

[Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer at PulteGroup]

Yeah. As always, as Ryan said, land is not on sale. We have not seen opportunities on large-scale things for banks or private market transactions of any substance. And in terms of the current activity levels, I think it's a combination of both and it probably depends on where you are in the country. There are parts of the country where we have seen some willingness to negotiate on land because the market is a little stickier than it was 18 months or 24 months ago. But by and large, no, the market is pretty firm. And we are -- we have not changed our underwriting screen at all. Based on activity levels that we see and can project, we're able to make them underwrite, but they're not on sale.

[Michael Dahl, Analyst at RBC Capital Markets]

Okay. That makes sense, Bob. And then just as a follow-up, maybe I'll broaden that out slightly. When we think about some of these dynamics, could you just touch on more specifically your sticks and bricks cost, both in the quarter? How we should be thinking about that in the second half? I know you alluded to lumber, some lumber increases maybe creeping in, but maybe any more quantification of sticks and bricks? And then on the lot side, how should we be thinking about inflationary dynamics in your land cost here over the next handful of quarters?

[Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer at PulteGroup]

Yeah. I think on the land side, and we always answer it this way, we don't have any ramp-up or ramp-down in our land portfolio. And so the normal inflationary aspect we see comes if we buy land in three-year increments. We develop it. We then build on it and cost it off. And so we've seen a pretty steady increase. I wouldn't want to put a particular percentage on it because it varies on when we are in the -- if you think over the last five years, the way pricing has moved. On the vertical side and even on the horizontal development side, so get outside of the acquisition side of the dirt, we came into the year projecting, call it, 12% to 14% increase in costs. We've been able to dial that down. We highlighted on the last call, we were 8% to 9%.

We're still there. So our total house cost is up about that year-over-year, and that's going to be inclusive of lumber save earlier in the year, it started to pick back up. Materials and labor is the real driver of that. We've been able to work with our trades to try and find efficiencies. Ryan talked about it. We want to be a production consistent cadence of starts, consistent -- consistency in the production cycle that makes it easier for the trades. And now that the supply chain is healthier, we've been able to reduce some of the cost increases through efficiency, not on the purchasing side for materials because, again, that inflationary aspect is there. And when you kind of wash all that together, we're seeing costs up, like I said, 8% to 9%.

[Michael Dahl, Analyst at RBC Capital Markets]

Very helpful. Thanks, Bob.

[Operator]

We'll take our next question from Truman Patterson with Wolfe Research. Your line is open.

[Truman Patterson, Analyst at Wolfe Research]

Hey, good morning, everyone. Thanks for taking my questions. First, you all generated almost $1.5 billion in operating cash flow in the first half of the year. Clearly, you've been rebuilding your spec pipeline, you're kind of cutting back on some land investment, but you should still generate some pretty healthy net income in the back half of the year. I'm just really hoping you can run us through some of the pluses and minuses on your full year '23 operating cash flow potential?

[Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer at PulteGroup]

Yeah. We haven't given the guide on that, Truman, but you're exactly right. I mean, if you think about it, we generated $1.5 billion through the first six months of the year. And if you put, I think the closing volumes and the cost estimates for margins and for SG&A, the operating margin on that forward business at a sales price of $540,000 is pretty rich. And certainly, inventory levels can -- will change. But we think actually that we have an opportunity to reduce our investment in-house over the balance of the year because of the improvement in cycle times. So to your point, we're going to generate a bunch of cash in the back half of the year.

[Truman Patterson, Analyst at Wolfe Research]

Fair enough. Fair enough. And then just wanted to follow up on a prior question. But given the healthy demand rebound so far, it looks like your absorption levels are at pretty healthy levels, a little bit above what we'll just call kind of historical 2Q averages over the past decade, if you will. Could you just run through whether there were any geographies or consumer segment where you're actually perhaps curbing absorptions again as of the second quarter?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah, Truman, we're -- look, we're always balancing our production machine with the amount of developed land that we have in front of us as well as what our trade capacity is. But other than a unique community here or there that is way oversubscribed, we're not in the type of allocation restriction mode that we saw maybe during COVID.

[Truman Patterson, Analyst at Wolfe Research]

Right. All right, thank you.

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Thanks, Truman.

[Operator]

We will take our next question from Anthony Pettinari with Citigroup. Your line is open.

[Asher Sohnen, Analyst at Smith Barney Citigroup]

Hi, this is Asher Sohnen on for Anthony. Thanks for taking my question. I just wanted to ask relative to sort of the sequential price growth on ASP in net orders you saw in the quarter. Was that pretty much like-for-like Or maybe there might have been some mix impact? And then sort of more broadly, would you say pricing power has gotten stronger at all versus where you were seeing it on your last call in April?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah, I think we highlighted some of that in our prepared remarks, and there was a question earlier, we have in certain geographies and certain communities have been able to modestly increase prices from what was arguably a pricing floor after we made adjustments late last year. So part of that is related to an effective use of the mortgage incentive, which we've used to help solve some affordability challenges. But part of that is there's a real shortage of inventory and the market is allowing us to make some modest price increases. So all of that's kind of reflected in the results that we had for Q2 as well as the guide that we've given for the balance of this year.

