Q2 2020 Pultegroup Inc Earnings Call
Ladies and gentlemen, that's the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on musical experience.
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Ladies and gentlemen, thank you for standing by.
And welcome to the Q2 2020, Pultegroup Inc. earnings Conference call. At this time, all participants are in listen only mode. After the speakers presentation. There will be a question and answer session. That's your question during the session you'll need to press star one on your telephone if you acquire any further assistance. Please press star Zero, Oh, no like to turn the call over to Mr. Jim Zeumer. Please go ahead.
Great. Thank you Sharon and good morning, I want to welcome you to pull to group's second quarter second quarter earnings call.
We hope that you've been able to remain healthy and say throughout these challenging times.
As with our Q1 call will provide an update on the Pandemics impact on our operations along with a detailed review of our second quarter financial results.
Participating along with me on today's call or Ryan Marshall President and CEO.
Although shaughnessy executive Vice President and CFO, Jim Ossowski Senior Vice President Finance, Jim Bob we're dialing in from outside.
A copy of this morning's earnings release in the presentation slides that accompanies todays today's call been posted to our corporate web site at Pultegroup Dot com.
Also post an audio replay of the call later today.
I want to highlight that we'll be discussing our reported results as well as our results adjusted to exclude the impact of insurance and severance adjustments recorded in the period.
A reconciliation of our adjusted results to our reported results.
Included in this mornings release and within our webcast slides. We encourage you to review these tables to assist in your analysis of our results.
Also I want to alert everyone that today's presentation includes forward looking statements about the company's expected future performance.
Actual results could differ materially from those suggested by our comments made today.
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 are actually some filings, including our annual and quarterly reports now.
Now, let me turn the call over right right.
Thanks, Jim and good morning.
I'm very pleased to report that the recovery a new home demand that we experienced over the course of the second quarter was nothing short of outstanding.
Our second quarter results show remarkable rebound in demand is April net new orders fell 53% from last year only to see year over year orders increased 50% for the month of June.
Led by strong demand among first time buyers, we saw meaningful improvement across all buyer groups and geography is as the quarter advanced.
This improvement culminated in June orders, increasing 77% for first time, 48% for move up and 21% for active adult over June of last year.
The rebound in demand during the quarter resulted in our aggregate second quarter orders declining only 4% from last year.
We're very encouraged by the fact that the momentum of this dramatic recovery continues as demand has remained strong through the first few weeks of July.
Improving industry dynamics in combination with discipline business practices allowed us to drive meaningful gains in our operating results in financial position.
These gains include revenue gross margin expansion and improved overhead leverage, which when coupled with our prudent financial planning and strong cash generation leave us in that position of strength as we work through the balance of the year.
For all the positive dynamics, we're experiencing are experiencing in our business. It's clear that cobot 19 continues to exact a severe toll on the economy and more importantly, the people of our country.
It goes beyond any business implications, but simply as human beings. One cannot look at the ongoing helped impacts and loss of life and see if there's anything but a tragic situation.
With this as a backdrop it is our heartfelt hope that everyone on this call your families as well as our employees trade partners and the communities, we serve remain healthy and safe.
From our health officials to our frontline workers to pharmaceutical companies the efforts to battle. This virus have then heroic.
Before we get into discussing our second quarter financial results. Let me provide a brief update on the impacts of the pandemic insights on how we're running the business currently.
At the outset of the pandemic, we closed our sales centers and model homes and quickly pivoted to working remotely and selling virtually.
I'm pleased to say that we began reopening in or sales centers in models in early may and we are now fully open and stuff to work with our walk in and by appointment customers.
As you would expect our salespeople are using appropriate P. P E.
Our adhering to social distancing practices and are following enhance cleaning and disinfecting processes to help protect the health of our employees and customers.
Well our sales centers are open we're interacting with customers on their preferred terms because not everyone is comfortable with in person meetings. We continue to take full advantage of available technology and tools that are successfully supported our efforts to sell homes virtually.
Except for a handful of markets.
Building was being done essential service from the startup cobot 19, so disruptions door construction operations were minor even during the early stages of the pandemic.
At present, our operations are fully functional in all markets across the country.
In in partnership with our trades, we are using appropriate PPD and her adhering to social distancing practices to protect workers on the job site and in the homes.
And finally, our financial services group truly did an outstanding job adjusting their business model that worked remotely and handle every aspect of the mortgage and closing process is virtually.
At present personnel are still working off site, but as demonstrated by the strong second quarter financial results and high capture rate. The team continues to perform at a very high level.
Thanks to the tremendous effort of our purchasing team working in conjunction with our suppliers our supply chain has held up well with minimal disruptions to our homebuilding operations.
Working closely with sales and construction, our purchasing group has been able to navigate around potential shortages and ensure ongoing availability of key building products.
Given the rebound in housing we have been increasing our land acquisition and development spend this primarily relates to land deals where we negotiated purchase delays of anywhere from 30 to 90 days.
We are now completing most of these transactions when the new closing date arrives.
Unfortunately, it's clear that covert 19 is not going away anytime soon so we remain disciplined and thoughtful in our land investments. This includes increasing our use of options, which now account for 46% of the lots that we control.
On the people side I'm very pleased to say that improved market dynamics have allowed us to bring back the majority of the employees that we furloughed during the quarter.
We have also had the opportunity to rehire a small number of the people. We released in May which is a good feeling.
