PulteGroup, Inc. (PHM) Earnings

Management highlights

- **Strategic Transition to Build-to-Order (BTO) * The company is successfully executing its planned transition away from elevated spec home inventory (adopted during COVID supply chain disruptions) back to a majority BTO model. BTO orders reached 45% of total Q2 orders, up 500 basis points YoY for the first half of 2026, on track to hit the long-term target of 60% BTO / 40% spec. BTO transition is on track to hit the 60% target sometime in 2027. * Spec inventory has been reduced dramatically: finished spec inventory fell to 1.3 homes per community at the end of Q2, down from 1.9 per community at the end of Q2 2025. Total spec homes in production fell to 6,600 (44% of total homes in production), down ~1,000 spec homes (13% YoY). Management considers the current 44% spec level to be the right target. * Build cycles have recovered to pre-COVID levels, averaging 100 working days or fewer across most markets. - **Overall Q2 2026 Operating Performance * Net new orders increased 6% YoY to 7,536 homes, with order value up 5% YoY to $4.1 billion. Average community count grew 8% YoY to 1,074, partially offset by a 1% YoY decline in absorption pace to 2.3 homes per month. * Home sale revenues totaled $3.8 billion, down from $4.3 billion YoY, driven by an 8% YoY drop in closings to 6,997 homes and a 3% YoY drop in average selling price (ASP) to $544,000. The ASP decline was driven by lower closings in higher-priced Northeast and West regions. * Home building gross margin came in at 25% for the quarter, driven by favorable higher-margin Florida closing mix, lower-than-expected discounts, and lower build costs. Q2 per-square-foot build costs fell 5% YoY and 1% sequentially to just under $75 per square foot. * Ending backlog totaled 10,966 homes valued at $6.8 billion at the end of Q2. * The Q2 cancellation rate held steady at 11% of starting backlog, flat YoY. * Net income totaled $472 million ($2.48 diluted per share), down from $608 million ($3.03 per share) YoY, primarily due to lower revenue and lower closings. Diluted shares outstanding fell 5% YoY to 191 million from 196 million, driven by consistent share repurchases. - **Capital and Land Strategy * The company repurchased 3.1 million common shares for $373 million in Q2. It ended the quarter with $1.4 billion in cash and a debt-to-capital ratio of 12.3%. * Q2 land acquisition and development spend totaled $1.4 billion, bringing year-to-date spend to $2.7 billion, on track to hit the full-year 2026 target of ~$5.4 billion. The company ended Q2 with 228,000 controlled lots, 55% of which are controlled via option contracts to limit downside risk. * Management maintains a disciplined land underwriting process, focusing on risk-adjusted returns for all land and M&A investments.

Guidance

- **Full Year 2026 Guidance Maintenance**: All full-year 2026 guidance was reaffirmed by management, with no upward or downward revisions to prior guidance ranges. - **Closings Guidance**: Full year 2026 closings are maintained at a range of 28,500 to 29,000 homes. Q3 2026 closings are expected to be between 7,000 and 7,400 homes. The larger step-up in closings projected for Q4 2026 was planned at the start of the year, and is driven by BTO homes sold as dirt that will close in Q4 given the 100-day build cycle. - **ASP Guidance**: Q3 and Q4 2026 average selling price is expected to be in the range of $550,000 to $560,000. - **Gross Margin Guidance**: Full year 2026 home building gross margin is maintained at a range of 24.5% to 25.0%. Q3 2026 gross margin is also expected to fall in the 24.5% to 25.0% range, with the sequential decline from Q2 driven by a return to a more normal geographic closing mix after Q2's favorable mix. - **SG&A Guidance**: Full year 2026 SG&A as a percentage of home sale revenues is maintained at a range of 9.5% to 9.7%. Management confirmed the company is on track to hit this target despite first-half deleverage from lower closings and lower ASP, driven by higher volume and higher ASP in the second half of the year. - **Community Count Growth Guidance**: Full year 2026 year-over-year community count growth for the remaining two quarters is maintained at 3% to 5%. Higher Q2 growth was driven by slower-than-expected community closing timelines, not a change in the full year plan. - **2026 Operating Cash Flow Guidance**: Full year 2026 operating cash flow is maintained at approximately $1 billion, with the second half driven by a cash tailwind from higher closings and inventory reduction. - **Effective Tax Rate Guidance**: Full year 2026 effective tax rate is maintained at 24.5%.

