Q4 2020 Pultegroup Inc Earnings Call
Good morning, and welcome to the fourth quarter 'twenty 'twenty Pulte Group, Inc. Earnings Conference call, all participants will be in listen only mode.
You need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions.
<unk> will be limited to one question and one follow up.
To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to James Zuma, Vice President of Investor Relations and corporate Communications. Please go ahead.
Thank you Andrew and good morning, I'm pleased to welcome you to both the group's fourth quarter earnings call for the period ended December 31, 2020. We appreciate your time this morning and offer belated best wishes for the new year I'm joined on today's call by Ryan Marshall, President and CEO, Bob O'shaughnessy, Executive Vice President and CFO and Jim SaaS Senior VP.
Finance.
A copy of this morning's earnings release and the presentation slides that accompany today's call have been posted to our corporate website at Pulte group Dot Com will also posted on our audio replay of this call today why.
I want to highlight that we will be discussing on a reported fourth quarter numbers as well as our results adjusted to exclude the impact of certain reserve adjustments and tax benefits recorded in the period a reconciliation of our adjusted results to our reported financial results is included in this morning's release and within today's webcast slides.
We encourage you to review these tables to assist in your analysis of our business performance 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. The most significant risk factors that could affect future results are summer.
As part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports now let me turn the call over to Ryan Marshall Ryan. Thanks.
Thanks, Jim and good morning.
Appreciate everyone joining today's call I hope that your new year has started well and that your that you remain healthy and safe.
It goes without saying that COVID-19, and the resulting challenges may 2020, a year. Unlike any that we've experienced before but let me just say right upfront that I'm extremely proud of how our entire team responded and how our organization remain engaged and focused during some very difficult times. Thanks.
Thanks to the sustained efforts of our dedicated team we successfully navigated through a year that started strong slammed to a halt and then accelerated into the strongest demand environment. This industry has experienced in more than a decade.
As you read on this morning's press release Pulte group completed on exceptional year by delivering outstanding fourth quarter results that included a 24% increase in orders of 220 point increase in gross margin and a 31% increase in adjusted earnings per share.
We also ended the quarter with $2 $6 billion of cash and a net debt to capital ratio below 2%.
Reflecting on a lot of hard work by an amazing team Pulte group realized a 6% increase in full year closings to 24624 homes and a corresponding 7% increase in full year home sale revenues to $10 $6 billion.
Benefiting from our ability to expand homebuilding gross and operating margins along with dramatic gains in our financial services business, we converted the 7% top line growth into a 29% increase in pre tax income of $1 $7 billion.
Our outstanding results extend beyond our income statement as we generated $1 8 billion in operating cash flow in 2020, after investing $2 9 billion in land and development during the year.
Beyond investing in land, we increased our dividend by 17% effective with the payment. We made this month and repurchased $171 million of our common shares in 2020, despite having suspended the program for six months because of the pandemic.
I am also extraordinarily proud to note that consistent with our focus on generating high returns over the housing cycle, we realized a 23, 7% return on equity for the year.
With 2020 complete we enter 2021 in a strong financial position and with numerous opportunities to drive further business gains.
Obviously, we can't control how the pandemic plays out, but we are optimistic that the multiple vaccines getting distributed meaning that we can see a light at the end of this long tunnel.
Rob will provide specific guidance as part of his comments, but let me offer a view of how we are looking at the business on how we plan to operate in the year ahead.
We expect a strong demand environment.
The housing industry experienced for much of 2020, and then reality for many quarters prior to Covid can continue well into 2021.
We've said for years that we thought housing starts needed to be around $1 5 million to meet the natural demand created by growth in population and household formations. We finally reached one 5 million starts from 2020, but.
But we have under built relative to this number for years.
Given this unmet need and the potential mix shift in demand towards more single family and away from apartment living we believe demand can remain strong going forward for our business.
On the demographic tailwind. We also believe that the pandemic has caused a permanent increase in the number of people who will be working from home full or at least part time.
Such a shift as it has profound implications in terms of what people need from their homes as well as where their homes can be located for example, we believe our remote working dynamic expands the buyer pool, because it can allow people to purchase more affordable homes and further out locations at.
At the same time working from home has the potential to increase the intent to buy new homes, which offer floor plans and technology features that better meet the needs of today's homebuyers.
With such a strong demand environment. It works to our advantage to be among the nation's largest builders with access to land labor and material resources.
We enter 2021 with more than 15000 houses in backlog 180000 lots under control of which half are controlled via option and long standing relationships with suppliers and trade partners. The combination of these factors should allow us to increase 2021 deliveries by more than 20% over last.
Year.
As we've demonstrated over the years I am confident in our organization's ability to operate the business successfully and to get homes built.
But I do think it's fair to acknowledge that there are points of friction in the system.
<unk> remains tight although the change in administration may allow for some relief assuming immigration policies are eased at the same time product manufacturers are battling supply chain issues and the occasional COVID-19 related disruption within their plants, although I must say our suppliers have been tremendous partners going above and beyond in many instances.
To provide the materials we need.
Given high expectations for the company's operating performance and our balance sheet strain at yearend I believe we are exceptionally well positioned to execute on all of our capital allocation priorities more specifically, we're targeting land acquisition and development spend of $3 7 billion in 2021.
This is an increase of roughly $800 million over our 2020 investment, but we think appropriate given the growth in our operations.
Beyond our expected land investment we have made great progress on planning for and selecting the location of our next Offsite manufacturing plant.
We still have a few details to work out what the owners of the sites under consideration, but we hope to finalize a plant agreement within the next couple of months and then began installing the requisite production equipment later this year.