I would note that most of the individuals returning to our organization or in the field construction roles.
Obviously, the demand for new homes has experienced a dramatic rebound over the past eight to 10 weeks. Following the initial shock from cobot 19.
Well housing demand certainly continues to benefit from historically low interest rates analyzing the drivers of demand suggests there are likely additional factors at work as well.
First looking at the number of Internet searches related to home buying the data indicate that there has been an increase in consumer interest in homes.
Particularly new homes utilizing available Google trends data, we can view patterns for specific search terms commerce, commonly associated with buying a new home.
Despite the overlay of covert 19 searches for new home related terms has been growing since mid March in fact, we routinely seen multiyear highs in the number of search as related to shopping for a new home.
I would note that we've seen a similar pattern in terms of Google searches for del Webb, which are up dramatically in May and June in fact unique visitors to our del Webb site are now approaching 70000 per week and are trending higher than they were at this time last year.
Second while we can debate the magnitude ZIP code level analysis on buying patterns points to a movement of renters and homeowners from urban centers into the surrounding suburbs.
Based on an internal survey roughly half of our division Presidents report that their business has experienced a modest increase in demand from urban buyers, while several of our divisions referenced a material increase in such demand.
And finally, we see the third and possibly largest driver of demand for new homes being the very limited supply of existing housing stock available today.
At the end of May the total housing inventory was 1.55 million units, which was down 19% from the prior year.
Im sure. We can all appreciate that it's hard to be comfortable opening your home to strangers during a global pandemic.
The strong demand has also helped to absorb some of the spec inventory, which had built up in the system in March and April.
Data show that in markets, where we operate the number of quick move in homes available for sale fell by 16%.
From the end of March through the end of June.
A lot has been made about the advantage of having spec units available, but the drawdown supply and the build cycle of less than 80 days for first time buyer product allows our build to order modeled to compete very effectively and with less risk.
The combination of strong demand and limited inventory has also allowed us to raise prices across many of our communities.
In fact at more than half of our divisions report raising prices and 50% or more of their communities. The typical price increases in the range of 1% to 3% and includes changes in based price and or reductions and incentives.
A positive change in market dynamics from April to the ended June has been dramatic and gives us greater confidence about the business moving forward as such we are re establishing guidance for the remainder of 2020, which Bob will provide as part of his review of our second quarter results.
In this regard I want to say that the volatility caused by the pandemic is unlike anything this industry has experienced even during the worst of the great recession.
The swings in demand during the second quarter alone were fast and severe buyer demand is clearly experienced a dramatic recovery in the quarter and it has remained strong through the first three weeks of July.
That being said covert hot spots continue to grow in size and number which in turn is slowing down the reopening the state and local economies. It is impossible to forecast how these dynamics will unfold in the coming weeks and months.
Per pultegroup, we will be optimistic about future market conditions remain very disciplined and measured and how we manage our business.
Now, let me turn the call Bob for a review of our second quarter results Bob.
Thanks, Ryan and good morning.
Similar to our first quarter call I won't go through our typical detailed analysis of our income statement and balance sheet, but I'll talk about the business in the context of cobot 19.
Also given the volatility in market conditions during the quarter, where needed I will provide some insights on the change in our business as the quarter progressed.
And finally as Ryan stated, we will be providing guidance on our expected third quarter and full year 2020 results.
For our second quarter home sale revenues increased 3% $2.5 billion the higher revenues in the period were driven by a 6% increase in closings to 5937 homes.
Partially offset by a 3% decrease in average sales price to $416000.
Consistent with recent trends the lower average sales price primarily reflects changes in product and geographic mix of homes closed.
I would highlight that these changes were exaggerated in the quarter at the pandemic caused temporary market shutdowns in several higher price locations, including Northern California, Michigan, Pennsylvania, and the state of Washington.
Closings for the quarter consisted of 31% first time, 44% move up and 25% active adult.
This compares with prior year closings of 28% first time, 46% move up and 26% active adult.
Net new orders for the second quarter totaled 6522 homes, which is down 4% from last year.
Given that we started the quarter with April orders down 53% from the prior year. This represents a tremendous turn around demand.
For the entire quarter first time orders were up 17% to 2327 homes move up orders were down 7% to 2873 homes and active adult orders were down 22% to 1322 homes.
We've gotten questions over the quarter about how active adult buyers are behaving so I want to note that demand among this group improved each month quarter.
In fact June orders were up 21% over last year.
Active adult buyers more comfortable going out and with the amenities now reopened in our communities.
The buying and selling process is feeling more routine.
At the same time active adult buyers are finding a strong demand environment and they have to sell on existing home.
So we're optimistic that an ongoing recovery in this part of our business.
For the quarter, our cancellation rate was 19% compared with 14% last year.
Our cancellation rate was driven by elevated cancellations in April as the cancellation rate fell to only 12% of our orders in June.
As we discussed during our Q1 earnings call. We've seen that buyers are excited to close.
We ended the second quarter was 13214 homes in backlog, which is an increase of 12% over last year.
At the ended the quarter, we had 10946 homes under construction, which is down 4% from last year.
Of the homes currently in production 2121, or 19% we're specs.
In aggregate the lower number of homes under construction is consistent with our decision to tightly managed starts as demand collapsed early in the pandemic.
While we are focused on building sold homes.
We have started to increase the number of speculative start in an effort to get us closer to our target ratio specs, representing approximately 25% 30% of units in production.
