Q1 2021 Pultegroup Inc Earnings Call
Good day and welcome to the Q1 2021 Pulte Group, Inc. Earnings Conference call. All participants will be on a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions.
To ask a question you May Press Star then one on your Touchtone phone.
If you would like to withdraw your question. Please press Star then two please limit yourself to one question and one follow up please.
Please note. This event is being recorded I would now like to turn the conference over to James. Please go ahead.
Great. Thank you Sara and good morning, I want to thank everyone for joining today's call to review policy groups operating and financial results for our first quarter ended March 31 2021.
While it has only been a year or Q1 2021 earnings call, we'll obviously be very different discussion than we have at this time last year.
I'm joined on today's call by Ryan Marshall, President and CEO.
Although shaughnessy executive Vice President and CFO, and Jim SaaS key senior Vice President Finance.
A copy of this morning's earnings release on the presentation slide that accompanies today's that accompany today's call have been posted to our corporate website at Pulte group Dotcom.
We will also post an audio replay of this call later today.
Before we get started let me highlight that in addition to reviewing our reported first quarter results. We will also discuss our adjusted results, which exclude both a $61 million pre.
Pretax charge associated with a debt tender completed in the quarter.
On a $10 million pretax insurance benefit recorded in the period.
For purposes of comparison, we will also discuss prior year Q1 earnings adjusted for $20 million pretax goodwill impairment charge.
A reconciliation of our adjusted results to our reported financials.
In this morning's release and within todays webcast slides, we encourage you to review these tables to assist in your analysis of our business performance.
As always 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.
The 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 on our SEC filings, including our annual and quarterly reports now let me turn the call over Ryan right.
Thanks, Jim and good morning, as detailed on this morning's release, our financial results show exceptional first quarter performance for Pulte group from double digit gross and sign ups revenues and earnings to enhance liquidity and the $1 billion expansion of our share repurchase authorization, we posted a trim.
And then to start to 2021.
Beyond company specific gains our first quarter results reflect the ongoing strength of home buying demand throughout all segments of our business.
It is worth highlighting that I believe the strength of the market is due in part to a significant housing shortage in this country that shortage has been years in the making and we will take years to correct.
The first two sentences from a recent Wall Street Journal article at least summarize the current state of housing supply in the U S. The U S housing market is $3 8 million single family home short of what is needed to meet the country's demand. According to a new analysis by mortgage Finance company Freddie Mac.
The estimate represents a 52% rise in the nation's home shortage compared with 2018, the first time, Freddie Mac quantified the shortfall there.
On this long term structural shortage COVID-19 has also resulted in a growing desire for single family living and has changed where the home buyers want and need from their homes. We believe these new wants and needs are often best mastered the floor plans and features available on new construction.
These dynamics to supportive demographics, low interest rates and an improving economy and you get the tremendous demand environment, we are experiencing today.
The strength in demand as reflected in our strong order growth for the quarter in total our net new orders were up 31% over last year, while our absorption pace was up 37%.
On a unit basis. This was the highest first quarter sign ups, we've reported on over a decade.
And at $4 $6 billion, our highest reported quarterly sales value ever.
I would highlight that the strong demand we experienced in the first quarter of 2021 has continued into the first three plus weeks of April we continued to see high traffic volumes in our communities and buyers anxious to purchase a new home.
Working within this strong demand environment, we continue to improve our operating and financial performance, our pricing strategies and disciplined business practices helped us to generate a gross margin of 25, 5% and on an adjusted operating margin of 14, 6% in the quarter.
The resulting cash flows were then available to fund the future growth of our business and an increase in our ongoing return of excess capital to shareholders at a very basic level. This is the model that we have been refining for the past decade. It starts with running a higher performing homebuilding operation seeking to capture incremental gains in all areas.
As of the business.
It also includes investing in high quality projects and increasing our use of land purchase of options to improve cash flows and overall asset efficiency, while delivering consistently strong returns on investment and equity.
Having built our homebuilding operation that we believe can routinely generate strong returns and cash flows. We then allocate capital to support our long term success and reward our shareholders.