Our IC G operation in Jacksonville has exceeded our expectations. So we were excited to get this new plant up and running sometime during the first quarter of next year.
Along with investing in the business and continuing to fund our dividend as you read in this morning's press release, we will be using available cash to pay down $726 million of our outstanding debt in the first quarter and finally, we will continue to return excess funds to shareholders through our share repurchase program in response to the uncertain.
East caused by the pandemic, we have suspended share repurchase activities during the second and third quarters of last year.
As detailed in our press release, we resumed the program and repurchased $75 million of stock in the fourth quarter.
Our full year total to $171 million.
We have repurchased more than one third of the companys share since initiating the program and we expect to remain an active buyer of our shares going forward.
Housing demand was outstanding in the back half of 2020 with strength across all geographies and buyer segments.
And I'm certainly pleased to report that this strength has continued unabated through the first few weeks of January the housing industry has been extremely fortunate in being an economic engine, but we do not take this for granted nor will we forget how devastating COVID-19 has been for thousands of businesses and millions of people.
It is certainly our hope that we are rapidly approaching the end of this pandemic let.
Let me now turn the call over to Bob.
Thanks, Ryan Good morning, everyone and let me add my best wishes and express my hope that we can all navigate the coming year on health and safety.
As indicated on our press release, our fourth quarter financial results were impacted by the following items of.
$16 million net pre tax benefit from adjustments to insurance related reserves.
$22 million pre tax charge from adjustments to financial services reserves.
And a tax benefit of $38 million, resulting from energy tax credits and deferred tax valuation allowance adjustments.
Where appropriate I'll referenced the impact of these items during my review of the quarter.
For our fourth quarter home sales revenues increased 5% over last year to $3 $1 billion.
The increase in revenues for the period was driven primarily by a 4% increase in average sales price to $446000.
As closings were up 1% to 6860 homes.
The increase in average sales price for the period reflects a strong pricing environment for all buyer groups. We're pleased to report that on a year over year basis. Our average sales price was higher for our first time move up and active adult buyer groups.
The demographic mix of our closings moved slightly in the quarter and reflects changes caused by the pandemic and by our strategic investment to serve more first time buyers.
Consistent with these dynamics, our fourth quarter closings in 2020 consisted of 32% first time 46 per cent move up and 22% active adult.
In the fourth quarter of 2019 closings were comprised of 31% first time 45 per cent move up and 24% active adult.
Our net new orders for the fourth quarter increased 24% over last year to 7056 homes, while our average community count for the period was down 2% from last year to 846.
The decrease in community count reflects the slowing of our land activities earlier this year in response to the pandemic as.
As well as the faster closed out of communities due to the strong demand environment and related elevated absorption paces.
Demand was strong across the entire period and actually accelerated toward quarter end at December orders were higher than November and essentially flat with October.
Given the strength of ongoing demand our divisions are taking specific actions to manage sales pace and production. So our backlog does not get overextended.
We're also being thoughtful about adjusting price to help cover rising house costs.
Especially the cost of lumber, which moved significantly higher in the quarter.
Consistent with what we experienced during the third quarter demand was strong across all of our brands, including the ongoing acceleration in demand among active adult buyers.
In the fourth quarter first time orders increased 27% 2084 homes.
Move up orders increased 17% in 2994 homes, while active adult orders increased 33% to 1978 homes.
In fact, our Q4 active adult orders were less than 100 units below the all time quarterly high we reported in the third quarter of this year.
After a pause in the first half of 2020 active adult buyers have clearly gotten off the fence.
Our fourth quarter cancellation rate was 12%, which is down from 14% last year.
Based on the strength of our sales our year end backlog increased 44% over last year to 15158 homes.
Backlog value at year end was $6 $8 billion compared with $4 $5 billion last year.
We believe our large backlog and continued strong demand for new homes has the company extremely well positioned to realize significant year over year growth in closings in 2021.
At the end of the fourth quarter, we had a total of 12370 homes under construction of which 1949 or 16% were spec.
In the fourth quarter, we focused on clothing sold inventory, but we're actively working to increase production of sold and spec homes throughout our markets.
Our large backlog makes this process a little easier and we're working closely with our trades at product suppliers to ensure the needed capacity to deliver more homes going forward.
With 12100 with 12370 homes under construction at year end, we expect deliveries in the first quarter of 'twenty 'twenty one to be between 6000 306600 homes.
At the midpoint this would be a 20% increase in closings over last year.
This growth rate is in line with what we expect for the full year as we were targeting deliveries to increase approximately 22% to 30000 homes for all of 2021.
Given the strength of our move up and active adult sales along with price increases realized across all buyer groups. Our average sales price in backlog was up 4% over last year to $448000.
Based on the prices and backlog, we expect our average sales price on closings to be in the range of 430 to $435000. Both for the first quarter and for the full year 2021.
As we've said in the past the final mix of deliveries can influence the average sales price, we deliver on any given quarter.
Reflecting the benefits of the favorable pricing environment and our ongoing work to run a more efficient homebuilding operation our fourth quarter gross margin of 25% was up 220 basis points over last year, and 50 basis points from the third quarter of this year.
Driven primarily by increases in lumber and labor our house cost will be higher in 2021, however, given strong demand conditions, we expect to pass through most of these costs through increased sales prices.
As a result, we expect gross margins to remain high and be approximately 24, 5% for both the first quarter and the full year.
Our reported SG&A expense for the fourth quarter was $280 million or 9.1 of home sale revenues.
Excluding the $16 million net pre tax benefit from adjustments to insurance related reserves recorded in the fourth quarter.