Based on our backlog at the number of units in production. We currently expect to deliver between 6000 6300 homes in the third quarter.
Further we now expect deliveries for the full year to be in the range of 23500 24000 homes.
With an average price in backlog of approximately $430000, we expect third quarter Asti to be in the range of 425000 to $435000.
For the full year, we expect average sales price on deliveries to be between 420 and $430000.
As always the mix of deliveries will influence the average sales price we realized in any given quarter.
Back to my review of our second quarter results gross margin for the quarter was 23.9%.
This represents an increase of 80 basis points over last year and sequential gain of 20 basis points from the first quarter.
Margins in the quarter benefited from the strong sales environment in the back half of 2019, when the majority of these homes were sold.
Margins also reflect lower incentives as sales discounts were down 40 basis points from last year to 3.5% and down 10 basis points from the first quarter of this year.
Given today's favorable demand conditions, we expect gross margins to remain strong through the back half of the year.
Currently we expect gross margin for the third quarter to be in the range of 23.9% 24, 24.2% with full year gross margins to be or range of 23.8% to 24.1%.
Our reported SGN expenses, the second quarter was $197 million or 8% of home sale revenues.
Included in our reported yesterday was $61 million pre tax benefit resulting from the reversal that insurance reserve are partially offset by the previously announced $10 million pretax charge for severance, resulting from staffing actions taking the quarter.
Excluding these two items, our adjusted SGN a expense for the quarter was $247 million or 10% of home sale revenues, which is 80 basis points better than in the second quarter of last year.
The improvement in overhead leverage was driven by the volume growth realized in the quarter along with the actions taken to lower overhead expenses in response to changing market conditions.
While we typically give guidance only for full year SG. They expenditures, we are providing Q3 numbers as well.
We currently expect SGN expense to be in the range of 9.9%, 10.4% of revenues for the third quarter.
And our adjusted SGN eight to be in the range of 10.3% to 10.7% of revenues for the full year.
Turning to financial services, our operations generated $60 million, a pre tax income representing an outstanding 141% increase over the prior year.
The increase was driven by an improving and improved margin environment.
Higher loan volumes, resulting from growth in the company's homebuilding operations.
The higher capture rate.
In fact, our mortgage capture rate for the second quarter increased to 87% from 81% last year.
The improved capture rate reflects the opportunity our homebuilding operations are finding to leverage pulte mortgage and providing value added services to our customers.
The investments our financial services team have made in building their technology platform allows them to transition to offsite operations with virtual processing without missing a beat.
Closing out my comments on our income statement, our second quarter income tax expense was $108 million, which represents an effective tax rate of 23.7%.
This compares to tax expense of $80 million for an effective rate of 24.9% last year.
Our effective tax rate for the quarter was lower than last year and our historic guidance.
Primarily because of energy tax credits realized in the period.
Going forward, we continue to expect our tax rate to be approximately 25%, excluding any discrete permanent differences like the energy tax credits that may arise.
Our reported net income for the second quarter was $349 million or $1.29 per share while our adjusted net income was $311 million were $1.15 per share.
Prior year net income for the period was $241 million were 86 cents per share.
Moving over to the balance sheet, we finished the quarter with $1.7 billion of cash after having repaid the $700 million, we drew down from our revolving credit facility in March.
In addition to our strong operating results, our second quarter cash position benefited from our actions to strategically differ investments and land vertical construction costs as well as our decision to suspend our share repurchase activities.
Having repaid the revolver, we ended the quarter with a debt to capital ratio of 32.1%, while our net debt to capital ratio fell to 15.5%.
In the second quarter, we invested $452 million and land acquisition development, which is down from $619 million in Q1 of this year and $857 million in the second quarter of last year.
I would note that last year's spend included $136 million related to the American West acquisition.
Through the first six months of 2020, we've invested approximately $1.1 billion and land acquisition and related development.
Given the improving market conditions, we are increasing our investment in both land development and the purchase of new land assets.
As such we expect our full year land investment will be approximately $2.7 billion as we begin completing land deals that we previously deferred.
I'd like to highlight pandemic and any materially impact it has on housing demand where the consumer in the broader economy could influence how much capital we ultimately invest.
We ended the quarter was 163000 lots under control of which 46% or option.
This represents our highest option position over a decade as we continue to progress toward our target of 50% owned and 50% optioned.
Let me now turn the call back to Ryan for some final comments Brian.
Operating in the midst of a global pandemic, an extreme market volatility the company delivered an outstanding quarterly earnings performance, while generating strong cash flows that further strengthen our financial position and flexibility.
I want to say that we are certainly encouraged by the rebound an acceleration in demand that we've experienced over the past few months.
While there are different thoughts on the drivers of this demand what is clear is that the desire for homeownership remains high for all buyer groups.
There is the first time buyer looking to exit a shared living space or the active adult by are looking for a new adventure people want to place to call their own.
Being said, we continue to monitor the acceleration of covert 19 cases in cities across the country, along with delays and even step backs in the reopening of local economies.
Given these conditions, we remain committed to taking a disciplined and thoughtful approach to running our business.
While we have had to adjust business practices are fundamental goals and strategies have not changed as we continue to focus on generating high returns through time.
This means allocating capital in alignment with our stated priorities of investing in the business.
And our dividend and one appropriate returning excess capital to shareholders through share repurchases.