As we've highlighted many times our highest priority is investing in our business through the acquisition and development of land assets that can generate required risk adjusted returns to that end. Since 2016, we have invested $14 $6 billion in land acquisition and development and have done so.
While building a more efficient land pipeline.
They clearly demonstrate the progress we have made at the end of 2016, we own 99000 walks, while controlling an additional 44000 lots via option.
Today, we actually own 5000 fewer lots than five years ago and have more than doubled the lots, we hold via option to $100 on.
This significant and continuing change in the composition of our land pipeline has allowed us to increase the returns we generate while also helping us to reduce land related market risk.
As you know we have also made the return of funds to our shareholders and integral part of our capital allocation over the past five years, we've returned approximately $3 billion to shareholders through dividends and share repurchases, including $154 million of stock repurchased in the first quarter.
On that front I am happy to note that this morning's announcement that our board approved an increase of $1 billion to our repurchase authorization.
And finally as you saw on the first quarter. We're also prepared to allocate capital with a view towards further strengthening our balance sheet and reduce our financial leverage.
Paying down $726 million of debt in the quarter, including the successful tender for $300 million of our nearest dated outstanding debt, we were able to lower our debt to capital ratio on a gross basis the 23, 3%.
To be paying down debt and returning significant funds to shareholders, while targeting a 30% increase in Orlando acquisition on a development in 2021 says a lot about our expectations for the earnings power and the financial strength of this business.
I think it also reflects a more return oriented shareholder friendly approach toward operating our business. In fact, I think there is an ongoing maturation of the broader homebuilding industry in terms of its ability to generate higher returns with reduced risk.
Given changes in the industry's operating and return profile, we believe investors can grow increasingly comfortable about investing in the sector over the entire housing cycle.
What's the opportunity for sustained high levels of housing demand I believe pulte group's unique operating strategy has us well positioned to compete and to continue to grow our business beyond the financial strength that I discussed I believe that our size and diversity provide important advantages for example, a key driver to our.
Order growth in the first quarter was the ongoing recovery in demand among active adult consumers.
A year of being separated from their kids and grandkids has been more than enough for this buyer group.
With vaccinations now moving into high gear, our active adult buyers are anxious to get on a third lives, including moving into our new del Webb community.
In conclusion, 2021 has gotten off to an excellent start for our company.
With ongoing strong demand that exceeds available supply our backlog value of $8 $8 billion, and our tremendous financial strength and flexibility I am excited about what we can accomplish this year, let me now turn the call over to Bob.
Thanks, Ryan and good morning jumping right into our operating results home sale revenues in the first quarter increased 17% over last year to $2 6 billion.
The higher revenues for the period reflects a 12% increase in closings to 6044 homes, coupled with a four percentage increase in average sales price to $430000.
While home closings for the period were up more than 12% over last year deliveries came in slightly below our guidance with the shortfall, resulting primarily from the severe weather in Texas.
4% or $17000 increase in average sales price realized in the quarter benefited from price increases across all buyer groups and was led by a 6% increase in asps for our active adult closings.
The buyer mix of closings in the first quarter was comparable with the prior year and included 33% from first time buyers, 43% for move up buyers and 24% from active adult buyers.
As Ryan mentioned, our net new orders in the first quarter were up 31% over last year to 9852 home.
We experienced strong demand across all geographies and buyer groups with notable ongoing strength among our active adult buyers.
In the first quarter orders among our first time buyers increased 39% to 3303 homes move up orders gained 18% to 4040 homes.
And active adult orders increased a robust 49% to 2000 and 509 homes.
49% year over year increase in active adult COVID-19 closings reflects the impact of the slowdown in sales in the last two weeks of March last year, but I would highlight that the 2500 active adult orders. This year represent a first quarter high dating back almost 15 years.
I would also point out that buyer demand was consistently strong during each month of the quarter, even when interest rates increased during the period.
The 31% increase in orders could have been higher but our divisions continued to actively manage sales in the quarter to match production rate and to help maximize project specific returns.
