Q1 2020 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly. Please continue to stand by and thank you for your patience.
Thursday
dead dead dead dead dead.
Dead dead dead dead, ladies and gentlemen. Thank you for standing by and welcome to the q1 2020 group home.
Earnings conference call at this time. All participants are in a listen-only mode after the speaker's presentation. There will be a question-and-answer session to ask a question during this session. You will need to press star one on a telephone. If you require any further assistance, please press * 0. I would like to now hand the conference over to your speaker today Jim. Zeumer, please go ahead sir. Thank you Joanna. Good morning, and welcome you to pull up the group's first quarter earnings call. Although sadly. Most of the conversation will be about the impacts of the covid-19 pandemic in that regard. I certainly hope that you are all well and staying safe with today's call is a little different giving we have Multi Group participants located in number of locations. So I apologize in advance for any technical difficulties. We may encounter joining me here at an appropriate social systems are Ryan Marshall president and CEO and Bob O'Shaughnessy Executive Vice President and CFO joining us remotely or senior vice president finance, and I'm pleased to welcome home.
still president and CEO
Multi Financial Services was dialing in from Denver. We thought it would be helpful to have Deb available to answer questions about our mortgage operations and overall mortgage market conditions the car off this morning to earnings release and the presentation slides that accompanies today's call have been posted to our corporate website at posted group.com will also post an audio replay of today's call to our website a little later month before I turn the call over to Ryan. I want to alert everyone that today's presentation includes forward-looking statements about the company's expected future performance actual results to differ materially from those subjects are comments made today, but 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 or details in our SEC filings, including our annual and quarterly reports. Now, let me turn the call over to Ryan Marshall Ryan.
Thanks, Jimmy. Good morning. Before we began. Let me offer my thoughts and prayers to everyone on the call today and in the communities in which Pulte group operates. I sincerely hope that you and your families are like well in her managing through the challenges created by covid-19. I also want to acknowledge and say thank you to our nation's health care workers and First Responders who have been remarkable in fighting the on a lot of this disease given the devastating effects covid-19 is had across the country. I'm going to focus my comments on the company specific impacts and our operational responses. Bob will then discuss some of the key numbers within our first quarter results as well as some factors to consider as you think about our business going forward.
To assess the impact of covid-19. It's probably best to go back to the beginning while that seems like a lifetime ago. It really is only been six to eight weeks more specifically about healthy group and the broader Housing Industry entered 2020 with tremendous momentum and strong buyer demand, and this is reflected in the 16% growth in orders that we report for the first quarter compared with the prior year. I reported q1 order growth. However is not reflective of current market conditions in the first quarter net New Orleans were up more than 30% over the prior year for both, January and February.
It's now old news when I say that with the virus spreading rapidly and governments implementing shelter and place restrictions home by and demand slowed dramatically is marked progressed. I appreciate the magnitude of the slowdown in the first full week of March our net new orders, exceeded 800 homes in the final full week. This number dropped it just 140 as a result our March 2020 orders and total were down 11% from March of 2019.
From orders being up 30-plus percent to being down 11% in just a few weeks is unlike anything we have experienced before it's this level of volatility along with dramatic economic slowdown and ongoing job loss. They'll let us to withdraw or guidance for 2020 as indicated in our press release earlier today, and we will not be providing any new guidance wage condition stabilized.
Do you?
The economic slowdown intensified as we moved into April it is no surprise that housing demand has slipped even further through the first three weeks of the month. We have sold approximately 920 homes on a gross basis, excluding cancellations. The underlying trend is the buyer traffic to our website and in turn our communities has decreased material. This is obviously a very small sample size. But directionally, we are running a little below fifty percent of the pace in the first quarter with the most recent Trends generally suggest able to up slightly.
Well, the impact of covid-19 was hard and fast pulled the group is fortunate to have an experienced management team throughout our organization. In other words. We have been through slowdowns before May such that we can and are responding quickly a Cadence of functional meetings. Skype calls to be exact at every level of our operations were organized and our ongoing wage based on real-time insights supplied by Frontline managers. We are routinely adjusting sales construction purchasing mortgage and other functional practices to the rapidly changing market conditions important information from these division level meetings is then routinely shared via a daily call with my senior team that reviews everything from customer traffic and sales to language and conditions in the mortgage Market think of my leadership calls as a virtual War Room in which we can quickly assess ongoing events and adjust business tactics as required wage.
It's vital that information flows both ways inside our organization. We can quickly disseminate critical data and decisions back into our operations via internal Communications channels, including the new age section within our internet this section also acts as a data repository for key policies and materials as well as a robust and growing Warehouse of best practice videos and videos cover everything from the direct marketing and managing a great virtual house tour to conducting an efficient option selection meeting online and even closing a home purchase remote key.
I won't take you through the daily even hourly evolution of our business practices, but I will share with you how we are operating the business today.
To help ensure the health and safety of our customers and employees. We are working remotely and leveraging available technology platforms to enable virtual interactions with our home buyers club. I'm walking computer-generated floor plans and picking a lot on our interactive Community maps to selecting options and applying for and ultimately closing the mortgage at this point. We were able to effectively do everything remotely. In fact, I fully expect we will be integrating a number of these new practices into our selling processes even as we move back to more normal operating conditions, I think are millennials and active adult buyers in particular will appreciate appreciate having more options in terms of how they interact with the home-buying process.