This also means operating against the same risk weighted criteria that we have you so successfully to invest in land for the past eight years.
Although given today's environment, we are certainly working to assess any elevated risks associated with operating during a global pandemic.
I want to thank all of our teams.
From our corporate and division offices to our frontline field personnel for their tremendous efforts. During these very challenging times, everyone has pulled together as we transitioned our operations to work remotely and then where appropriate moved back on say the sales centers could reopen and markets exited their lockdowns.
I'm implementing new technologies, and virtual selling strategies to using PPD and appropriate social distancing our people have been smart fast resilient and maybe most of all invested in each other and in our company.
Let me turn the call back to Jim.
Great. Thanks, Ryan we're now prepared to open the call for questions. So we can get passed so we can get as many questions as possible. During the remaining time in the call. We ask that you limit yourself to one question and one follow up thanks, and chairman would ask that you just repeat instructions and market started if you'd like to ask a question at this time. Please press star then the number.
One on your telephone keypad, if you would like to withdraw your question press. The pound key. Your first question comes from John Dibella with Bank of America. Please go ahead.
As I think you for taking my question.
The first one is obviously the bounce that we've seen has been remarkable.
In terms of strength and sustainability here, but I guess the question is going forward. The big question in our mind is.
How sustainable is this going to be and I know, that's a very difficult to answer but what I'm wondering is what are the things that you're kind of monitoring monitoring.
To gauge whether you should kind of step on the gas here or maybe pull back a bit.
Well John its its Ryan and good morning. Thanks for the question. We're monitoring all the same metrics that we typically monitor when we run the when we run the business. So we're looking at what's going on with consumer behavior. What are we seeing the desire for homeownership what's happening in.
New home searches on the Internet some of the things that we described in our prepared remarks.
We clearly paid attention to what's happening in the resale market.
Which still to this day remains our biggest competitor.
Certainly we have new home competitors, but with the majority of.
Home sales being dominated by resale.
We certainly pay attention to what's happening there.
We look at what's happening in the job market with unemployment what job creation et cetera. So.
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We're really focused John the biggest thing that I would emphasize is we're focused on delivering high returns through time.
And so while we certainly have got a little bit of a tailwind at our back right now with consumer demand.
The investments that we're making the way that we're running the company the way that we're managing that way that we're managing cash.
We're very much focused on those being through cycle.
Through cycle type.
You know movements. The other thing I think in the more kind of short term that we've got to pay attention to is state shelter in place orders and what might potentially happen as a as local economies may revert back to phase one phase two et cetera.
Certainly that could have an impact on the kind of shorter term demand that we might see in a sales office.
That's helpful. And then maybe just on the biggest market specifically in American West. So what are you seeing any improvement there as some of the casinos have begun to reopen.
Yes, surprisingly John if you remember at the end of the first quarter call I highlighted Vegas is a market that we were quite concerned about given the dominance of tourism and travel related economy.
That market is performed incredibly well and in fact had a spectacular June so with the reopening of the casinos even at a limited capacity we've seen a lot of the local workers go back to go back to work.
And and folks your back in the casinos and staying at the hotels. So our Vegas business did quite well in June and we're very happy about that.
Great. Thanks, very much guys.
Thanks.
Next question comes from Mike Dahl.
Please state your company your line is open.
Hi, This is Chris on for Mike. Thanks for taking my question.
My first question, which ill back what's your latest priced.
Hey thoughts are in the current demand environment you guys mentioned, you were able to raise pricing.
Over 50% of your community and in line with what we were seeing as well and.
I was hoping to see if.
If youre thinking screens now in terms of pricing.
We think about price moving up past that 1% to 3% you mentioned.
And given where demand is running right now.
Yeah, Chris.
It's the same process that we've always used which is we evaluated on a community by community basis, taking into consideration what's happening in the local resale market that we compete against as well as what we're doing in our competitive efforts against our other new home competitors. Those are the things that really influence.
And what's going on in our pricing decisions. We're certainly focused on driving the best through cycle returns that we can and so.
That continues to be the overarching theme an umbrella that we used to make decisions I would remind you that you need to really pay attention to rent as well, especially with our first time buyer business that is an alternative.
Source of shelter for that consumer and so they're going to constantly look at the economics of what's more advantageous so.
While demand is good we don't believe that you can raise prices in an on non fettered way.
Got it makes sense.
And then my second question I'll, probably get drilling earned to that.
Demand trends, we're seeing some of that cobot hot spots in Texas, Florida, Arizona, I realize it's tough to gauge what what.
And ultimately look like there but.
The last few weeks have you seen any sort of the favorable trends as far as the impact that that.
Yes, so those markets have been incur incredibly strong for us Chris.
The three that you highlighted, Arizona, particularly Phoenix, Texas and Florida.
Not only as a hot in temperature right now they're also hop in terms of sales pace. So despite the fact that there has been an increase in cobot cases in those markets. They have been some of the most aggressive in reopening the local economies and we certainly seem that translate into success in our sales offices as well.
Got it appreciate the color guys.
Next question comes from Mike Rehaut with Jpmorgan.
Hi, Thanks, Good morning, everyone and congrats on the recent results.
The next month, when it hits and I know, it's a little tough to go too detailed but.
The the June results, obviously incredibly strong.
And you talked about July.
Showing strength as well.
I think there's obviously a lot of focus around the exit rate coming out of the quarter.