Along with raising prices on 100% of our communities to help cover cost inflation and moderate sales all of our divisions used dropped lot releases to more directly manage sales and some or all of their communities.
For the first quarter, we operated from an average of 837 communities, which is down 4% from last year's average of 873 communities.
The year over year decline in community count is consistent with our prior comments and reflects the impact of our decision to slow land spend when the pandemic first hit in March of last year.
Along with the accelerated close out of communities, resulting from the ongoing elevated pace of sales.
Consistent with the overall strength of the market our cancellation rate in the quarter declined by more than 500 basis points from last year to just 8% and we ended the quarter with a backlog of 18966 homes, which is an increase of 50% over last year.
On a dollar basis, our backlog increased 58% to $8 8 billion.
On a year over year basis, we increased the number of homes, we started in the quarter by 25% to 8364 homes, which helped to raise our total homes under construction by 22% to 14728 homes.
Of these homes 1798, or 12% were spec units, which on a percentage basis is down slightly from the fourth quarter of last year.
Given market conditions, we have continued to work with our trade partners to further increase production and expect to increase overall starts to at least 10000 homes in the second quarter of this year.
This would be an increase of at least 20% over the first quarter of this year.
Based on the stage of construction for the 14007 hundred 28 homes currently under construction, we expect deliveries in the second quarter to be in the range of 7000 407700 homes at.
At the midpoint this would be an increase of 27% and deliveries over the second quarter of last year.
Based on the ongoing strength of buyer demand and with almost 19000 houses in backlog, we are raising our guidance for full year closings to 32000 homes. This is an increase of 7% from our prior guide of 30000 homes and represents a 30% increase in deliveries for the year versus the prior year.
The strong pricing environment has helped to lift the average sales price in our backlog by 5% over last year to $465000.
Given the backlog ASP and the anticipated mix of deliveries, we expect our average closing price on the second quarter to be in the range of 440 to $445000.
For the full year, we now expect our average closing price to be between 450 and $455000.
Our wholesale our homebuilding gross margin for the first quarter was 25, 5%, which is an increase of 180 basis points over the prior year net.
The sequential gain of 50 basis points from the fourth quarter of 2020.
The increase in gross margins, which exceeded our prior guidance benefited from the extent exceptionally strong pricing environment for sold on spec homes and for the mix of homes closed in the period.
In addition to the 4% increase in year over year Asps.
Our gross margins also benefited from lower sales discounts a two 5% in the quarter, which represents a decrease of 110 basis points for the same period last year and a decrease of 50 basis points for the fourth quarter of last year.
As has been well reported material and labor costs continue to move higher being led by lumber prices, which now seemed to reach new highs every day.
While we now expect our house costs, excluding land to be up 6% to 8% for the year. The strong device demand environment is allowing us to pass through these costs in the form of both higher base sales prices and lower discounts.
Given these cost price dynamics, we expect gross margins to move higher throughout the remainder of 2021.
As a result, we expect to realize sequential gains of approximately 50 basis points in each of the three remaining quarters. This year.
Which would have us in the range of 27% for the fourth quarter of 2021.
In the first quarter on a reported SG&A expense was $272 million or 10, 5% of home sale revenues.
Excluding the $10 million pre tax insurance benefit reported in the period, our adjusted SG&A expense was $282 million or 10, 9% of home sales revenues.
This compares with prior year SG&A expense for the quarter, a $264 million or 11, 9% of home sale revenues.
We are adding people to handle our higher construction volumes, but we still expect to realize sequential overhead leverage with the second quarter SG&A expense in the range of nine 9% to 10, 3%.
And for the full year, we now expect adjusted SG&A as a percent of homebuilding revenue to be approximately nine 8%.
As Jim noted, we did record a $61 million pre tax charge in the period relating to the cash tender offer for $300 million of our senior notes that were completed in the first quarter.
Turning to Pulte financial services. They continued to report outstanding financial results with pretax income more than tripling to $66 million, which compares to $20 million in the first quarter of last year.