For potential home buyers who do want to visit a model and meet in person such meetings where permitted are by appointment only appointments in sure we can control the number of attendees and enforce social distancing as well as to provide time for us to implement our enhanced cleaning protocols moving from sales to construction. We are working closely with our trades to confirm confirm compliance with national and local guidelines relating to social distancing and On-Site Health and personal hygiene practices construction has been designated an essential service across all of our markets except for Michigan, Pennsylvania the state of Washington and key municipalities in Northern, California.
We have also notified our home buyers that we will be providing warranty service for emergency situations only until this crisis is past finally as an extension of protect the health and reducing risks for entire team toward the end of March. We made the decision to guarantee employment for all Multi Group employees through the end of April. We wanted to make sure we provided a sense of security. So our employees could focus on their families and on taking care of our customers given the severity of the economic slowdown. We recognize that Staffing actions will be needed to better align overhead expenses given the slowdown in housing demand and we are planning for such but this decision is consistent with Pulte groups employee first culture.
Beyond our people given the challenging operating environment and economic uncertainties resulting resulting from covid-19. Our focus is on protecting the company's liquidity and closely faith in our cash flows. Bob will review details shortly. But let me provide a few high-level comments on the actions that we've taken today on the land side. We are working closely with your exam and sellers to postpone the purchase of land Parcels currently under contract land sellers understand what's happening in the market. So conversations typically take a very collaborative approach. I am extremely pleased to say that we have been successful in delaying well over ninety percent of the lot scheduled for purchase in the near-term. We would hope to have similar success as in when we need to deal with contracted land positions such scheduled to close in the future in the rare situations where we have been unable to agree on some form of extension with the land seller. We have authors.
Away from the loss and written off any Associated option and or pre-acquisition expense in the first quarter these charges amounted to only four million dollars in a similar fashion. We were were to intelligently slow Land Development such that it is more appropriately aligned with the current sales environment at this point. Our approach is focused on delaying development rather than outrage mothballing communities. The ladder may become a tactic depending on how the Slowdown plays out. But for now, we want to continue turning assets even at a reduced rate. We've also implemented strategies to limit the amount of capital. We are investing in vertical construction. This includes contacting backlog customers and reconfirming their status before beginning construction of that sold. You guys having said that between our existing structure starts and an elevated cancellation rate. We have spec units in production that we are also moving on to a slower track dead.
At quarter-end. We had a total of about 3100 bucks in the pipeline of which almost.
40% were early enough in the build cycle that we are able to suspend further construction depending upon the exact stage of production construction on the remaining spec units will be held off slowly Advanced or completed on schedule and then sold
given the actions that we've taken to adjust land and house spend will be able to post on several hundred million dollars in cash outflows for a number of months by effectively idling parts of our boxes. We can maintain strong liquidity while positioning our operations to meet buyer demand. However, it develops over the remainder of 2020 and into the next year. I'm hard to Envision a more difficult operating environment than what we are experiencing today. And I don't even want to try to sugarcoat it that being said given the way that we have been running the business over the past decade. I do believe that Pulte group is very well positioned both operationally and financially to navigate the challenging and volatile market conditions will face until the impacts of the pad damage reseed. Now, let me turn the call over to Bob to discuss key elements of our first quarter operating and financial results, Bob.
Thanks, Ryan and good morning. Everyone before starting my review. Let me reiterate that we have withdrawn our previous guidance relating to our 2020 results and will not be providing any new guidance this time. This decision was driven by the dramatic impact coronavirus has had unemployment GDP and consumer confidence the result of which is that it's impossible for us to forecast how Mark Byers will respond when conditions ultimately begin to improve we are optimistic. The fire Advance has the ability to rebound but there's too much uncertainty at this time for us to provide meaningful guidance.
Is Ryan indicated given the dramatic changes demand Dynamics and overall market conditions? I'm not going to walk through our first quarter statements in the usual detail. I will however discussed to one result of a high level and in the context of how we expect the business to operate over the next couple of quarters.
Looking at the income statement wholesale revenues in the first quarter increased 14% 2.2 billion dollars higher revenues is a. We're driven by a 16% increase in closing the 5873 homes.
Partially offset by a 2% decrease in average sales price to $413,000.
Decrease in average sales price for the quarter was driven primarily by changes in the product and Geographic mix of homes closed.
Product mix continues to benefit from the expansion of our first-time business which increased to 33% of our closings in the corridor up from 25% last year.
In addition 42% of our closings came for move-up buyers and the remaining 25% came from active adult fires in the prior-year 48% of clothes were move up and 27% were active.
A 33% of clothings. We have achieved our stated goal of having first time represent about one-third of our business given are growing investment in first time in the fact that it was experiencing strongest demands prior to the Slowdown first time could increase slightly as a percentage of our overall business going forward.
It's Ryan noted order for the first quarter were up 16% of the prior-year to 7495 homes by fire group. First time orders were up 31% off 2476 homes.
Move up increased 13% to 3345 homes and active adult was up 5% to $1,674 driven in part by the 16% increase orders the end of the quarter with 12629 homes and backlog which is up 20% over the first quarter of last year.