I assume you don't want people to model, 50% order growth in the back half of the year.
Is trying to get a sense of maybe.
Give a rough idea so far how July is trending.
Obviously, there is there's a lot of movement within the quarter. There can be some pent up demand. It can also be some increase incremental demand from.
Meats, and perhaps coven itself.
But any directional help around how July is going so far in.
You know.
Around any expectations.
Where that order growth may or may not set allowed in the third quarter would be helpful. I know, it's very forward looking but.
The numbers are just very very volatile currently.
Yes, Mike Good morning, and thanks for the question June was a spectacular month and we're very pleased with that to your point I do think there was some pent up demand for a lot of the reasons that we listed in our prepared remarks, and some of the things that you highlighted.
So to assume that.
Growth rates like that would continue forward.
That's the time will tell what I will tell you about July and we're not going to deviate from our traditional practice.
Other than to comment on the how the first three or so weeks of July has done the first three weeks in July of continued to be strong.
Albeit on a somewhat seasonally adjusted basis as we go into the that kind of dog days a summer. So we're very happy with how july's performed.
We're optimistic about.
Kind of what the summer selling months will hold for our business.
But it won't stop short of kind of providing a full forecast for the third quarter.
Okay no.
Appreciate that and you obviously had to try there and can be again, there's a tremendous amount of focus.
Second question you guys.
Talking about the price increases.
And about half your communities, which is encouraging.
Obviously, you've had a spike in lumber costs as well.
You know traditionally you've actually actually when you've had cost inflation, you've actually had the industry is typically even had margin expansion is topline gains exceed.
The cost side of the business do you see the current environment is being anything different in could you mentioned, obviously trying to not allow.
You know pricing to get out of hand, and you don't want to price yourself out maybe similar to a couple of years ago.
But how do you see your ability to at least.
Offset cost inflation in the current environment.
Hey, Mike, It's Bob and a fair question certainly lumber has trended to candidly all time highs.
We've given a guide on our margins for the balance of the year.
And I think most folks are familiar with the way we purchased lumber it's on a trailing.
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13 week basis, and so you are lumber package pricing for the balance of the year is pretty much set so that these increases.
We'll really be more of an impact in 21, depending on how the market lumber market performs over the next three six weeks 12 weeks.
So on balance actually the.
The market is pretty good for commodities.
Lumber being an outlier.
And I think most builders were able to try and work with their trades to drive pricing down we'll see some benefit for that that's incorporated into our guide for the balance of the year twice the margin improving as we continue through the year.
Given the pretty quick ramp up in the.
The business I think it's reasonable to expect that the trades, we'll be looking for some of that money back as time goes by but.
In a world, where we can get some modest price increases that's to your point, usually so for us to offset it.
Those potential increases in costs. So we're not giving a guide on margin beyond 2020.
But you can tell from the guide for the balance of the year, which is up from where we were in Q3, which is.
Sorry, Q2, which was up from Q1 and up a lot from last year that the market's pretty good at so we are always conscious of overall affordability to ryans point rents always the biggest competitor.
And to our resale, but.
We feel pretty good about our pricing opportunities and our cost controls today.
Next question comes from Kenneth Zener with Keybanc. Please go ahead.
Good morning, everybody.
Okay. Okay.
Can you give any youre.
Okay. Appreciate the outlook in the volatility given youre closing guidance.
Or three Q, it's actually a little higher.
As a percent of your units under construction, then as normal which reflects lower.
Michelle construction phase.
The second quarter.
Can you talk to how you think the industry or homepay in particular might be constrained in terms of production Theres, obviously, a lot of order growth demand.
You know anytime a job license, but what is really constraining your.
Growth I mean is it that your build construction times you don't want to go out more than six months you made very specific comments around.
Have prebuild model.
You want to do but you said you guys can do.
First time buyers I believe in 80 days. So what is really the protection constraints you are seeing within.
Given communities.
That kind of limits you are.
Units under construction as we think about where you can go into second half of the year. Thank you.
Good morning, Kennen. Thanks for the question when we think about production constraints. It's the number one continues to be labor, which is not a new theme.
You know the entire industry has talked about that for a long time and.
It is one of the big reasons that we made the acquisition of IC G down in Jacksonville earlier in the years, we felt good moving to more Offsite type manufacturing was going to be one of the ways that we could really look to eliminate some of the pinch points over time.
Over the long pole with with labor by being more efficient with the way that we're able to manufacture the shell.
So you know labor I think continues to be the number one theme what we are finding is that.
The labor wants to work so as shelter in place restrictions have been lifted more and more in using an appropriate PE and social distancing, we've been able to get homes built there are additional requirements.
I would tell you that it probably adds a few days in some places to cycle time, just because it's a little bit slower than what you'd maybe ideally like so that might be a little bit of an added overly constrain directly related to co. Good. The other one is municipalities. So.
Municipalities are typically have fairly lean in inspectors and permit.
Their back office permitting.
Facilitation and so as those municipalities have sheltered in place and they've asked their city in county employees to do the same.
We have seen an experienced.
On a bit of delay in our overall cycle time, just in our ability to get permits and get instructions.
Thank you.
Thanks, Ken.
Next question comes from Sherman Patterson with Wells Fargo.
Hi, Good morning, guys nice results and thank you for all the detailed there's theres a lot to digest there.
So first question Big picture, you're seeing some buyers exit more densely populated urban areas.