Our adjusted SG&A expense was $296 million or nine 7% of home sale revenues.
Last year, our reported fourth quarter, SG&A expense was $262 million or eight 9% of home sales revenues.
Excluding an insurance reserve adjustment of $31 million last year, our adjusted SG&A expense was $293 million per 10% of home sales revenues.
At the outset of the pandemic, we took action to adjust our overheads in anticipation of a more difficult operating environment.
Although nearly all furloughed employees have rejoined the company and we've hired back many of the employees. We released we still expect to realize improved overhead leverage in 2021.
At present, we expect SG&A expense in the first quarter of 2021 to be in the range of 10 five to 10, 9%.
This is down from 11, 9% last year.
For the full year, we are targeting an FCA and SG&A expense of 10% of home sale revenues down from 10, 2% on an adjusted basis last year.
Our financial services operations continued to deliver strong results as we reported fourth quarter pre tax income of $43 million, which is up from $34 million last year.
It's worth noting that our fourth quarter 2020 results include the $22 million pre tax charge from adjustments to our mortgage origination reserves as we settled claims tied to mortgages issued prior to the housing collapse.
The increase in pre tax income in the quarter from our financial services business reflects continued favorable rate in competitive market conditions, along with higher loan volumes, resulting from an increase in mortgage capture rate on <unk>.
Capture rate for the quarter was 86% up from 84% last year.
Our reported tax expense for the fourth quarter was $86 million, which represents an effective tax rate of 16, 4% and which reflects the tax benefit of $38 million, resulting from energy tax credits and deferred tax valuation allowance adjustments recorded in the period.
In 'twenty and 'twenty, one we expect our tax rate to be approximately 23, 5%, including the benefit of energy tax credits, we expect to realize this year.
Finishing out my review of the income statement, we reported net income for the fourth quarter of $438 million were $1 62 per share.
Our adjusted net income for the period was $404 million or $1 49 per share in.
In the comparable prior year period, the company reported net income of $336 million from $1 22 per share and adjusted net income of $312 million or $1 14 per share.
Benefiting from the outstanding financial performance, and resulting cash flows generated by our homebuilding and financial services operations.
We ended the quarter with $2 $6 billion of cash in.
In addition at the end of the year, our gross debt to capital ratio was 29, 5%, which is down from 33, 6% last year and our net debt to capital ratio was one 8%.
In the fourth quarter, we repurchased one 7 million common shares at a cost of $75 million or an average price of $43 69 per share.
For the full year, the company returned $171 million to shareholders through the repurchase of four 5 million common shares at a cost of $37 58 per share.
As noted in our earnings release, we expect to pay down $726 million of our outstanding senior notes in two separate transactions during the first quarter of this year.
First we will exercise the early redemption feature effective February one on $426 million of senior notes originally scheduled to mature on March one of this year.
In addition, we initiated a tender offer this morning for $300 million of our 2026 and 2027 senior notes, which we expect to complete on February 26th.
Assuming full execution of the tender the retirement of the $726 million will save the company approximately $34 million in annual interest charges and on a pro forma basis, lower our gross debt to capital ratio to 23, 7%.
In the fourth quarter, we invested $942 million on land acquisition and development, which brings our full year 2020 spend to $2 $9 billion as Ryan mentioned, given our positive view of the market and the expected strong cash flow generation of the business. We currently expect to increase our investment in land acquisition and development.
$3 7 billion in 2021.
And finally, we ended the year with slightly more than 180000 lots under control of which 91000 were owned and 89000 are controlled through options I want to highlight that based on these numbers with effectively reached our stated goals of having 50% of our land pipeline controlled through options.
And given our guidance targeting 30000 closings from 'twenty. One we've also reached our goal of having three years of owned lots.
Land acquisition can be lumpy, so the numbers could move around but we remain disciplined on our investment practices and focused on enhancing returns and reducing risks through the use of options now let me turn the call back to Ryan.
Thanks, Bob when I took over as CEO in 2016, there were several areas, where I saw an opportunity to enhance our long term business performance. Among the targets. We put in place were to expand first time to be one third of our business.
To lower our lot position to three years of owned lots.
To control, 50% of our land pipeline via option and.
And increase our growth rates, while continuing to deliver high returns for our shareholders.
Given our 2020 performance and our expectations for 2021. It is gratifying to say that we've achieved these initial goals with this foundational work in place. We can now continue developing an even more successful business as we expand our operations advanced innovative customer centric technologies and integrate new construction processes.
These.
Our outstanding 2020 results in combination with continued strength in housing demand.
Also has pulte group entering 'twenty, one with tremendous momentum we began the year with our largest backlog on well over the debt and well over a decade, along with great operating metrics and a strong balance sheet that gives us the flexibility to capitalize on market opportunities.
These opportunities include the expansion of our off site manufacturing capabilities that I spoke about earlier as well as the geographic expansion of our homebuilding operations.
I am sure that most of you saw last week's press release that Pulte group has established new operations in the greater Denver area.
At the same time, our Raleigh division is extending its reach and establishing a presence in the triad area of North Carolina, which includes the city's of Greensboro, Winston Salem and Burlington.
We have our initial land positions in place and we're working quickly to increase our lot pipeline in these new areas.
We are excited about the opportunities we see in both markets as well as several other cities. We are currently evaluating.
With our goal to increase closings by more than 20% this year, along with investing $3 $7 billion in land and our expansion into new markets. We believe we are well positioned to grow our operations, while continuing to deliver high returns.
In closing I am extremely proud of what our organization accomplished in 2020.