Given the strong order rates over the past several quarters. We ended q1 with $12,088 under construction which represents an increase of 17% over last year with the increase in production was driven entirely by sold homes as spec production on a unit basis was down 1% from 2019 and represented only 26% of homes under construction.
Consistent with Ryan Thomas, we have curtailed new specs. For the time being and are identifying opportunities to efficiently and safely pause construction of spec units already in production. I guess this was a tale holding units at the foundation stage, but we can hold after they are dried in if needed.
While we were not providing Guidance with regard to expected quarterly or annual results. I think it's useful to share information on backlog performance and the current state of our construction operations. First off today fires have wanted to close relative to the size of our backlog. We are seeing minimal cancellations with most as you would expect driven by job losses resulting from the Coronavirus.
Who's the first three weeks of April? We've had 360 backlog units cancel, which represents only 3% of homes in backlog based on these numbers in our experiences to date clear that our home buyers are willing and even anxious to get into the safety of their new home.
Second our trades want to work. We remain in close communication with our trades to coordinate activities and ensure we are operating in compliance with all work rules and safety guidelines.
As we have had to adjust the Cadence of start and also production timeline ongoing communication with our trade base is critical to maintaining production efficiency.
Third we are having to proactively and intelligently manage the supply chain. The initial challenge was adjusting to any disruption of materials under a components from China. We were fortunate in that we had recently conducted an extensive analysis of that supply chain in response to the US China tariff issues in 2019 more recently. However, we are dealing with the closures of us plants as a result of state or Municipal restrictions to keep people at home. The US's plans typically have less inventory in the supply chain. So adjustments have to be made very quickly for Commodities and Mechanical plumbing electrical and we can usually swap to an upgrade or identify a comparable product manufactured by another supplier. It's much more difficult when the delay involves products such as cabinets countertops and appliances were colors and styles can be difficult to match.
In these instances. We are working with our
Customers to identify suitable Alternatives or we may simply have to wait extra days until the required product becomes available.
As of today's call delays across the Enterprise are relatively minor that they can be disruptive within a specific Community or market and may cost away from completing impacted homes.
Continuing with my review of our first quarter results gross margin for the quarter was 23.7% which is up 30 basis points over last year and up 90 basis points sequentially from the fourth quarter of 2019.
Gross margin exceeded not only last year, but our guidance for the. In addition to benefits resulting from the mix of homes closed our improve our improved gross margin reflects, the prior strength of Pac-Man and our ability to capture incremental pricing opportunities as incentives decrease to 3.6% in the quarter. This is down 40 basis points from the first quarter of last year and took a basis points from the fourth quarter of 2019 broadly. We would generally tell you the prices have been holding unlike the back half of 2018 when there were issues related to affordability be issues today relate to the inability to leave your home job loss or simply fear price does not solve these issues.
Price is also benefiting from low levels of new and existing home Inventory on the market that being said expect from the industry's production pipeline are rising and cancellations resulting in inventory build-up in a number of markets across the country. We focus on driving the best returns which often leads us to solve for price over Pace, but we need to continue selling homes and Thursday. We will be competitive in the market.
RSD extension the first quarter was $264 or 11.9% of home sale revenues.
This is 110 basis points lower than the first quarter of last year in which sg&a expense was $253 or 13% of wholesale revenues. The Improvement in terms of Leverage is driven by the volume growth realized in the quarter as Ryan discussed given the ongoing erosion and home buyer demand witnessed across the country. We recognize that we will need to make adjustments to our organization planning is already in process that will result in furloughs and layoffs. In addition to other general cost reductions needed in order to right-size our operations.
Moving on you will see a line for Goodwill impairment in our first quarter income statement given the significant decline in equity Market valuations. You determine that an event-driven impairment tests on the name associated with our January 2020 acquisition of icg was appropriate this test results in an impairment totally twenty million dollars.
It's apparent was not the result of any factors specific. I could use operations but rather reflects the broad-based declines in the market capitalization of publicly-traded construction companies During the period I'm having now worked with icg since the closing. We're even more excited about the opportunities. We see for such off-site production, of course accounting guidelines don't factor in our excitement, but simply evaluate the recovery Goodwill based on objectively verifiable Market data, and as we all know the equity markets have been under stress in recent weeks.
Looking at our financial services on.
Operations the business generated pre tax income of twenty million dollars an increase of 58% over prior year pre-tax income of $12.
This year's higher pre-tax income reflects an improved margin environment higher loan values consistent with growth in our home building operation as well. As a higher capture rate mortgage rate mortgage capture rate increase to 87% in the quarter from 80% past year. I would note that given disruptions in the National Mortgage Market caused by covid-19. We did have to write down the value of our mortgage servicing rights in the quarter reported to have Services pre-tax income for the first quarter includes the suggestion.
Completing my comments on income statement. Our first quarter income tax expense was $60 for an effective tax rate of 22.8% compared with fifty million dollars off the effective tax rate of 23% last year. Our effective tax rate for the quarter was lower than last year and our recent guidance as we recorded benefits related to equity compensation.
In summary for the first quarter our net income was $240 or $0.74 per share, which is an increase from prior-year net income of $167 or $0.59 per share.