The large increase in pretax income reflects favorable competitive dynamics in the market as well as higher loan production volume, resulting from the growth on our closings.
And on 150 basis point increase in capture rate to 88%.
Tax expense for the first quarter was $90 million, which represents an effective tax rate of 22, 8%.
Our effective tax rate for the quarter was lower than our recent guidance, primarily due to benefits related to equity compensation recorded in the period.
We continue to expect our tax rate to be approximately 23, 5% for the balance of the year, including the benefit of energy tax credits, we expect to realize this year.
In total for the quarter, we reported net income of $304 million or $1 13 per share.
Our adjusted net income for the period was $343 million for $1 28 per share.
In the first quarter of 2020, the company reported net income of $204 million or <unk> 74 per share and adjusted net income of $219 million or <unk> 80 per share.
Turning to the balance sheet, we ended the quarter with $1 $6 billion of cash on a gross basis, our debt to capital ratio at the end of the quarter was 23, 3% down from 29, 5% at the end of the year.
As we used available cash to pay down $726 million of senior notes in the first quarter.
Our net debt to capital ratio was five 5% at the end of the quarter.
Along with paying down debt during the quarter, we repurchased $3 3 million common shares at a cost of $154 million or an average price of $46 11 per share.
As Ryan mentioned, given the strength of our business and expectations for continued strong strong cash flows and whether our existing repurchase authorization down to approximately $200 million at the end of the quarter.
The board of directors approved an increase of $1 billion to our repurchase authorization.
The return of excess capital to our shareholders remains a priority and as such we expect to remain a consistent and systematic buyer of our shares.
In the first quarter, we invested $795 million on land acquisition and development.
Including the lots we put under control through these investments. We ended the first quarter was approximately 194000 lots under control of which 94000 were owned and 100000 are controlled through options.
With 51% of our lots now controlled via option, we have surpassed our initial target of 50% owned 50% optioned and expect that the percentage of option lots can move even higher.
Consistent with our outstanding financial results I'm pleased to report that earlier this month standard <unk> Poor's upgraded pulte group's debt to investment grade.
This means that our senior notes are now rated investment grade by standard <unk> Poors, Moodys and Fitch, it's been a long process, but I'm extremely proud of the improvements we've been able to achieve on our credit metrics.
Now, let me turn the call back to Ryan.
Thanks, Bob before opening the call to questions. There are two final topics that I want to quickly review first is one of the nation's largest homebuilding companies, we recognize and accept the important responsibilities. We have to continue advance advancing sound ESG policies and.
On today's world successes judge not just by what we do but also considers how we do.
As such along with actively working to improve how we operate we are advancing our associated environmental social and governance reporting to that and along with all of our other accomplishments in the first quarter, we launched a new section of our website called Pulte carriers. In addition to housing information on our efforts to run a sustainable business.
Ports the communities that we serve the site also contains our reporting against the sustainability accounting standards Board standards for our industry.
This is the first year reporting against the SaaS V standards, and we look forward to showing our progress on future updates will be posted to the site.
Finally, I would like to give a big shout out to the entire Pulte group family for being ranked on the Fortune 100 list of best companies to work for.
Since the founding of our company, we have viewed our culture is a critical and competitive advantage.
A fortune 100 list is built on an analysis conducted by the great place to work organization, which is based on employee surveys from thousands of companies in our case, they surveyed 100% of our employees to.
To make the Fortune 100 list is an accomplishment but to make it for the first time when we are operating in a global pandemic is clear and resounding statement about our people and the culture that they have the culture. They have built inside of our organization.
I truly cannot be prouder of our company and specifically of our field leaders, who do so much to support our people and.
And help them to be engaged, especially during these challenging times my heartfelt thanks to all of you.
Let me turn the call back to Joe.
Thanks, Ryan we're now prepared to open the call for questions. So we can get to as many as possible. During the remaining time on this call. We ask that you limit yourself to one question and one follow up Sarah can now open the call for questions, we'll get started.
Thank you.