And I want to thank all of our employees for their efforts toward delivering on outstanding home buying experience and homes of exceptional quality.
I also want to thank our suppliers on trade partners, who are working tirelessly to provide the resources needed to successfully run our business.
We entered 2021 with high expectations, but I know the pandemic continues to rage and so we will continue to operate our business thoughtfully and safely.
Let me turn the call back to Jim.
Great. Thanks, Ryan from.
Now prepared to open the call to questions. So we can get as many questions completed as possible. During the remaining time on this call. We ask that you limit yourself to one question and one follow up. Thank you and now let me ask Andrew to again explain the process and open the call for questions.
Thank you we will now begin the question and answer session to ask any question you May Press Star then one on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please.
<unk> Press Star then two.
Again participants are limited to one question and one follow up at this time, we will pause momentarily to assemble our roster.
The first question comes from Mike Dahl of RBC capital markets. Please go ahead.
Alright, Thanks for taking my questions on nice results.
Brian.
Bob I guess first question really is around land investment in.
In a way capital allocation as well.
Got to turn our nose up at an $800 million increase in land spend this year. It does seem like you guys are maintaining your typical balance when you're thinking about the debt.
Pay down debt potential for share repurchases a lot of your peers have started to more significantly ramp up.
Land investment just given the strength in demand and potentially some.
Yes, some shortfalls in community counts coming how do you think about this current environment.
And your allocation to land investment relative to your more balanced kind of through cycle mentality.
Yes, Mike Good morning, Thanks for the question.
A couple of things that I would share with you number one I would orient you to the fact that we've maintained for the better part of a decade that we're running a balanced business through cycle.
Where we want to invest.
Invest in land first and foremost and grow our business, but there are other parts of capital allocation that we believe create long term value.
We are taking a pretty pretty big step up in our land spend this year is I think we've highlighted this morning go into $3 $7 billion. It's a big bump from where we were at in 2020, certainly there were some delays in 'twenty that have rolled into 'twenty, one, but even adjusting for that.
We think it's a pretty big step up.
We are going to continue to be very thoughtful and responsible in making sure that we're driving the types of returns that we know create long term value.
We just don't believe that now.
Now is the appropriate time to get into.
Back into the mentality, we're all available.
Cash is funneled into land.
The last thing Mike I would tell you is that we do well, while we don't peg our land investment specific to this number we do think about.
Land spend as a percentage of revenue.
And we think the numbers that we have allocated and projected for 2021 are an appropriate step up reflective of what is a very strong market.
Okay got it. Thanks, Ryan My second question goes to the margin side and you clearly had success in terms of.
Utilizing price on controlling costs to drive margin expansion and I think you alluded to.
Margins potentially being slightly lower than the <unk> levels, and mostly being able to offset the increase in house costs could you just elaborate more on kind.
Kind of magnitude of the increase in costs, maybe on a per square foot basis, or however, you want to quantify that that you're expecting to come through the <unk>.
P&L and also if you could share.
Some sort of kind of price per square foot that you've been able to achieve just help us understand that that balance between price cost a little bit better.
Yeah, Mike It's Bob.
I think important to remember we're starting from a very strong margin position.
And certainly in the fourth quarter, we got the benefit of some spec sales and we don't have a ton of spec on the ground today. So as we're looking forward into the year, we're trying to project is.
Whereas the sales prices that we've contracted.
But we recognize that our house costs are going up we are projecting them to be up in the neighborhood of 5% net.
Next year in fiscal 'twenty one.
So that's inclusive of.
Commodity input cost and labor.
So you know.
A little bit richer increase than we've seen for the past couple of years. Obviously the market is strong we think we can get most of that price back.
On the other thing we are conscious of is affordability and we want to make sure that we've got pricing that.
People can actually afford to close on so our teams are doing a nice job of managing that price equation as we're out in market.
So the guide for the year at 24, and a half again reflective of a very very strong environment.
And but we do recognize especially with lumber having risen so rapidly.
That there'll be a little bit of pressure on margins with that.
The next question comes from Ivy Zelman of Zelman <unk> Associates. Please go ahead.
Thank you and.
Congrats on a strong year on the fourth quarter maybe.
Maybe Ryan you can help us better understand when you think about the $2 7 billion.
Acquisition land.
Development.
Then.
EBIT, excluding COVID-19, we hear a lot from municipalities are builders complaining.
We want affordable housing just not in our backyard and just thinking about some of the constraints on getting lots developed.
Is there anything that can change with maybe whether it's on type of tax incentives.
Robert There's a lot of focus on the demand side on the body of administration, but do you think that it's not a constraint that appears to be and you're overcoming that or is there something that has to change to continue to build more shelter for this country with municipalities being a bottleneck.
Yes, Ivy good morning.
Thanks for the question I think you've touched on on <unk>.
Item that frankly, we've been talking about as an industry and as a company for a while.
And you hit the nail on the head I think all municipalities want more affordable housing and shelter as they work to grow their job base and grow their own local municipalities and economies.
But you nail that they wanted as long as it's not next door to existing residents or.
Other folks that are already there so.
I believe that's a more of a local issue than it is a national issue.
And.
But that being said I do think.
<unk> from the top from the administration can certainly help to influence what local municipalities do.
So look there are challenges out there, but one of the things that I think we highlighted is our size.
And I think the talented team that we have we're working through.
What is a challenging environment out there and we are able to get our land entitled We are able to get it developed we are able to get investment.
If things were a little easier.
You could do even more but we feel we feel very comfortable about the numbers that we've put forth for 2021.
The next question comes from Matthew Bouley of Barclays. Please go ahead.
Hey, good morning, Thanks for taking the questions.