Turning out to a discussion of our balance sheet cash flows and use of capital. We ended the quarter with one point nine billion dollars of cash, which is up from 1.3 billion dollars at the end of 2019 with our increased cash position primarily reflects our decision to draw seven hundred million dollars from our revolving credit facility in March.
Even the dramatic decline in global economic conditions and the uncertainty of the future demand Trend we drew on our facility and an abundance of caution, the incremental net interest expense related to these borrowings wage, which will be reflected in interest extent is approximately a million dollars per month. So it's low cost insurance as we move through the next few months in the first quarter. We invested $690 in land acquisition and development on a sequential basis. This is a decrease of 152 million dollars from the fourth quarter as we are working quickly to adjust land stand to Max the current operating environment.
Land acquisition spend in the quarter amounted to only $219 our lowest quarterly investment since 2014 and will likely decline further as we worked as a firm futureland Burgesses in the first quarter. We repurchased 2.8 million common shares for $96 million dollars or an average price of $33.86 per share as business conditions during the month of March. We elected to stop our repurchase activities at this time. We are suspended share repurchases consistent with our focus on conserving capital.
In conclusion, we entered this period of economic uncertainty in a position of strength or Home Building operations have proven to be efficient and highly profitable and we maintain ample liquidity. We're operating in a period of unprecedented job loss and economic contraction, but I'm confident in our ability to manage through the turmoil and successfully exit to the other side. Let me turn the call back to reinforce Channel comments write Bob highlighted that we're dealing with this economic crisis from the position of strength. We've put ourselves in this position by operating a highly profitable and high returning a building business for a number of years the strong operating results. We delivered in this first quarter are consistent with the strategies and tactics against which we have consistently operated by the time we get through the challenges of covid-19. We will have adapted to a lot of changes.
Won't have changed. However
Is the Strategic and disciplined approach we take the running our business which is delivered great financial results in the past our work to maintain an exceptional culture and a committed team doesn't change our ability to underwrite and develop outstanding communities designed to meet customer needs while delivering High returns doesn't change.
Are focused on delivering Superior Quality Homes and outstanding customer service doesn't change. So while a lot will change the fundamentals that have made polti group successful remains solidly in place.
In closing before we open the call to questions. I want to say thank you to our employees and our suppliers who have been absolutely amazing throughout these past few weeks in a period of heightened risks and fears where and when appropriate you have been on site and operating in our communities as required you have quickly adapted to working from home in servicing our customers from a socially acceptable distance and through it all you have maintained an upbeat attitude and a can-do spirit. It has been impressive to watch. Let me turn the call back to Jim.
Great. Thanks Ryan now prepared to open the call for questions so we can get as many questions as possible during the remaining time in this call. We ask that you limit yourself to one question and one follow-up to ask you and to explain the process is and open the line for questions.
As a reminder to ask a question, you will need to press star one on your telephone to withdraw your question, please press the pound or haschke. We ask that you limit your questions to one question and one follow-up phone number we can pull the Q&A rests.
Your first question comes from line of Ellen Ratner from zelman Associates. Your line is open. Hey guys, good morning. Hope everyone is doing well within the organization and your families and thank you for all of your commentary this morning. You know, my my first question if I could and maybe this is directed for dead. But you know, I'd love to hear and dig in a little bit find out what's going on in the mortgage markets today. I know you know that the headlines have been kind of fast and furious about tightening in terms of credit overlays being instituted by a number of investors and lenders and I I know there's a lot of disruption on the servicing side as well. And I'm just curious. You know, what you've seen over the last couple of weeks in terms of your ability to originate loans to sell loans to sell servicing rights wage in taking that a step further. Where are the current standards today that your originating for your buyers.
Morning, Alan. Thanks for the question. There's certainly a lot there we are doing well and I hope that that everybody had zone is is healthy as well. You know, maybe let me just start with some real broad overview comments and then I'll turn it over to Deb our Pulte Financial Services team has been absolutely outstanding. We do have very good liquidity. The operations of the mortgage company have really continued with minimal Interruption there certainly are some challenges there. But I I really do believe that Deb and her team have effectively helped navigate those so with that I'll turn it off and and she can provide some additional commentary.
Sir, thanks Ryan.
Good morning, Alan. Yeah, so certainly disruptions. We've seen a lot of headlines. I think one of the things that is important to note is not all disruptions apply to all lending business models. And so for full see the majority for the majority of our loan programs that quality mortgage offers. We're working with the same investors. We're working with the same virus of servicing that we've done business with for years for Pulte mortgage. We are looking to add additional investor partners for our government loans where the environment has gotten more restrictive than the conventional market and our strategy Remains the Same which is the seller Lawns and secondary market and Thursday. So our service day, you know the jumbo Market you read the headlines that it may be Frozen and while I think there's far fewer participants were part of a game.
With several Banks and several Credit Unions that are still dying are jumbo loan from providing us that liquidity. So I'll stop there and see if you want to go into any more detail, Yeah. I know that that's a very helpful. You know, I do have one or two follow-ups to that if I could, you know, I guess on the government side it seems like that's where we've seen some some FICO and DTI over put in place. I know some lenders have gone as high as seven hundred not going below that others are kind of more on the 6th 6680 range. So, you know, I guess the question is when you look at your book of business and you look at your back, you know, it seems like cancellations have been very modest. Are you still able to get a an FHA VA loan done at at a call at 646-6050 and what percentage of your business actually off falls into that criteria right now?