A reminder to ask a question. Please press Star then one on your touched on if Youre using a speakerphone. Please pick up your handset before pressing the keys.
John from the question queue. Please press Star then two.
Our first question comes from Mike Dahl with RBC. Please go ahead.
Good morning, Congrats on those accomplishments on the results. My first question is on active adult.
Good to see that.
Buyer group continuing to rebound I'm curious as you look at buyers that are coming in the door.
Today is there any change in buyer profile that youre seeing kind of post COVID-19.
COVID-19 now whether it's where are these buyers coming from what features are they looking for on the homes. What amenities are they are looking.
For on the community is just anything that youre seeing that may or may not be different would be great to hear.
Thanks for the question, Mike and just to clarify your question about buyer profile is specific to the active adult consumer or about all consumers.
Specific to active adult.
Really no change Mike.
In the makeup of that buyer group, the things, where the places they're coming from on the things that they're asking for I think largely remain the same as what we've experienced over the last four to five years.
Got it.
Okay. My second question is around the margins Thats, a great trajectory through through the year and I was hoping.
When we think about kind of the debt cost inflation guide relative to the margins. If you could give us a sense of how that cost inflation.
January looks.
Does it would seem like by the time you get the four Q.
You may maybe this isn't kind of boutique, but you may be at kind of peak cost in place and yet you're guiding to a gross margin north of 27% maybe you could just.
Give a little bit more color on on that trajectory of costs alongside.
The pricing on margin curve.
Give us a better sense of that.
Yes, Mike.
To clarify if you if you add the sequential 50 basis points per quarter that would get us to around 27, not north of 27.
In terms of the margin and certainly what we have seen is an acceleration in cost lumber being the primary driver of that I think everybody is well aware its at all time highs.
M.
We're hopeful that supply will come to that market and the pricing will.
Wayne somewhat.
We've been waiting for that and haven't seen it yet but.
We have updated our guide in terms of what the inflationary aspect of the sticks and bricks is.
Yeah, we had been at or near five 6%, we're now 6% to 8%.
And depending on what lumber does that could move a little bit even higher than that having said that we've got a really strong pricing environment right now it has accelerated through the year.
And so as we look at the production.
And our build out for the year, we see being able to cover those cost increases and obviously it could lead to that 50 basis point kind of sequential movement in margin through the year.
Our next question comes from Alan Ratner with Zelman and Associates. Please go ahead.
Hey, guys. Good morning, Congrats on the great results.
Ryan I I'd love to drilling a little bit more in terms of your expectation for starts to accelerate to over I think he said 10000 in the second quarter, it's certainly encouraging because I think that there is.
Probably a view out there that the only thing really limiting orders at this point is is production and.
Isn't there some seasonality in that in that start number.
If you just kind of annualize that it would seem like you're gearing the business up to produce a lot more homes and youre going to deliver this year. So I'm curious if you could talk a little bit more about how you're getting that starts growth about 20% sequential improvement or are these new labor relationships that you're forming is it just the trades ramping up hiring and production from that standpoint.
Point is it anything related to the you know the vertical integration, that's perhaps improving your efficiency. There and then just tying in cycle times and how those have been trending into that discussion as well would be great.
Yeah Ali Good morning, It's Ryan I. Appreciate the question, we are proud of the quarter and we're very excited about how the balance of the year is shaping up we've been working hard on the production environment for the last two to three quarters as we always do.
But certainly in this.
Period of time, when we've got unprecedented demand.
On the production machine becomes more important than ever we do believe that the size of our business. The way we run our business the relationships that we've nurtured and fostered with our trade partners over the years.
Are really paying dividends for us and that's the that's the primary driver that has led us to.
On the point, where we can make the 25% 25% increase in production in Q2.
Moving to <unk>.
Our Q1, rather and then moving to almost 10000 units in Q2 so.
We're very pleased with how the production machine is moving it's not without its challenges and Bob's highlighted some of those on the cost front, we're certainly seeing some challenges.
With certain commodities windows appliances, a few things like that.
But our our procurement team has done just an outstanding job in managing some of those minor speed bumps on the road.