Segment performance

PulteGroup reports financial performance broken out by home buyer segment (the company's primary product/operating segmentation), with the following results for Q2 2026: - **First-time buyers**: Represented 39% of Q2 net new orders, up 5% year-over-year (YoY), and 41% of Q2 closings. The YoY closing mix for this segment increased 2 percentage points. - **Move-up buyers**: Represented 36% of Q2 net new orders, up 4% YoY, and 37% of Q2 closings. The YoY closing mix for this segment decreased 4 percentage points. - **Active adult buyers**: Represented 25% of Q2 net new orders, up 12% YoY, and 22% of Q2 closings. The YoY closing mix for this segment increased 2 percentage points. Geographic segment revenue/order performance: - **Florida**: Q2 net new orders increased 19% YoY, with strong consistent performance and a higher-margin closing mix that boosted Q2 gross margins. - **Midwest (Columbus, Cleveland, Chicago)**: Strong order demand with positive YoY order growth. - **Southeast (Greenville, Coastal Carolina)**: Strong positive order demand with YoY growth. - **Texas (Dallas, Houston)**: Early signs of improvement, with positive YoY order growth after periods of soft demand. - **West (California, Pacific Northwest)**: The only region with YoY order decline; core demand remains soft, requiring aggressive competition for sales. Financial Services segment performance: - Pre-tax income of $37 million in Q2 2026, down from $43 million in Q2 2025. The decrease was driven by lower overall home closing volumes in the home building segment. The Q2 mortgage capture rate held steady at 85%, flat YoY.

Risks & headwinds

- Macroeconomic and geopolitical uncertainty: Consumer demand and order activity continues to experience week-to-week variability driven by global tensions, shifting interest rates, inflation, and swings in consumer confidence, which create uncertainty for future sales performance. - Commodity cost risk: Rising lumber prices and sustained high oil prices create upward pressure on build costs and land development costs (as oil impacts asphalt, underground piping, and diesel fuel for construction equipment). The prior YoY decline in build costs is not expected to continue for the remainder of the year, as the tailwind from falling lumber prices subsides. - Competitive market pressures: Demand remains soft in core West markets, requiring aggressive competition to drive sales. Incentive levels are expected to remain elevated for the foreseeable future due to ongoing affordability challenges for consumers. - M&A execution and valuation risk: Most potential tuck-in M&A transactions fail to meet the company's strict risk-adjusted return underwriting standards, particularly when sellers seek premiums for intangible assets that do not add incremental value to PulteGroup's existing operating platform. - Integration risk: Large scale M&A and business integration carries inherent risk of cultural and operational disruption, which is why the company prefers small tuck-in transactions focused on land asset acquisition.

Analyst Q&A

• Q: The company noted early demand stabilization across markets; can you share which geographies are seeing this stabilization? /

  A: Four of five reporting regions saw positive YoY order growth, with the West remaining the softest. Strong stabilization and growth is seen across Midwest markets, Southeastern markets including Coastal Carolina and Greenville, and Florida (which grew 19% YoY and has posted strong results for multiple consecutive quarters). Early positive signs are also emerging in Texas, with the first YoY order growth in recent quarters, though it is too early to call a sustained recovery.

• Q: How does PulteGroup approach industry consolidation and M&A, and what is your strategy? /

  A: PulteGroup prioritizes transactions that make the company better, not just bigger. M&A is primarily viewed as an alternative way to acquire land, so all deals are underwritten to the same risk-adjusted return standards as stand-alone land purchases. The company prefers small tuck-in acquisitions that build local market scale, rather than large multi-market transactions, consistent with past acquisitions of smaller regional builders. Deals most often fall apart when seller valuation expectations for intangibles do not align with the value those assets bring to PulteGroup's existing platform. The pipeline of potential targets remains steady, with the highest opportunity for tuck-ins in new markets the company is already expanding into organically.

• Q: Is the full-year gross margin range still 24.5-25%, and should investors expect results toward the higher end of the range? /

  A: Management reaffirmed the full-year 24.5-25% gross margin range, and advised investors not to assume results will come in at the high end of the range. Incentive loads are expected to remain elevated, and ongoing macroeconomic and geopolitical uncertainty continues to impact consumer confidence, so management maintains the original full guidance range based on current performance.

• Q: What is the outlook for BTO penetration in the second half of 2026, and when will you hit the 60% BTO target? /

  A: There is no specific target set for BTO penetration in the second half of 2026. Management expects continued steady incremental progress toward the 60% target, which remains on track to be achieved sometime in 2027. The 15 percentage point incremental increase from current 45% will be added gradually between Q2 2026 and the 2027 target date.