You know, which metro's or regions are you seeing this the most pronounced.
And on top that are you actually seeing migration from.
More densely populated regions like the northeast to less than fleet populated areas like the south.
You know just looking forward how do you think that's kind of plays out over the next year too.
Good morning, driven its Ryan thanks for the question.
For I'll answer your second question first as far as northeast to the South that's a trend that we've been experiencing for a long time.
So it's hard to suggest that that it's it any more than what it already was.
Due to solve for.
You know.
Housing affordability in a number of other things as some of the southern States I think it really work too.
Ramp up their job creation and.
Create opportunities in the south so I would suggest that that continues to kind of happened and I wouldn't necessarily suggested thats accelerating.
As far as the markets that we highlighted where we are seeing an increase in our local business as a result of.
Urban ex this if you will use that term loosely.
San Antonio North Florida.
Southwest, Florida, which for us would be the Naples Fort Myers Sarasota.
Kind of West Coast to Florida, and then we're also seeing a bit of it in the northeast corridor, which is middle and Southern Jersey.
And into Pennsylvania. So there I think we are seeing some folks that maybe we're living closer to the city.
New York City that is looking for an opportunity to be a little bit more suburban in new Jersey in Pennsylvania.
Okay. Okay. Thanks for that and then on your entry level just some of your thoughts moving forward you all of our it seems like now you're making a bit more of an aggressive push towards the first time buyer entry level segment.
What portion of your business are you kind of targeting at this point.
Is it primarily through expanding through your centex brand nationwide and.
It seems like everybody that makes us rotation, it's really been actually a benefit to gross margin.
Can you just talked about some of those moving parts for us.
Sure sure him and I will take you out a bit of a time machine trip and go back to fall of 2016.
We talk to the company that we felt that we had an opportunity to reposition our business to be a bit more.
Balanced in the in the consumers that we target and we laid out that ideally we wanted our first time buyer business to be about 35% of our business. What we highlighted was is that we wanted to do it the right way and intentionally go out and by parcels of land that would allow us to be.
To to effectively and successfully and specifically target the first time buyer business.
Done that as is evidenced by the lots that we control currently.
For our first time buyer business equals 34% of the total loss, we control are targeted to the first time buyer business.
And what we've talked about as it would take some time from the time that we acquired and secure that land to where you see it coming through in the business. The most recent quarter, 31% of our closings represent.
Or were specifically targeted to the first time buyer that compares to 32% of our closings in Q2 their Q1 so.
We are and then compared to prior year second quarter, we were 28% so what you've seen as it's gone from our business being 26, 27% first time to we're now in the 31, 32% and we're moving much closer to that ideal target of 35. So we.
We think it's done wonders for our business, we're seeing nice growth there.
We are probably just a few percentage point shy of where we ideally want to be in terms of closing mix at this point in time, but we've got the land pipeline that will will drive that.
Next question comes from Alan Ratner with Zelman and associates.
Hey, guys good morning.
Nice quarter and congrats on the the execution during this difficult time.
Ryan just on that last point on the land pipeline.
Obviously, you're you're starting to gradually ramp the acquisition and development backup again, presumably the land you're buying now is probably for maybe late 21 22 deliveries I would imagine at this point, but.
Just trying to think forward here a year in a difficult spot where you kind of do you have to take a view on the sustainability of the trends you're seeing now you could do certain things to mitigate the risks such as optioning more but yeah. When you look at 21 and the pipeline you have.
Assuming this is sustainable.
Do you foresee any air pockets on the supply side thinking about the land pipeline, primarily where you would not being a position to grow in 21, assuming this just kind of flurry of activity continues through the end of the year or do you think the pipeline is sufficient to continue growing through 21.
Yes, Alex Thanks for the question I appreciate it we're not giving any guidance on 21 at this point in time.
What I will tell you just.
Broadly about our land pipeline as its healthy.
We control over 160000 loss.
And to your point about how sustainable and how you can manage that risk with that forward view. It's it's a big reason that we've been driving toward the 50 50 mix on owned versus option.
I'm really proud of what our team has been able to do and pushing that number to 46% options, which is the highest that we've ever seen in our business in over a decade. So.
That's that's a real when and when we look at the lots that we've actually approved in the current year the percentage of options are over 60%. So while we've moved the entire portfolio inclusive of del Webb when we.
Isolated just to 2020 acquisitions were north of 60% so.
I think thats it thats, a big part of it we've got a really big backlog Alan.
We're over 13000 homes in backlog, 12% increase over prior year.
So we're well positioned to not only deliver the next six months of the year, but that gives us.
It really nice kind of running start into early 2021, as well, which we think so real advantage and kind of our built to order model is that it gives us so much forward visibility and we know that it's it's a big part of whats continues to contribute to the outsized margins that our business is able to generate.
We did highlighting in Q1 and again as part of kind of our land spend numbers in this quarter. We did we were cautious and the amount of land development dollars that we outlaid early in Q2.
Certainly that we'll have a bit of impact on our ability to get new communities opened on the original timeline.
We think thats, a short term kind of blip and.
It is not something that's going to materially impact our ability to continue to perform wall.
Got it that's helpful. Ryan I appreciate that.
And then second you had some positive comments on Vegas earlier, and it's good to see that market continuing to work performing well in the face of a tough job environment. There as you look at the land spend for the back half of the year on your footprint you if the benefit of being very well diversified are there any markets, you're thinking about a vegas or less.