On the last part of your question Alan about cycle time, we are seeing in certain markets.
You know some some incremental days being added to the overall cycle time because of some of those supply chain constraints, but we believe we've factored all of those into the guide that we've given for not only Q2 closings, but also.
Q2 start rates.
Great and on that point I know you guys are not huge spec builder, but I'm just curious if you've changed your sales approach at all given those cycle times extended given the cost environment are you, perhaps waiting more until the home is framed or started before starting up before selling homes or are you still.
And kind of the mix of your business, perhaps is it still a lot frontloaded before the home has started just trying to get some insight into whether you are concerned about visibility into costs and things like that when you're starting the sales process.
Yes, Alan we're certainly concerned about the cost increases on that I think Bob's answer to the prior question highlighted that.
It's part of the reason that we've moved on.
Our guide in terms of expectations on cost increases up because things are getting more expensive. We are in certain consumer groups, most notably in the lower price points. We are waiting to sell those homes later, starting in <unk> and we're waiting to sell those as they get later into the production.
Cycle.
It's really allowing us to do two things, we're getting kind of current day sales price and we've got better understanding on the delivery timing.
And you know.
What the cost of those homes are the.
The other thing I would add Alan and it was a.
A question that was part of your first question on thoughts around our start rate and whether or not.
We're ramping up for more deliveries and it's really about our spec inventory, we've historically run around 25% to 30% of our total production volume of stock.
You heard in Bob's prepared remarks that we're running at 12% today and so part of the incremental start rate will be to rebuild that spec pipeline that wed like to carry.
Our next question comes from Michael Rehaut with Jpmorgan. Please go ahead.
Thanks, Good morning, everyone and congrats on the results.
First question I had was just on some of your comments around April.
How to think about the current demand backdrop, you mentioned that.
You are seeing continued strength into the month.
And you Havent any builders right now that are young.
Managing pace that.
That could be selling stronger then.
And then they allow for but obviously you have swapped a managed pace with production.
Sure.
In terms of.
Strength that you've seen into April.
The first quarter's pace is something that.
Given what youre seeing in the marketplace, you think might be sustainable because typically you do have a 5% roughly 5% decline.
Decline in sales pace.
Q due to seasonality I'm wondering if you know.
If you have comments on April.
M.
And just overall demand backdrop.
Should we expect the current sales pace.
Nearly four per month.
To continue into the second quarter.
Yes, Mike It's Ryan good morning, and where we typically see seasonality in Q2 as into the May and June part of Q2.
April 10.
Generally tends to be fairly in line with March.
We've seen as I highlighted in my prepared remarks, we've seen the first three weeks of April continue on a very strong fashion. So time will tell what kind of seasonal adjustment we see in.
In May and June were not giving any kind of a forecast on that.
Thank you have heard from us in a number of other builders that have recently reported the demand is really strong and we've had to limit sales in nearly every community.
Either via lot release or price increases or in most cases, both so.
We'll have to see how how the back two months of the quarter play out when you take into consideration unprecedented demand along with.
What's been a historical are slightly seasonal falloff.
All things all other things being equal Mike the business environment right now.
Is incredibly strong for a number of reasons.
It's a good time to be a homebuilder.
Great No I appreciate that.
Second question on the.
On all the progress with the gross margins, obviously very impressive.
The 27% exit rate this year would.
Start to match your prior peak gross margins from the last cycle.
If you were to annualize it.
Yes. It is.
Certainly one of the concerns that we hear from investors around maintaining this level of profitability.
Over the next couple of years to the extent that demand moderates at all I was wondering if you have any comments around that.
Any perhaps structural improvements that.
Other changes to the business model, perhaps debt.
Make you a little more comfortable that this higher level of profitability in gross margins can be sustained over the next couple of years.
Yes, Mike Thanks for the question.
We havent given any kind of a guide for forward.
Periods beyond what we've done in 2021.
As to your question about structural changes in the business I think we have made some real structural businesses structural changes in the way that we operate our business and we've talked a lot about those and we talked a lot about them in this current.