[Asher Sohnen, Analyst at Smith Barney Citigroup]

Great. Thanks. And then what are your thoughts on kind of the sustainability of progress you've made on cycle times and costs kind of heading into '24 as housing activity is heating back up. Are you -- do you anticipate maybe pressure on cycle times?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah. We actually believe that we still got opportunity to continue to do more. And Bob highlighted it in the question that he just answered a minute ago for Truman as it relates to cash, as we feel that we've got opportunity to continue to reduce cycle time, not only in the balance of this year, but well into '24. It's predominantly coming from a healing of the supply chain and removing a lot of the inefficiencies that crept in, given -- but we had a broken supply chain and trades were incredibly inefficient. So we're making progress. We're pleased with it, but we're probably nowhere near where we'd like to be. Our target still remains getting back to pre-COVID cycle times, which is where I think the Company can operate.

[Asher Sohnen, Analyst at Smith Barney Citigroup]

Great. Thank you. I'll turn it over.

[Operator]

We'll take our next question from Susan Maklari with Goldman Sachs. Your line is open.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Thank you. Good morning, everyone.

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Hi, Sue.

[Susan Maklari, Analyst at The Goldman Sachs Group]

My first question is thinking a bit about the supply chain and the rise that we're seeing generally in starts within single-family, how do you think about the industry's ability to continue to improve and perhaps sustain some of this as overall demand continues to move higher? And are there any areas specifically that you're more focused on or where we could perhaps see some issues bubble up again?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah, Sue, the supply chain -- supply chain is mostly healthy. There are certainly pockets of places where we're continuing to focus. But I think labor, while tight, it's generally available, and we're making -- we're using it efficiently, and it's working. Supply chain, we feel pretty good about. The one area that I'd highlight is electrical components, specifically around switchgear that goes into multifamily buildings, so townhomes and condos. Those are more unique and sometimes customized products that are difficult to find in the cycle. And the lead time to get those things ordered has continued to extend. The other one would be transformers. So transformers that go into the horizontal land development side of things those are also in short supply. So a couple of things on the electrical component side. Other than that, I would tell you that labor and supply chain are operating pretty effectively.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Okay. And then thinking about the business longer-term, as your ROE starts to come off the peak that we've seen more recently, but do you think about the longer-term operating dynamics on the ground today and perhaps how they've changed relative to where we were coming into the pandemic? Are there things that you think you can hold on to, so that the ROE can perhaps stabilize a touch higher than that 20% or low 20% range that you were in before COVID?

[Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer at PulteGroup]

Yeah, Susan, I'll try. It's Bob. Yeah, I think we are seeking to be efficient with our capital. We've got share repurchase activity, we highlighted, we've got $400 million that we've done this year already, but we're creating a lot of equity through the earnings of the business. So I think the modeling that you're trying to do doesn't really factor into our decision-making, right? We're making investment decisions on ability to generate return over time. Do I think that there's an opportunity to do better than we've done historically? Yeah, of course. We can be more efficient with our balance sheet. So we highlighted earlier this year that we had $1 billion of extra capital tied up in-house. We've long talked about trying to increase the optionality of our land book, which would be an opportunity for us as well. We're at 50% today -- 51%, sorry. So I think if we can make progress on those fronts, we have an opportunity to continue to generate really strong returns through time.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Okay. Thank you for the color.

[Operator]

We will take our next question from Joe Ahlersmeyer with Deutsche Bank. Your line is open.

[Joseph Ahlersmeyer, Analyst at Deutsche Bank Aktiengesellschaft]

Thanks. Good morning, everybody.

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Good morning.

[Joseph Ahlersmeyer, Analyst at Deutsche Bank Aktiengesellschaft]

Just to follow up on that last question, perhaps if you could just talk if you've got in your mind, an upper limit on the idle cash that you might carry on your balance sheet going forward? And then also just maybe talk about your appetite for increasing leverage just given the stability in your business?

[Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer at PulteGroup]

Yeah. I don't know that there's -- I wouldn't want to put guardrails around anything we do. Yeah, we've been pretty clear and it's 10-plus years now in terms of how we're going to allocate our capital. We've also been, I think pretty clear that we don't take a point in time assessment of that. We have a business plan and a model that we've created, and we iterate through time that we use to make the decisions on how to invest that capital and just a refresher in the business first and high return. We want to pay a dividend. We use excess capital to buy back stock. We'll manage that against leverage. We've reduced the expected leverage in the business. If you think back a decade ago, we said between 30% and 40% gross debt to cap, we adjusted that to 20% to 30%. We're under that today. I think you could see us do lots of things. And I wouldn't want to say, well, if we have more than X dollars of cash, we're going to do something different. We'll continue down the same path. We spend time with the Board working through the different capital decisions we make. And I think that's exactly what will be going forward.