Endo, maybe where.
You are going to be a little bit more conservative on land spend and perhaps reallocate those dollars elsewhere or do you feel like your whole portfolio right now.
Has an equal look at Atlantic opportunities.
Alan It's Bob.
I think the simple answer to that is that.
All the markets are open.
We are seeing positive demand trends across the country is Ryan walks you through.
And so our view is until we see something change.
We're willing and able to invest everywhere.
Yes, I heard Ryan I'd say that we're looking through with a little bit tighter lens and so as an example for the things that we deferred 30 or 60 or 90 days ago, we have a new process that we've instituted where she was asking the asset management team actually refreshes our expectations of market conditions. So an approval that got me for our.
I would say 10 months ago waiting for some final entitlement.
Before we move money, we're actually going back and saying Okay did the pro forma is that we built than do they still apply.
And so I think what would I would characterize it is we're using the same discipline, we always have.
We've put one more hurdle in the purchase process.
And that hurdle is applicable to every market.
And so using Vegas, or North, Florida, and your example.
Certainly.
As Vegas has opened and improved our attitude towards it has gotten a little bit better.
And so really we're looking at current on the ground data.
We're listening to what the state regulators governments are saying about shelter in place.
And we think we're making educated investment decisions. So.
I don't know if that gets you all the way to where you wanted to be put in in general we're open for business, but we are being disciplined in that thought process.
Next question comes from Stephen Kim with Evercore ISI.
Yes, thanks, very much guys.
I'm really intrigued about the opportunity for you guys to raise prices I know you said you raise prices.
More than happy communities.
In one half your the divisions.
And I'm thinking that you've probably crossed over the absorption rate threshold in their communities and most of your communities by now above which further growth lead you to raise price.
We're also seeing mortgage rates down 80 basis points year over year, and so I'm thinking that the median monthly payment that youre entry level buyer is paying.
It's probably down quite a bit.
And probably down a lot more than the than the decline and they're seeing and rents. So I'm curious one with the last time, you think you saw buyers monthly payments down this much versus rents and is there any reason to think that there is going if that's going to be.
I will provide you a lot of headroom to raise prices in a way that it's very different from what we've seen in the last few years.
Yes, Stephen that a tough question Theres a lot a lot in that I will try and impacted.
And maybe easier than unpacking. It is to simply say, it's a really favorable demand environment out there.
And I think as we highlighted theres a number of factors that are driving that one.
Money is very affordable right now and so the the prospect of.
Being able to afford a new home is probably better than it's been a long time I will caveat it by saying the first time buyers still got to have a down payment.
So theres got to be enough savings from somewhere in order to make that happen.
And we don't see that being a huge impediment, but it is it is a.
Restrictor out there that are our hurdle rate, our hurdle that needs to be cleared before the first time buyer can enter the the home buying market or the homeownership market.
To your point, Steven I think.
It's not been often the decline in interest rates and resulting payment has been faster than the decline in rent and so you combine that with the fact that theres a desire to probably not live and more densely.
Constructed apartments type complexes I think those are really positive.
You know positive.
Tailwinds for the entire industry and certainly as we move our business closer to 35%.
You know being first time, we think that bodes well for the future of the business.
Yes. It certainly does my follow up relates to the down payment comment that you made.
Historically, you're right down payment has been viewed as like the one of the key impediments to first time buyers.
But I'm thinking in this environment, we've seen student loan forbearance.
Through from March to September.
We found that the average payment on that student that is nearly $400 a month.
If you take a couple of what that both may have student loans, I mean ramp it out 12 or keep growing data through September plus a couple of 1200 dollar stimulus checks I mean that alone can pretty much match.
Go a long way towards providing a down payment.
So I'm curious as to whether or not you are hearing from the folks in your communities at the sales folks that the ability to come up with a down payment if not the hurdle that wants wasn't in fact that hurdle may actually be getting a lower.
Given the they increased savings.
Yes, Stephen I don't know that Weve, specifically her direct feedback on on down payment related concerns.
That theres anything there that I would highlight what I would tell you as evidenced by the year over year growth rate that we highlighted in our June sales from the first time segment.
We were up 70 70 plus percent in the first time buyer segment. So.
If you use that as a data point it wouldnt.
Largely suggests that.
Those buyers are able and are finding ways to come up with a down payment whether it's from the means that you suggested or something else.
Money is clearly there and thats translating into a favorable sales environment out of that segment.
Next question comes from Susan Mcclary with Goldman Sachs.
Thank you good morning.
Susan.
My first question is can you give us a little bit more color on the SGN side, especially as it sounds like you have taken that some of those people that youve furloughed and perhaps even adding to the head count from some of the more permanent reductions that you did how should we think about that flowing through and can you give us some sense of where you are in terms of the headcount.
Yes sure Susan.
I think if you kind of piece together everything that we we included in the remarks.
You know be caused the business has been strong we have brought back.
Almost all of the furloughed folks that we had asked to wait to come back to work.
We've even rehired a couple of people but.
On balance, we had announced about $65 million for the C.
Fiscal 20 related to the actions that we took and I would tell you that remains pretty much where we think we landed we may reintroduced a couple of cost and principally I'm thinking on the IP side.
You know to make sure we can continue advanced that work.
Beyond where we thought we would based on the work we did in May.