Wanted to follow up on the margin side.
So you know guiding gross margins up 20 basis points.
'twenty one despite this pricing environment I'm just wondering if there's any.
Other margin headwinds that we should be aware of beyond that that increase in house costs, you just mentioned Bob some thinking.
Whether it's the mix of option land, that's come up and maybe now coming through.
Or perhaps more first time closings expected just just what else might be sort of play.
Playing into the puts and takes there on that guidance. Thank you.
Yeah, Matt I don't I don't think there's anything really dramatic obviously land is more expensive each successive lot the vintage kits.
Kind of.
Worked through Youre, bringing more expensive land on as the market has appreciated through the years. So that's a contributor.
Other than that I mean, we've got a very large backlog, we've got pretty good visibility into what our margins are going to be.
And.
In.
And candor.
Yes.
We contracted these houses.
Three months ago, and so the pricing environment isn't fully reflected in our sales right. Now so you see that kind of on a little bit of a lag with us.
We actually like that because it puts us in a position where we can understand our house costs going into it when we're contracting.
But we.
We do have a little bit of a lag in terms of where the pricing environment is right now versus what is closing for us for instance in the first quarter.
Okay understood Thats helpful.
Second one just around selling pace.
I heard you say that.
December ended up by even stronger then.
November.
And correct me if I, if I misheard you of course.
But just you know, obviously pulte like many others ending the year running faster than usual last quarter, you guys talked about sort of intentional slowing our pace do you think you have the capacity at this point to see.
Further uptick on selling pace into Q1 as normal and I guess I think you mentioned January sort of continued unabated.
Any additional color there would be helpful as well thank you.
Matt Good morning, its Ryan.
We did have a very strong fourth quarter.
You heard correctly December sign ups were up over November and equal to what we did on October.
I think for those of you that have been following the industry for as long as you have.
That's a typical normally you see.
Seasonally downturn October to November November to December so.
It's reflective of how strong the demand is and then.
January is off to a very good start so.
We did.
And the majority of our divisions manage the number of sales that we were we were.
Allowing to be sold either via lot releases or price increases or some combination of both.
And that's really about making sure that we're matching our sales rate to our ability to produce homes.
We've significantly increased the production capacity that we have.
So I think we're doing a nice job working through that and then the other the other factor that you've got to think about is lot availability. So we factor all of those things into our sales release in our pricing strategy in all of those elements are reflective are reflected in the guide that we have.
Given for the full year or so.
Look as I highlighted on some of my prepared remarks.
It's a great time to be in the homebuilding business and I think there are a number of really strong demographic and economic trends that are going to continue to help support this industry.
The next question comes from Stephen Kim of Evercore ISI. Please go ahead.
Yeah, Thanks, very much guys good quarter.
I was really intrigued by.
Some of the things that give a glimpse into what could be coming one of the interesting things I think that you pointed out is the do you have a build to order model, which.
Suggest that what we saw on the fourth quarter doesn't really I fully reflect the environment, which are it sounds like it was pretty enormously strong in the fourth quarter. So it looks like that's still yet to come and so in that vein I wanted to ask you about.
Your.
Outlook for pricing and therefore implicitly margin, we couldnt help but notice that your order price. This quarter was extremely strong and relative to the price that you are forecasting or your outlook for price for the full year next year I just did a quick analysis of that going back through time.
<unk>.
And we have never seen anything like the kind of decline that you're calling for in your full year 'twenty, one closing price relative to the order price that you took this quarter and in your commentary everything seemed to suggest that there is actual momentum building in price.
And so I just wanted to talk to you about what is embedded in that is very significant mix shift of more entry level communities that you are embedding in that assumption.
And are you not seeing what other builders seem to be seeing which is aimed at consumers actually paying up for more options and upgrades, what's your bto model would capture.
And even a preference for larger homes.
Because your guidance would seem to suggest that's not happening nearly to the degree that you can have a negative mix shift it's kind of I'm curious so I was wondering if you could address that.
Good morning, Stephen It's Ryan. Thanks for the question there was a lot in there to unpack and I'll try and touch on the key elements in if I Miss anything will come back and grab it and a follow up but we are seeing a robust pricing environment as I think we've highlighted as it relates to the pricing the ASP guidance that we've given for the full year.
It is being largely influenced by the increasing amount of first time business that we have coming through our business along with geographic mix. So.
As you know we build in kind of coastal locations like Northern California, Southern California, et cetera, and so.
The load of closings that come out of those divisions relative to other places in the country can certainly have an influence on ASP.
As it relates to pricing and our ability to take price.
Steven you know that we've long talked.
<unk> talked about our strategic pricing methodology.
And how that has been a large contributor.
<unk> of the company's outperformance in margin relative to the competition. So.
Certainly we feel that will continue to be a.
A real strength for the company.
We're operating in the same market, but I think everyone else's and so theres not really any reason to believe that we wouldn't.
Benefit from from the uptake in demand and the ability to push price.
Yeah, It certainly would agree with that.
Then maybe we haven't seen it as quickly in your numbers just because you have a built to order model, but that should also allow you to capture I would think if anything a little bit more price because you give your customers the ability to option in that regard we've seen a couple of other builders report so far that are spec builders.
And in both cases, well so far we've seen margins for the spec builders surprise to the upside even versus what they had thought a couple of months ago and when we dig into that some of it obviously is pricing, but some of it is also that cost per square foot seems like it didn't go up as much as they might have thought and part of the reason for that.