Yeah, so we still have credit available certainly at the you know, 646 60 range. Some investors are requiring loan-level price adjustment for those credit scores. But for the most part there's decent liquidity at that level Allen, you know much like our product mix has been for many years FHA and VA together are about 20% of our book of business.
Your next your next question comes the line of Jack masenko from s i g your line is no open.
Good morning, and hope everybody's well on your end or morning, you know, you're coming into this with a really really strong backlog. And so I guess first question I have is you know, Ryan what's you know, what are the regional heads doing to to preserve that backlog any kind of strategies there and then and then Deb what's the mortgage company doing proactively to kind of peel through that backlog. Is it a second set of eyes on the underwriting? Is it a is it a home closer touch on the employment status just kind of curious how you guys are manager because there is a lot of folded Revenue there and and and preserving that I would imagine is is priority number one.
Yeah, Jack. Good morning. It's Ryan.
And and we do really we really do believe that that the size of our backlog is a real benefit for us as we move through this crisis. The good news is that the majority of that baggage made a buying decision prior to you know, the effects and the impacts of covid-19. And as you know Bob highlighted in detail, we've largely seen most of those buyers anxious and ready to move to the closing table. We certainly done a lot of things in working with our plan Pulte Financial Services Partners. So inclusive of doing drive-by closings from where we've been able to sign the majority of the documents virtually and there's only a handful of things that need a wet signature and we've been able to do that without you know, human interaction and contact which is which has been great, you know, in terms of of tactics that are our operators are taking to preserve that bap.
We're really working with our buyers in a collaborative way to understand their specific needs in the cases of job loss and things like that in some cases, you know, we we've had to take a cancellation and and that's reflected in the numbers the Bob shared with you, you know, certainly we've got great partnership with a mortgage company on a on a number of fronts and and not only does that help minimize risk, they provide just outstanding products and service from our mortgage teams been a to give us insight into concentrations of customers that might fall into a particular industry. But you know, we are very careful not to mention, you know, violate any of the banking regulations that would prohibit the mortgage company from sharing, you know, specific buyer data. So, yep.
Those are you know, those were the a few of the things that we've been we've been doing to manage the backlog.
Okay, and then you know one for Bob, you know looking at you know, stop the buyback slowing down the lansburgh and monetizing backlog, you know cash position probably balloons pretty significantly into your friends, you know, assuming it's a big summer, but I guess assuming you somewhat of a you were probably you know, how do you think about the cash, you know, you know twelve months out. I mean Ryan, it sounds like you know prepare for the worst off the past but you know, you know, you certainly can attach number is 2 and 1/2 3 billion kind of numbers no debt coming to you until you know, twenty Twenty-One and if wage other side of this, you know, is it going to be buyback? Is it going to be we accelerate the land spend cuz the demand is there you're going to catch up. How do you think about you know, this this this this large like
We can transition either this year.
I think our view on this is we want it to get as liquid as we could we drew on our revolver just from a precautionary standpoint. So I think the first use of any cash would be you know, as we get more comfortable with this we would seek to pay that down. Um, you know, you mentioned that we've got a maturity in March of next year. It's not that far away that would be a pretty high priority for our cash, you know, depending on market conditions would we refinance it? I don't know it'll depend. But other than that, I think the process will go through is no different than what we've been doing for the last month, you know, five plus years, which is evaluating the opportunity to generate returned from that cash. So, you know, if if we think there's an opportunity in the land market, obviously that would be a place where we would place a Mary importance on investing. Um, you know, if we have excess capacity beyond that, you know, we're we're always thinking about repurchase activity. We've obviously stopped dead.
You know as time goes by we will revisit whether that's appropriate, you know, and we obviously pay a dividend will be in the course of a discussion with our board visiting what we do with that over time. So I think the answer is it it isn't really any different but I would tell you obviously the first thing we would think about is the revolver. Um, and paying that down your next question comes in line of Michael Rio from JPMorgan your line is now open
Thanks. Good morning, everyone and hope everyone in the multi-family extended family are are safe and healthy and this time off first question I had was was if I could try to get a little bit more clarity. Obviously appreciate with regard to order Trends in the you know, last six weeks off so and obviously the appreciate all the detail that you've given I think you know, what a lot of people are are are thinking about is trying to parse out, you know, in in terms of the wage orders and and the the fall off and orders, you know, where which markets in which segments maybe you've seen it the worst, you know, you mentioned wage about a 50% decline in sales pays versus the first quarter in April and so I was curious if there's any additional granularity might have for us in terms of dead.
You know by market which markets maybe you saw a greater drop off and you know across your three major, you know consumer segments where where you saw it a little worse or or better off? Yeah, Mike good morning. What I would tell you is that you know, April started very slow as the majority of the country went into shelter-in-place type of orders, but you know some some markets very aggressive, you know, late end of March early part of April and then eventually you saw the entire country go into that mode as as our sales process evolved in caught up to that, you know, we went to a by appointment only for the protection of not only our sales team but also the customers and then we quickly. Apted to a lot of virtual selling practices with um, you know virtual tours heavy use of Microsoft teams do engage with customers. Yep.