[Joseph Ahlersmeyer, Analyst at Deutsche Bank Aktiengesellschaft]

Got it. Thanks, Bob. And then just maybe if you could talk about the improvement relative to pre-pandemic in your gross margins and your returns on inventory, if there's a number you could quantify around production improvements and even more specifically, if the actions you've taken getting back into the off-site construction space, if there's anything to call out there? And maybe just an update on how ICG is doing?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah. Let me take the ICG piece. We're really pleased with how that business is operating. We have two factories up and operational that are doing well for us, and we're very pleased with what we're getting there. We've talked about once we get some additional factories up and open and it's covering a bigger percentage of the business, we'll share more detail about the cycle time gains, the cost savings that we're seeing from that business, but we're really pleased with what that team is doing. In terms of the first part of your question, I didn't -- you got that one? Okay.

[Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer at PulteGroup]

It's interesting. I would tell you, we're -- you're asking if there are productivity gains. If I understood the question correctly, you're asking if there are productivity gains that we've gained by virtue of the pandemic that we might be able to save post-pandemic. I would tell you exactly the opposite is true. We have a less efficient business, and it shows up in our cycle times, right? And the supply chain dynamics caused us to lose production efficiency. And you heard Ryan say it a minute ago, we think we've got opportunity to improve from here on that.

[Joseph Ahlersmeyer, Analyst at Deutsche Bank Aktiengesellschaft]

That's great. I appreciate that. Thanks, guys. Good luck.

[Operator]

We will take our next question from Alex Barron with Housing Research Center. Your line is open.

[Alex Barron, Analyst at Housing Research Center]

Yeah, thanks, guys. Yeah, just to ask again on the ICG. Is there any plans to roll this out to more markets near term?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah, Alex, when we made our first acquisition around our off-site, our off-site manufacturing efforts, we said we believe we can have up to about eight plants that will impact about 70% of our overall production volume. That's still the path that we're on. We're -- we haven't announced any new openings, but the strategic direction of eight plants over time and 70% of the business still holds firm.

[Alex Barron, Analyst at Housing Research Center]

Got it. And I'm not sure if I missed it, but did you guys give your land position in owned and option?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

I gave the total control, but I give you the owned, the owned is 104,000 lots, the option is 110,000 lots for a total control of 214,000 lots.

[Alex Barron, Analyst at Housing Research Center]

Got it. And in terms of direction, obviously, a lot of builders, I guess, yourselves included kind of slowed down acquisition of lots at the end of last year, but are you guys seeing the next few months as something that will reaccelerate or just still kind of hold near current levels?

[Ryan R. Marshall, President and Chief Executive Officer at PulteGroup]

Yeah, Alex, we gave -- we kind of gave our updated land guide, which is at $4 billion, which is a lot of money. It's not an insignificant investment in our overall land portfolio. Roughly half of that is new acquisition. The other half of that spend is on kind of development on lots we already own. 214,000 lots gives us certainly ample runway and supply for our go-forward business. And going back to some of the answers that I gave on similar questions earlier, we're really confident in our land acquisitions team to continue to find good spots, negotiate what we believe are fair in market prices that will continue to help us generate industry-leading returns and gross margins and help us continue to grow the business.

[Operator]

And we'll take our next question from Rafe Jadrosich with Bank of America. Your line is open.

[Rafe Jadrosich, Analyst at Bank of America]

Hi, good morning. Thanks for taking my question. Can you just talk about the sort of specific drivers of the quarter-over-quarter step-up in gross margin in the second quarter? And then what drove upside relative to your guidance from a quarter ago?

[Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer at PulteGroup]

You're meaning sequentially, right?

[Rafe Jadrosich, Analyst at Bank of America]

Correct.

[Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer at PulteGroup]

Yeah. So we had highlighted that a couple of things influence it relative to our guide. One is we got better pricing on specs than we were projecting. And the second was the mix of communities that we got closings from looked a little bit different than we thought. So you can see from the sales environment that the market was pretty strong. We were able to translate that in the specs that we saw. Really, those are the two primary drivers, that's why we called it out [Indecipherable].

[Rafe Jadrosich, Analyst at Bank of America]

Got it. Okay. That's helpful. And then you've spoken a little bit about the underwriting strategy going forward. Like how should we think about your option mix going forward? And like what's the longer-term target relative to the current 51%?

[Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer at PulteGroup]

Yeah, we've been pretty clear. We had targeted 50% a year or so ago, we increased that to a target of 70%. We have gotten to a point, I think at the richest, we were at 56%. We walked from about 60,000 lots over the back half of 2022, which pulled us back down closer to 50%, now we're starting to rebuild again, very large. We had highlighted, we've been able to increase that in this most recent quarter. And again, the target still remains to try to be about 70%.

[Rafe Jadrosich, Analyst at Bank of America]

Great. Thank you.

[Operator]

And ladies and gentlemen, that is all the time we have for questions today. And I will now turn the call back to Mr. Jim Zeumer for closing remarks.

[James P. Zeumer, Vice President, Investor Relations and Corporate Communications at PulteGroup]

I appreciate everybody joining us on the call today. We're around and available to the remainder of the day if you've got any questions. Otherwise, we'll look forward to speaking with you on our next quarterly call. Thank you.

[Operator]

[Operator Closing Remarks]