That is because they found that they are building somewhat larger homes and that the somewhat larger homes have an actual lower cost per square foot. Because you know, there's only one kitchen and and only one roof and all that kind of stuff. So you get more efficiency. When you build a slightly larger box I was curious if youre seeing any of that and if you have incorporated.
Of that into your thinking about what cost per square foot will be over the next six to 12 months.
Yeah, Stephen So we've certainly.
Factored in into the guide that we've given what we believe the product mix will be but within a given community.
The offering that you could have could easily range from just as an example, 2000 feet to 3300 feet.
Within that there might be four or five floor plans and you don't know what plan the customer is going to choose until they come into the sales office. So we have made some assumptions.
I think as we highlighted in our prepared remarks, we're seeing customers.
Different things based on their current.
Their current living situation their work from home situation the need for more space more space for school more space for home gyms et cetera. So.
I think Theres certainly has a story to be told that there are some bigger homes being.
Being built.
To your point I'd agree with you bigger homes are a little bit more efficient.
No.
Time will tell we've factored in what we think are our best assumptions at this point in time and we'll continue to keep.
Everyone updated as the year progresses.
The next question comes from Michael Rehaut of Jpmorgan. Please go ahead.
Thanks, Good morning, everyone and congrats on the results.
I wanted to circle back to gross margin and I apologize if this is.
Beating a dead horse a little bit, but just wanted to try and get a better sense of.
The levers here and you know you hit on on price.
Yeah.
But when you look at the 25% margin in the fourth quarter.
It was up a little bit versus the guidance of 24, and a half and now you're also looking for 24 and a half from the first quarter end of 'twenty, one and the full year of 'twenty. One. So I was just curious number one what drove that differential on if it was more temporary or mixed driven per se.
Number two.
When you think about price.
<unk> versus cost inflation.
I think a lot of builders have been looking towards you know some decent level of gross margin expansion in 'twenty one versus 'twenty.
Given your margins being so much higher historically over the last few years than most of the other builders.
I'm wondering if there's any upward limitations on.
Taking price.
From an affordability perspective or competitive perspective.
That's why you know, perhaps we're not seeing as much expansion in 'twenty one versus 'twenty.
Given the higher starting point.
Yeah, I think it's.
It's apples to oranges to a certain degree in terms of us versus others. So I can't comment on their relative margin performance.
And Mike There is theres clearly nothing that prevents us from accelerating price if it's available on the market and if that's expensive.
Expansive to margin, we're going to do it I think we've demonstrated.
And you saw it actually in fiscal 'twenty versus the prior year, we were up there.
That 25% debt, 25% was up 220 basis points over the prior year.
So we were paying attention to market and we're looking to get every dollar of price that we can.
I think in terms of the.
The the.
Forward Guide, we've got 15000 plus homes in backlog.
We kind of have pretty good visibility into what our margin profile is going to look like next year.
There is nothing and I wanted to be clear about this nothing that will stop us from trying to expand that margin.
But based on what we see today, we want to give you the best estimate we've got and as I said.
Answer to an earlier question.
We do see <unk>.
Vertical construction cost escalating.
Lumber I think everybody is aware of.
It's a busy market out there theres a lot of people saw a lot of houses we think there'll be some price on the labor side that will be asked to contribute for that.
So at the end of the day, we are.
You know pretty we're pleased with our margin profile will seek to try and push it to the extent that we can get more price going forward at that more than covers the increasing costs, including land I think you can see us.
To that end.
Yeah on theirs.
There is no message here, but.
We outperformed in this most recent quarter.
The opportunities there, we'll seek to do the same going forward and Mike on the Q4 outperformance I just.
You asked where did that come from.
We mixed in.
More spec inventory in the Q in Q4 than we had anticipated and so.
There is a good example of we were able to get kind of current market pricing that helped.
I'll provide some outperformance in Q4.
Okay. Thanks, Thanks for that Ryan and Bob.
Very helpful.
I guess secondly, I just wanted to focus a little bit on community count.
And the sales pace and.
Your community count in the second quarter, just down a touch on year over year.
Which was relative positives I think versus some of your peers, having much greater declines.
Yeah.
At the same time.
<unk> comments I believe around.
No.
And correct me if I'm wrong here.
But to a degree perhaps managing sales pace to make sure youre not getting too far ahead of your backlog.
And.
Allowing your business to operate at a relatively consistent cadence.
Yes, hi.
Should we think about 'twenty one on those metrics.
Metrics specifically.
Community Count if you could give any directional guidance for the first quarter and where we should.
Specced yearend to wind up and sneak scripted.
Kind of limited or manage your sales pace.
Could we expect you know.
Sales pace in 'twenty, one to be more kind of consistent even off of these levels.
Obviously again youre not seeing in your numbers, maybe the dramatic year over year growth on some of your peers and I'm just wondering if.
That could actually work towards your benefit as you get through.
The next few quarters.
Yes, So I think the question sort of is what's the community count for next year and how are we thinking about sales against that.
And the.
The way I think we ask you to think about community count as we obviously had a slowdown in development spend this year, even some delayed act.
Highlighted that we're going to be investing at a more aggressive rate next year Ryan walked through that.
Where we see it as community count in Q1 of 'twenty, one versus Q1 of <unk>.
<unk> is down about 5%.
And then if you fast forward to your question at the end of the year, where do we think will be we think we'll be down about 5%.
Kind of end of year 'twenty, one versus end of year 'twenty, we'll have some variability in that during the year and it will be dependent on what's the sales environment like how quickly are we closing out of communities.
And what's the weather like how does development go.
We will obviously be looking to accelerate communities as much as we can.
But the sales environment is going to drive some of that number too.
And we are.
Looking at.