Yeah, Jack. Thanks for the question. And hopefully we are wrestling with that particular question, you know.
we could share documents and
You know the various choices that that the buyer would have and what we saw as we moved through April each week. We were doing more virtual appointments with our team got more comfortable with it. I think buyers got more comfortable with it. And so we were encouraged by that, you know, we had as as I shared with you we had over nine hundred sales in April birth date which you know in this environment where largely the entire country is still at home, you know to be able to sell that many homes virtual I you know, I think is a is a fairly decent result. You know, we are starting to see some pretty positive Trends in our traffic data just starting this week as we get more of the you know, I think is more of the country is talking about reopening we've seen certain States already take action to reopen and I think some of the the South
Understanding and the fears around covid-19 are starting to subside. You know, we're seeing some positive traffic Trends which I think bodes. Well in terms of wage or groups and segments. The one that I would tell you was probably down the most early as the Del Webb consumer, which I'm sure as you can appreciate is understandable. Number one. That's a that's a age demographic that is most susceptible in at the highest risk to the virus. And so that's a buyer group that I think was was early on the most wage costs us and probably continues to be there also a buyer group that's heavily influenced by volatility in the equity markets, which we know there was plenty of that in the the back half of March is that stabilized and as the virus starts to come under control we started to see that by our group, um rebound it's a buyer group. That's got some great liquidity. They've got strong well,
They're not as dependent on the job market. And so we're actually starting to see some some some nice Trends from that group. What I tell you though. Mike is is every buyer group is not acceptable to the impacts of this virus. I don't think there's any one group that is going to be untouched. They may go through different phases as the uh, took the the impacts to the economy moved through the entire system. Thanks Ryan. I appreciate that that answer I guess for a second question. Maybe if I could speak in slightly a two-parter number one, you mentioned the virtual orders coming in of that $960. I was curious how they you know, roughly what what percent was able to be counted as an order without the customer even physically walking into the home.
and conversely you
And then a prior question around the 360 cans in the first two weeks of April, you know, I think you know primarily driven by job loss. I just try to get a sense again going back to the I guess if you want to call back log scrubbing if you feel like that 360 represents fully the the initial job losses that I am seeing across the country or you know, if potentially there might be an additional portion of the backlog susceptible to the recent unemployment trends
Yeah, Mike in terms of how many of the April sales were able to do everything virtually. I don't have that number at my fingertips. I would tell you it was July in the Lion's Share of the process was done virtually, you know, there are some buyers that maybe they wanted to do at least one on-site visit. It wasn't required. However, and we were set up operationally that the entire process could be handled virtually. So we you know, we feel really good about that in terms of the cancellations wage, you know, there are some number of cancellations that we take in a given month just as a normal order normal course of business and you know that's reflected in what is are are are kind of normal cancellation rate for those that we've seen in April. I would tell you, you know, probably the majority were covid-19 in some way shape or form.
You know most of those kind of relating to job loss or family health reasons as we move kind of through this. Yeah, I think there's certainly continue to risk depending on how deep and how prolonged the the the downturn is and then what the recovery looks like so, you know the job loss or the unemployment claims today were a little better than they were last week, but you know it over four million. It's still a pretty big number and you know, we'll ultimately just need to see how that plays out over the coming weeks off.
Your next question comes the line of Stephen Kim from evercore is I your line is now open.
Yeah, thanks a lot Brian and a name and thanks for the all the information. Thus far sounds like you are doing a great job as one could expect in this in this environment. There were some very interesting things that you mentioned with respect to how things have been evolving very recently so far in April and I just wanted to get a couple of things together that you said and just sort of get your overarching view as to how the demand picture looks like. You indicated that when you get your numbers for cancellations and and the sales you were viewing. Obviously. It seems like it picked up relative to the final week of March in terms of the gross orders. And then on top of that your cancellation rate if I were to extrapolate that out to a full quarter looks like you're talking about a month can rate of maybe 12% or something like that for a full quarter's worth which is like less than half of what you saw during the global financial crisis. Now, you said price isn't really the issue and.
I wanted to move in. So with all of that said
I'm curious as to how you think this fire pullback compares to other demand pull backs that we've seen usually for instance. When you see the man pulled back there is kind of an immediate price response or sort of a demand for that and you know, it doesn't seem like that's happening today and you've seen a pick-up in traffic even before the states have opened up. So it seemed to me almost as if there is like like a fire that's gone, you know gone dormant and we can had a blanket thrown over and then the blanket gets removed. There may be a spike in demand and I'm wondering if I should be ready to capture that and if you think that that's even something that's worth preparing for or if it's more important to sort of be defensive in the case that you know things get worse and Lindbergh
So my question is is a little bit of complicated. I apologize. But how are you? How are you seeing the demand potential to spike in the next let's say month or two things actually do open up and what are some of the things that you're doing to position yourself to capture that if in fact that happens
Yeah, Stephen. It's a great question. And and I I would tell you, you know, we don't have a better crystal ball than anybody else does in terms of what the recovery ultimately looks like. Is it a u is it a v is it an L? Is it a square root recovery, you know there's there's a ton of theories out there weird looking and studying all of them. You know, I think you made a couple of of interesting points that I would tend to agree with buyer desire to own a home seems to be holding pretty strong and proud and strong. You know, the ultimate question I think is going to be when does the economy start to reopen and how deep and prolonged or the job losses, you know, we took the jobs are a critical component of a you know, a homebuyer being able to make the decision to move and do something different from you know, if the job losses can be midnight.
