Rob McGibney: Actually, there’s a lot of moving parts to it. If you reflect back on the push and pull we’ve been through, there was a couple times over the past few years where we pulled out of the land market because it was cloudy. What’s really happening post-COVID and then that took off. Net interest rate’s running. Things stalled. So you pull back again and you reset. And we extended a lot of deals, renegotiated others. We did a lot of things. Kept the control of the assets that we liked. So, it’s kind of deceptive to look at two years ago, because that was one of the periods where we walked out of a lot of options at that time, because they weren’t making the sense that they did when they were first tied up. So, we’re comfortable with where we’re at.
We have that healthy tension. We need lots for 2026 and beyond. But we don’t have to do something outside of our underwriting in order to fill the pipeline. So, we have a healthy discipline that we’re adhering to, and yet, at the same time, we’re encouraging the division to grow. So, at a four-year supply, actually, of owned, that’s probably a little high. I’d rather have it more controlled, less owned if we can get there. But we’re pretty comfortable with how we’re positioned heading into 2026. Right now it’s a focus on 2026 and beyond.
Operator: And our next question comes in the line of John Lovallo with UBS. Please proceed with your question.
John Lovallo: Hi, guys. Thank you for taking my questions. The first one is, can you just help us with the drivers of the 60-basis-point gross margin beat versus your expectations in the first quarter? And then help us with sort of the walk from the first quarter to the second quarter in terms of factors like the leverage impact, mix, net price, et cetera?
Jeff Mezger: Right. So, yeah, there were a few things that came into that. One was we had a little bit of mixed shifts. So we pulled, and interestingly, we pulled a lot of the higher margin deliveries out of Q2 and the Q1 on an incremental basis towards the end of the quarter, which we’re always striving to close as many homes as we can and try to get those behind us, and this time the mix worked out in our favor where we had some pickup on that side. The can rate was a pretty important factor for us as well, where we didn’t have to resell homes that had already been in our backlog at healthy margins and we didn’t have to quickly discount those homes to get them sold in the quarter. So, that helped us incrementally. And we’ve been really, as far as the forecasts go, that’s always a difficult one to forecast out.
So, we did, I will say, as we were forecasting the 21% for the first quarter anticipated a can rate similar to what we’d seen in the prior two quarters and had a little bit tucked away on that increment. So, those were the main drivers. We like to be — we like being up. When you look at it sequentially, we’re really based in the second quarter predominantly up what’s in our backlog, and we really saw sort of a tick up in some of those incentives and whatnot back in those times when those sales were booked and they’re coming through. And the final thing and it’s always the same, and I know everyone hates hearing it, including me oftentimes, but mix plays a big part of this, between communities, high margin, low margin communities, between regions and between divisions.
So all of those factors sort of come together in that. And if you’re plus or minus a percent quarter-over-quarter-over-quarter for the most part it kind of reflects an operation that’s running pretty smoothly. You’re pulling your deliveries from your backlog. You’re not seeing many cancellations. You’re not having many — much pressure on you to resell homes and close them in the current quarter due to cancellations and we really liked the steady environment that we saw in the first quarter, it was a really nice start to the year for us and we’re looking forward to the rest of the year as a result of that, particularly, selling through the spring.
John Lovallo: Got it. That’s helpful, Jeff. And then, if we think about the slight uptick in the outlook for SG&A as a percentage of sales to 10.2%, I mean, that’s coming with slightly fewer communities than you were previously expecting a little bit of an uptick in sales. But I guess the question is, does that reflect the need for higher broker commissions or higher marketing spend, things of that nature? What exactly is driving that slight uptick?
Jeff Mezger: It really has nothing to do with the commission side of it. We are putting a little bit more money into marketing and advertising, as we talked about. On the community count, as you pointed out, declining, I mean, half that decline was really due to earlier sellouts. And the community, the other half is just a few communities that pushed out in the first half of 2025. So we’re still planning on spending money marketing, advertising, et cetera, for those communities, yet in the fourth quarters, we’re approaching openings on those. So it really did impact it in a way where a lot of reduced expense on that side. But I think, overall, if you just go right up top on the SG&A side, we’re just preparing the company to operate at a larger scale.