A pretty big step up in acquisition spend next year, which would obviously contribute to years beyond that.
The next question with Apollo and apologies to MS. Zellman follow up per second question for her from Zelman and Associates, Inc.
Hey, guys.
Thank you.
Yes.
With my last answer.
Oh no no.
All right.
It was <unk> polymer right yes.
Yes.
There you go.
Just digging a little bit on the land that you think about spending.
Spending $3 7 billion are you spending.
Are you fully set up from 22 or are you still buying from 'twenty, two and how far out are you buying and just give us.
Perspective between the margin differential on the option loss.
First is on the one loss if there is a differential from a price or margin perspective.
Yes, both good questions, we're pretty well set up for most of 'twenty two at this point.
Some of the spend that will happen in 'twenty, one will influence the back half of 'twenty, two but we are mostly set up so.
Given the difficulties that you highlighted in your first question with entitlements and approvals and things like that we're largely into 2023 at this point in time.
And we've factored that into kind of everything everything that we're doing.
In terms of.
The second part of your question I lost my train of thought on on that one.
Option option on the options. Thank you.
Margin or price differential.
So I mean.
The thing I'd share I know you focus on returns and I recognize that and I see it a faster return with the option or a better return, but just thinking about the pricing in the market that the land grab right now it's pretty heated. So what are you seeing if there is a differential when youre operating loss and what that maybe from an impact on gross margin, even if it's a better return.
Yes.
I don't want this to come across as a non answer IV, but but you highlighted the most important point, which is we underwrite to return.
Every single deal we do has got very different characteristics, depending on who the seller is.
As a general rule of thumb, though there is a cost to doing options, they're not free.
And we factor that into what the ultimate return is on the overall kind of risk reward balance that we think we're getting for the option. So.
Bob anything else you'd highlight on that.
The one thing I'd add is that in terms of the optionality.
A couple of ways that that manifest itself right.
On a finished lot option transaction or you're tying up a bigger parcel where youre, saying all right I want a third of the lots today, a third of lots two or three years from now on a third of lots two or three years. After that remember, we're trying to manage against market risk as much as anything else.
And so.
I don't think that the cash.
This step up is as impactful on margin because of that as opposed to just doing a straight finished lot option deals. So if youre on a master plan, because they're they're getting real time retail pricing for taking all of that risk to for you to take just in time lot delivery.
So I don't know if you look at the book a lot of our transactions are more what I've described as having you know these are larger lot positions that just more than we need right now and so we're paying a little bit for people to carry the land, but then we might even be developing the land it might not even be an option of finished lots.
I don't think its deleterious from a margin perspective as some people think sometimes when they're looking at it exactly the way you just did.
The next question comes from Ken Zinger of Keybanc. Please go ahead.
Good morning, everybody.
Good morning, Ken.
So to make sure I was connected.
Great quarter I mean, your leverage is flat your returns on capital or as I look at our returns on inventory are very high. So you should be investing in your company like Youre doing so my I have two questions first.
Hi.
Go over your logic for this 50% owned to optioned target.
And how much does del Webb legacy land play into that and then my second question.
You're a build to order builder yet your start capacity is limiting your orders.
Perhaps so what does that mean for your kind of start capacity I mean, you started about seven 5000.
We can calculate your starts basically so what is your 30000 guidance reflect in terms of where you are.
Thirdly capacity as Kelly.
<unk>.
Good morning, Ken.
So.
I'll, maybe take the the start capacity question first.
And we feel good about how our production machine is running.
We have ramped it up.
Almost every single quarter, and we continue to do so and that's.
The guide that we've given for full year deliveries are reflective of.
The pace that we believe our production capacity is on.
Certainly if we can do more work to do that and we think the demand environment.
Is there that would would allow us.
But there's a lot of there's a lot of moving parts on that.
Labor capacity supplier capacity et cetera.
So in addition to that Ken and I think everybody knows we've long believed that the build to order model.
Is better for a number of reasons and it's the one that we've chosen to largely.
Employ.
But spectra specs are a big part of kind of what we do as well, especially with our entry level lower price product.
And so in addition to building are sold on started backlog. We're also.
Increasing the number of specs that we have in the system.
I don't believe that the built to order model is limiting our ability for success because at some point in time, you've got to make a decision about how much you can build.
Whether you build out is a sold or you build out as a spec you've still got a you've got to put the start on the ground at some point in time so.
We're.
We're in a great time right now we're excited about the prospects for 2021 and.
If we can we can keep some of the wins at our sales here I think we're going to have a great year.
Okay.
Okay.
And are you still there.
Next on the queue.
Okay.
Is 930 could Dave timed.
Yes.
Andrew.
Okay.
I think we're still live on the call, but I don't know that we can get anybody up from the next Q&A.
Operator are you there.
Anybody wants to taxpayer E Mail me a question, we can try answering it that way.
Yes, Jim I got confirmation from a couple of folks that the audience can still here. So it sounds like it's on operator.
Challenge, so if anybody wants to.
We're still here so if anybody wants to text me a call or text me a question, we'll do our best to take it that way because I'm not sure we're operator disappear too.
Okay.
Well I'm not sure at this point in time in terms of technical difficulty, how we're going to solve this but.
Again, we'll give it another couple of minutes if anybody wants to E. Mail me a question or text me a question I'm happy to we're happy to answer it.
Apologize for this confusion I guess it is just that.
Okay.
Pardon me. This is the conference operator, it looks like we're experiencing some technical difficulties I'm I'm going to go ahead and take over the call for now it seems we are in the middle of our Q&A session is that correct.
Correct.
Okay. Our next question comes from Jack <unk> with <unk>. Please go ahead.