Advised um and the folks that have been furloughed or able to be called back, you know, I think that bodes well for housing, you know different than I think other FAQ, you know housing downturns. Typically there has been a build-up of Supply which we don't have right now. There's not a buildup on the resale side. There's not a buildup on the new South and so, you know, I would tell you that's largely why we've seen price continue to hold Bob's prepared remarks. I think hit the nail right on the head, which is you know, this is something that is being driven by partly fear partly folks being at home and not being able to leave their homes and price doesn't necessarily solve that and so I you know, I think what you've seen from the industry for the most part is there hasn't been a lot of of discounting other than you know in a few places where we've seen some co-broke typing club.
Is to move inventory that was finished.
You know, we we haven't seen in the market broad-based price reductions on base pricing which I think is generally a positive way in terms of being opportunistic Steven. I think our model of having a very large backlog that is you know, over 12,000 at this point that puts us in a very good position, assuming the cancellation rates remain where they're at and for clarity we're running at a level that you know, we're 3% of four of the month of of April. I think that translates into something a little less than the number that you quoted but, you know, we'll see kind of what that cancellation rate ultimately wage Trends to for the full quarter. Hey Steven just to to maybe further clarify the the canned. I think what you're going to see is based off.
The sales level that we're seeing today.
Gross and the cans against that 12,000 unit backlog. You will likely see an elevated cancellation rate in Q2 because you're going to have a reduced sales environment. We've highlighted the sales are down, you know cans while they're not huge against the total backlog are going to be big enough that relative number. So just you know, I heard you say that we might have a lower Camry compute to ornette can rate is that will not be the case.
Yeah, I was referring to a backlog can rate. So yeah, because I think that's
got it. Okay. So yeah, so that's that's great appreciate that sort of sort of kind of follow up on that. I feel like I thought it would be interesting to hear a particular that you're you know, give me your headquartered in in in Georgia how you're planning on handling a reopening policy wage probably won't be unified across the country. And so I'm curious as to how whether Pulte would be adopting kind of a across the country kind of a policy or will it be determined locally? And I'm also curious if you could talk about this pricing issue how you price really isn't an issue. You're not seeing a lot of discounting. I'm curious instead of whether you're actually seeing any desire on the part of the people who are buying to actually if in fact maybe upgrade maybe are you seeing any increase demand for an extra bedroom? Let's say or maybe the home office and then lastly are you seeing
What can you give us a sense for what percent of your buyers need to sell a home first and how that's factoring into the demand picture today?
Yeah, Stephen. Let me there was a lot there. Let me see if I can organize kind of my my my response. So it was yeah, it was the reopening the the demand for extra maybe upgrades and then what percent need to sell a home first. Yeah. So in terms of reopening, we are taking a a coordinated effort from our corporate office and working with our our regional heads and our division presidents in terms of how we reopen but it will be a customer approached by state by market even by sales Center or by active community in some cases. So in most of the places where well back up we will not open anywhere until we're permitted by state and or local regulation that being said we will open on the time frame that we believe is appropriate for us off.
permitted by uh by local radio
So, you know in Georgia to your point starting this weekend, a lot of the Georgia economy is starting to reopen we will be taking a phased approach and how would we open our corporate office as well as how we open our our sales centers in Georgia in terms of upgrading Steve and I think what you'll likely see is a lot of folks that have been, you know, maybe lived in more confined spaces whether it be apartments condos. My guess is you're going to see an elevated desire for you know, maybe Suburbia and and have it a little bit more space than I think most of our homes do come with the ability to have Flex space and do things like home offices and I'd absolutely see that being high on the list of things that buyers would want and finally as it relates to homes to sell, you know, I don't know that that's necessarily changed from what the historical Trends were in, you know talking with a number.
For of of resale agents that that you know, I know here locally is as well as across the country. There's actually kind of a tight supply of good inventory on the job market. And so the you know, the feedback that I'm getting is if the home is priced properly and in good condition, they're actually selling and selling fairly quickly.
Your next question comes the line of John Lavelle from Bank of America your line is not open.
Hey guys, thank you for for taking my questions. I hope everyone's well first question in many of your competitors have talked about delaying land purchases, which you know clearly makes sense. I'm wondering though, you know, you're anticipating in a stress at the land developer level developers still able to access Capital at this point in any thoughts around that would be helpful.
Yeah, it's it's a fair question. You know for the most part we are developing John and so, you know, we are putting raw Parcels under contract or the larger developers. We have not gotten any indication that they've got Capital constraints. I think they like us are looking at the phasing of development. So long phases might be a little bit shorter might be delaying the next phase until we can work through the existing ones. So we haven't heard of a lot of noise in the market from folks that we've have developed in relationships with um, you know, everybody's focused on cash as you can well imagine. Um, but I think it's pretty coordinate at this point.