So with that our spend is pretty much what we thought it was going to be that is reflected in the guide that we gave.
So if you think about at our full year guidance, 10.3% to 10.7% of revenues NSG ne.
Is better than by about 20 basis points.
The guidance that we had at the beginning of the year, which we have obviously took down at the beginning of the pandemic.
So we don't we don't see a lot of creep back into the business, which is good and we want to be disciplined about that.
We hadn't included the furloughed folks in the save and so we we had hoped and expected to bring those folks back to work they've come back to Ryans point, there mostly field personnel, so they're serving revenue producing activities.
So we feel pretty good about our expense structure for the for where we are in the business.
And.
If the business continues to perform at a heightened level, we might need to bring some more people back, but again I think that would be well leveraged from an overhead perspective, because they would be bringing we bring them back to do things once against that are revenue producing.
Okay, all right that's very helpful and then.
The trends that we've seen and obviously the the relative confidence in your outlook can you just talk a bit too what you need to see to get comfortable to start to read in some of the repurchase activity and any color on what the timing of that could potentially be.
Yes so.
I think you know in fairness, we've come through a pretty tough time.
Fully drew our revolver.
We were able to pay that back comfortably we have a very nice cash position.
You know debt to cap is at 32% and a year ago is at 35. So we've made progress there. If you look at it on a net basis, it's at 15.5 down from 29% a year ago. So.
I feel really good about our financial position.
Having said that we're still in the midst of pandemic and so.
Yes, I think what we will do is very consistent with what we've done historically is we'll report the news.
So as and when we get into the market. After we've done that you'll you'll hear about it but the process will be you know Ryan and I and team here, we'll work through.
What are our medium to longer term capital needs. What do we think the business produces no different than pre pandemic.
Share and work through that with the board and come up with.
A game plan for how to how to repurchase equity.
You heard Ryan said earlier in the call our capital priorities have not changed.
Still invest in the business is high return, it's paying our dividend and if we have extra.
We will use it to.
Buyback stock, we also talked about leverage we're in a good spot there we do have a maturity in March of next year.
420, some odd million dollars that will be something that we would likely at this point think that we're going to use cash to satisfy.
But obviously market conditions needs for cash and capital will weigh on that as we get closer so.
We'll we'll have more to say about that as time goes by.
Next question comes from Jay Mccanless with Wedbush.
Hey, good morning, Thanks for taking my questions I guess the first question I had is could you give us any color on where you expect community growth for the rest of this year and maybe.
Preview for 21.
Yes, so community count growth.
We are thinking is good it be somewhere from between two and 4% down in Q3 and Q4 each versus the.
Average in the preceding year quarter, So Q3 versus Q3 the year prior.
Certainly the development delays and the land purchase delays you heard Ryan talk about it earlier in the call that come from what we did call. It beginning of April through the middle to.
Late June we've started to ramp that backup but that will have an impact on our community count as we go forward.
We've not provided any guidance for fiscal 2001, we'll we'll give you that as we get closer to the end of year and we go through our planning process.
Okay. That's helpful. Thank you for that.
The second question I had in terms of what you're looking for for new land acquisition and some of the migration away from the urban core you guys talked about.
His pulte as a company starting to look at further out land positions larger land positions more lots I mean is.
Cove and everything we've seen over the last four months.
Affected the way you guys are buying land or thinking about land going forward.
Yeah. Jay This is Ryan I think what we highlighted is that the process that we've used to evaluate risk associated with buying land remains very consistent so we've not made.
Major changes there certainly.
I do think that changes in consumer behavior from co bid that will clearly influence.
You know things overtime I think some of the bigger influences are going to be on home design quite frankly.
But what are our business.
Always has been somewhat are mostly suburban.
Just because.
That's where available land is so.
You know as far as going into the act serves and into B and C type locations and really making big bets on land I don't know that you should expect to see that from us.
We're going to continue to be very disciplined and where we invest.
We still think that access to transportation corridors good schools.
Employment Entertainment shopping et cetera, we still think those those things all matter and so we're going to continue to look at buying in locations, where we think buyers want to be.
Pre covert postcode good and.
Those are the elements, we think drive through cycle will return.
Do you think that from a plan standpoint, you guys are in good shape.
A lot more requests for.
The double work from home or students and the kids working from home environment are you guys adapting to that are and what.
What are you hearing from your customers right now as far as that goes if you're not going to go further out maybe talk about what's you're going to do with some of the house plans et cetera.
Yes, so so Jay I.
I think it's one of the things there's been a real strength for the company is our consumer inspired focus and the research that we've been doing for the past seven or eight years with our commonly managed plans.
We've really been designing and creating just some spectacular floor plans.
That not only I think meet current consumer needs they allow for great flexibility.
So in our build to order model there are a number of things, where we have flexible spaces that can be turned into a jim or home office or a second master or an in last week.
Those are all things that our current portfolio of plans allow for.
We'll continue to listen to the customer, especially in light of whats currently changing to see if there's more opportunity to accelerate that but keep in mind, what I highlighted earlier in the call. Our biggest competitor is resale and I can promise you that any of the new plans that we have are far better than housing stock. This 10 2030 years old.
At this time I will turn the call over to the presenters.
Great. Thank you very much appreciate everybodys time this morning.
Level for questions over the remainder of the day and move forward speaking with you on the next call.
This concludes today's conference call you may now disconnect.
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Okay.
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