It's always numerous photos on it.
Jack I think there's one weekend actually let's zoom or off the hook I'm not sure he had anything to do with it.
He was running around with wire cutter, but I don't know what that line.
No.
Next in the queue Jack.
<unk> probably.
So we've got a huge backlog you've got great visibility into it.
The industry has seen backlog conversion rates come down not surprisingly coming out on some of the unique things with <unk>.
Within 2020.
It looks like the <unk> guide is calling for continued pressure on backlog conversion historically, which is telling me there's a ramp in the back half.
This year had hit that 20% growth can.
Can we unpack some of the.
The drivers of that I think Bob talked about increasing spec.
In the prepared commentary, but kind of what gives you confidence you can.
Sort of build back from that backlog conversion in the back half of the year, while maintaining margin.
Yes, Jack good morning, its Ryan.
We tend to look at our conversion of a work in process inventory as opposed to backlog. So we do have a larger backlog than we ordinarily carry.
Which is reflective of the strong sales environment from a production standpoint, we're running.
Very comparable to what we've historically Ron in terms of work in process conversion.
And what I can tell you without giving you specific numbers as the daily weekly monthly start rates are increasing working through that sold not started backlog and the spec inventory such that.
We feel like.
The guide that we've given for the full year is very achievable. So it's not necessarily.
A huge bet on a bunch of incremental spec inventory, which I think you may have been alluding to a little bit certainly we want to put more in there, but it's really reflective of getting through the sold not started backlog.
In addition to putting some more spec on the ground our cycle times are a little elongated given some of the disruptions in the supply chain.
I think the the areas, where there is some a little bit of sand in the gears from a product standpoint are probably fairly widely known.
I'd highlight that the relationships we have the size of our company. The talented procurement team that we have we've done a really nice job working through that but it is it is a challenge that is out there for sure.
And then you've got.
You've got the one plant down in Jacksonville, Youre, bringing on another one on line early on line early 'twenty two.
Ryan how should we think of where will that show up in the numbers is that going to be.
At a company level is that going to be gross margin, it's going to be G&A ratio, maybe lower warranty reserves over time, we're working guys like us outside looking in.
Expect to see the benefit of that on the in the air.
And the model.
Yes, Jack I'll, let Bob take that one.
Maybe what I'll do is I'll highlight the benefits that we think we're going to get out of these plants and the reason the reason that we bought the first one the reason that we're expanding to the second one.
We're getting huge increases in our cycle time.
<unk>, which is a big deal.
On the labor efficiencies that we're picking up are tremendous as well.
You combine those things with the added.
Cost benefits that we're getting and we're very pleased with how these off site manufacturing facilities are performing so.
As I highlighted in my prepared remarks, Jacksonville has exceeded our expectations were on the plant number two.
On the final stages of site selection and just working through some contract thing so.
We're excited about the prospect of what the future of this holds and then I'll, let Bob touch on where you can see the numbers.
Yes, Jack it's in homebuilding, obviously, and so you'll you'll see I think a couple of impacts one is that the contribution from the business itself.
On the margin line, it's consistent with that.
Not a little bit better than our.
Building, our homebuilding operation.
And then you obviously have the benefit we believe in terms of both the cycle time that Ryan talked about but.
Even some cost benefit to the builder side of the business.
Actual divisions contracting with them.
And then there is a cost to doing this but it's not out of line with the rest of our business. So.
I think for all intents and purposes, you won't see it impact things materially other than that we get improved the improved operations that Ryan was talking about.
Operator, I think we have time for one more call if youre still there one more question if youre still there.
No problem. Our next question comes from Susan Macquarie with Goldman Sachs. Please go ahead.
Thanks for taking my question.
Mike.
It's really around the active adult plans and as you saw.
So on another nice lift there this quarter I.
I think Ryan in your comments you kind of mentioned the fact that it feels like debt buyers definitely out there can you just give us a little bit of color on you know.
What youre seeing in terms of the demand trends there, how youre thinking about that coming through and how much of this do you think is really being driven by the fact that maybe the existing market and in some areas in the country like maybe the northeast and other parts that werent as strong prior to Covid have really kind of picked up and allow these people to kind of get out of their homes and make that transition.
<unk>.
Yes, Susan good morning, and thanks for the question I think.
There's a number of things that are benefiting the active adult buyer right now.
One is they were first to kind of go to the sidelines, they've certainly got more comfortable figuring out how to buy and figuring out how to make the decisions that they want to make and as it relates to the retirement the.
The strong stock market.
Our behavior I think certainly plays a factor in that his retirement accounts or are flush and then finally, the strong resale market has made it.
On a seller's market and so very easy for.
For that active adult buyer to sell their existing home and move into one of our new community. So our expectation is that the web brand will continue to be a big part of our business and the buyer will continue to perform very well.
Okay.
My follow up question is around capital allocation and you started to buy back some stock on the fourth quarter can you just talk a little bit to how you're thinking about that for 'twenty. One on any kind of color you can give there.
Yes, Susan.
The stance that we've taken on stock buybacks is that we'll report the news what we have highlighted is it is going to continue to be part of our capital allocation.
We paused for the second and the third quarter, given the pandemic, but as you saw on the fourth quarter, we re initiated at a $75 million level. So we will be active throughout 2021.
Not going to provide forward guidance on the amount of the spend rather at the end of each quarter, we will share with you what we've done.
And I think we've now kind of run out of time and I apologize for the technical difficulties for it we will certainly look forward to getting back to everybody over the course of the day.
We appreciate your time and we look forward to talking to you on our next earnings call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.