Okay, that's helpful. And then you know the labor challenges that some folks are seeing mostly the smaller Builders and some of the social distancing that's going on on job sites. You get the sense that this could increase the demand or the interest for offside building and you know with your icg acquisition have you guys, you know see an increased inquiries into the business since June? Yeah, John, we're we're excited about I see G as Bob mentioned, you know, we we've now been operating with icg for for just over three months. We're more excited today than we were at the time of acquisition as we've started to incorporate icg products and materials into our Jacksonville operation. It's it's really gone. Well, you know, just like we talked last quarter. We really see the implementation and integration of off-site as being a long-term strategic move for the company name.
Dress what what we really believe are fun.
Donnell shortages in labor over time for the industry, you know, my guess is that um as social distancing practices will likely continue, you know, well into the future, I don't think this is a 30 or 60-day timeframe. We're we're we're going to be working on social distancing I think for a long time to come off even better opportunity to take advantage of the labor efficiencies that are created by using off-site. So suffice it to say we were excited then would have more excited now and you know, we're looking forward to continuing to see that expansion through uh, you know, our operation over the the coming years.
Your next question comes in line of Truman Patterson from Wells Fargo your line is now open.
Hi, good morning, everybody. And I glad to hear you all are safe. So first question, you know, you all have a proprietary pricing tool that's really help you achieve, you know, elevated gross margins. I'm hoping you could shed some light on the existing markets pricing as I would imagine, you know, there's a lack of inventory that you mentioned. There's also a lack of foreclosures with forbearance, which I think is that helps support, you know, the existing market price pricing, but have you seen any local market pricing that started to crack or rollover or there any local Metro that you're really watching near-term?
Yeah trim a good morning. It's Ryan is you know, I think we addressed in some of the prepared remarks. We've we've actually seen price hold pretty steady, you know, the the only pricing actions that we really seen there's a few spots where certain Builders have had an elevated level of spec inventory and in an effort to move those, um, you know, they put some financing incentives in place or some elevated co-broke incentives, which you know, I think ultimately the end of the day is more of a of an advertising mechanism as opposed to a price mechanism. So, um, you know underlying values in this environment I think of held steady. We haven't seen broad-based discounting on Thursday to be built orders. I haven't necessarily even seen broad-based discounting on the resale side either. So, you know knock on wood we'd home.
But that can hold for the time being, you know, the the results have been positive.
Okay. Okay, gotcha. So so specifically no real local metros that have really started to crack or anything along those lines, correct? Okay. Okay. Thank you. And then just open a get a a bit of an overview on you know, the broader Lane environment. But but really what I'm I'm hoping to understand is you know, whether you all are restructuring any of your options and Deals and what those are starting to look like and those conversations. And then also if you could look forward, you know, maybe one to two quarters, you know, what portion or magnitude of the option deals off possibly at risk of being written off?
Yeah, you know it's it's interesting. There isn't any particular form or fashion, you know, just like the way we've built the land book. It is negotiation with individual sellers M as we mentioned on the call, you know to this point, you know, everybody understands, um, you know, we had very limited impact. I you know, we had highlighted four million dollars in right off the pre acts home and we've got a normal run rate of to you know, if you think about it every quarter, we usually have a couple of million dollars. So it was slightly elevated but not materially so I think what that tells you is that the dialogue having with our sellers is constructive, you know in some cases we've deferred 30 days in some cases. We've deferred 60 days and some cases 90. Um, and I think you know will continue to evaluate as as we go forward. You know, I don't I don't know that there's any particular bucket of the contract that we have in place today that are anymore or Thursday.
That's at risk than anything else quite honestly, um, you know, the the decision to move forward is going to be based on how we see the market and whether there we get the return we are seeking from the investment making and we'll make those decisions candidly Community by community. So, you know, we are working with all of the sellers and I talked about development spend. You know, we're we're suggesting the folks. Hey don't put more money into it because we may we may need to wait a little while and they understand that so, you know on balance you never know where this is going to go because demand will dictate how we operate. Yeah Truman. The only thing I'd add to that is Faith negotiate land transactions. We underwrite to return as I think you well know the the two big variables in that our pace and price and we've talked to price in your first question, which is largely held phone number.
Assistant, you know pace is the unknown and until we kind of come out of this recovery and we start to see how things recover. You know, that that's what might ultimately kind of like what happens to underline land values, you know, but we do believe based on the optionality that we've really worked to put into our land book over the last several years worth well positioned as the companies ever been, um, you know to uh, you know, create some real optionality, you know in in how our land book, um, I know comes on to our balance sheet or how we ultimately purchase things over the coming months.
There are no further questions at this time. I will turn the call back over to Jim zeumer. Just go ahead sir. I apologize that we're a few more questions. We just need we've run out of time on this call will certainly be available over the course of the day. If you do have any other questions, we did run a little bit long. We want to provide as many comments as we could in our prepared script and hopefully answer as many questions as we track that way. Thank you for your time. Stay well, and we'll look forward to speaking to you on the next call.
ladies and gentlemen, this is
Today's conference call. Thank you for participating you may now disconnect.
off