And this current release.
I would continue to reiterate remind everybody that we are running a business that's focused on generating return.
That's what we believe creates value for our shareholders. So while the gross margins are nice and we're certainly enjoying a very rich margin right now.
That's not the number one or the only thing that we focus on when were managing land investment when we're managing risk.
When we're managing capital allocation in a way that allows us to not only grow our business, but to take that excess cash that's being generated by the business and we're returning that to shareholders and I think what youre getting out of that story Mike is a.
On a very attractive return.
Return on equity profile, but we're proud of and I think our shareholders are very happy to have.
Our next question comes from Chairman Patterson with Wolfe Research. Please go ahead.
Ryan and Bob Jim Thanks for taking my questions I appreciate it.
First on on active adult demand clearly very robust.
How sustainable do you think that as you know does it remain one of the better performers performing segments throughout 2021 and if so.
Absorptions in the segments, where you all are clearly elevated just given the 49% growth just how repeatable is this performance.
Your del Webb, when we think about the legacy communities generally larger communities.
Can you just run those a bit hotter than your other communities just wanted to get your take there is that how sustainable that performances.
Yeah Truman.
Good question one of the things that we just we looked at it I looked at it yesterday the traffic foot traffic through the door of our doors of our del Webb communities continues to be very strong through the first three weeks of April. So we're very pleased with that we like the way that that brand is.
Is operating right now.
The last kind of five to seven years, we've made some shifts in the way that we build those communities the way that we monetize them on the way that we create the lifestyle and as I think most of you. Appreciate the most important thing with our del Webb brand is the lifestyle that we offer the home is almost secondary.
In this post COVID-19 environment, I think what we're seeing is consumers really value the ability for.
Outdoor lifestyle type activities and events that allow you to be connected with other people, but still maintain some level of kind of social distance and the web communities offer that and so on.
We made reference to the fact that after a year of being kind of locked inside that buyer group is ready to kind of get on with life and get on with retirement.
And so.
We're happy with that the other thing that I'd highlight driven that's an important part of our story and our diversified consumer offering is we've got a big move up business in that move up business remains very strong.
And so that typically what happens is that active adult buyer when they are selling their home, it's going to a move up buyer.
Which allows them to go do a lot of things and gives them great flexibility moving into the Delaware communities. So.
On the tight supply environment on the resale side of the business I think is a very good forward indicator of how strong the Delaware business continue to be.
Okay, and then just on some of your larger I'll just call on battleship del Webb legacy communities do those allow for higher absorption basis.
Or are they kind of too small to necessarily move the needle.
Yes, Truman so we've got we're down to about six five or six of those really large battleship del Webb communities.
There is a good land pipeline in all of those communities and we are seeing very high absorption rates out of those those legacy communities.
We've said for a long time that if the market came back in such a way we could let the volume in those communities run.
A little more wide open given given the land runway and we're certainly doing that right now it's a smaller percentage of the overall business. So.
While it moves the needle is not going to move the needle as much as maybe what once would have.
Our next question comes from Stephen Kim with Evercore ISI. Please go ahead.
Yeah. Thanks, guys.
Exciting quarter fun times.
A couple of your competitors.
Last week talked about conducting a stress test on their backlog and kind of concluded that.
Mortgage rates could rise to like four 2%.
And they still wouldn't really see much of an impact on our backlog I was wondering whether or not you had done a stress test like that and then following up on Mikes question about peak margins. You know we've also been hearing a lot of people talking about peak margins and I've been pushing back and I just love to have you weigh in on some of the things that are more specific.
<unk> that we pointed out to see whether you agree or disagree.
We pointed out virtual towards an appointment scheduling drives reduced selling costs you have input cost inflation that is depressing. Your 2021 margins actually and so whenever that begins to moderate you should get a benefit next year you have lower interest costs.
Accentuated by your recent debt pay down and I would imagine you are probably also moving into some larger communities designed to run at a somewhat higher rate of absorptions and so all of these things should theoretically be structural margin improvements I was wondering if you agree with that.
Alright, so to the first of your two questions.
Steven.
Did we do a stress test I am not sure where the stress test is on your backlog, we are always working with our backlog though.
We actively manage them through the build cycle.
And I would tell you that there are many things that can it might happen.
In a rising rate environment, and we would work with those consumers.
There are different products that can be offered.
So, yes, I would agree that the strength of our backlog was 750 FICO scores.
Rising interest rates like that would not put R. R.
Buyers in jeopardy.
To your question on peak margins.
There is so much that goes into that what's the demand environment whats the land environment.
Type of product are we building.
Having said that I think your points are valid whether they support higher margins are not structurally over time I think they benefit the business. So you mentioned virtual tours are selling cost yes.
On enhancement.
Interest certainly we will get a benefit through time.
On the $726 million that we paid down this quarter is $34 million in interest cost, which will ultimately come through as lower cost of sales it'll take a little while because we capitalize it.
So there are a number of things that will benefit us through time.
But the.
They will be determinants of our margin, but so we will do so with the land cost so the vertical.
Construction costs and some of our selling prices so to Ryan's earlier comment we underwrite against.
Return you guys have heard that from us a bunch.
We obviously seek to maximize margin debt, we are able to achieve.
And we've got we've got some tailwind, but we've got some headwinds in the form of lumber et cetera. So.
Yes.
Ryan said, it's a good time doing the homebuilding business. It is we are enjoying very good margins and we see them expanding through the year. So I think thats a real positive.
Yeah, absolutely, it's encouraging and thanks for the guidance out for <unk> that I think was really helpful.
You have a business that you acquired a year ago, the ACG business, which operates.
Little more indoors, perhaps than I guess, you can call. It indoors a lot of air ventilation, but curious as to whether you could comment on the degree to which ICD has already begun to improve or aid your ability to ramp starts or perhaps.
What's that business, a little bit more impacted by COVID-19 restrictions I know theyre in Florida, So maybe not but just wondering if you could provide a little bit more insight.
Insight into how <unk> is contributing.
So Stephen we're very pleased with the ITG acquisition, we highlighted that.
On our on our Q1 on our Q4 call last quarter.
To highlight that the the business that we bought really only impacts our Jacksonville kind of North, Florida business and so it's pretty small in.
In terms of the overall impact of the company, but it has had a meaningful impact on our Jacksonville business and so we like kind of the fruits of what the fruits that we're getting off of that tree.
I think R. R.
Really good and it's part of the reason that we're excited.
Above.
Getting close to announcing the location of the second plant.
We've got you know.
We're down to kind of a final couple of sites that will be the location for that in short order, we'll be able to make a bigger announcement on that.
It's all part of kind of division and the strategy that we had for ACG and how we see that playing out for our business over the next six to eight years and we think we think theres a lot of benefit that will be generated for this company based on on that platform.
Our next question comes from Matthew Bouley with Barclays. Please go ahead.
Good morning, everyone.
Thanks for taking the questions and congrats on the results.
Ryan you made a comment.
On your prepared remarks that the homebuilding industry can generate I think you said higher returns at reduced risk and if I take that intend them with your other comment that debt puppies option land position can move higher than 50%.
Just love to hear elaboration on both of those points just why why the industry is structurally improve if it is simply the option market opening up or what else you meant by that and specifically for pulse.
How to think about where your option mix can go. Thank you.
Yeah, Matt Good morning, I appreciate it.
<unk>.
The comment and really what we believe has happened and so what we know is happening inside of our comp our own company.
And in what we believe is happening inside of the industry is there is a.
A better balance of risk that's being taken on to the company's balance sheet.
And most notably a more disciplined approach to capital allocation.
If you go back a decade 15 years in this industry.
It was very boom and bust all of the free cash flow on an up cycle was put into land.
And then that land was harvested over the.
<unk>.
The following years.
And sometimes you got caught in a cycle with the capital allocation philosophy that youre seeing from Pulte and I think youre seeing.
Elements of it from the entire industry.
Theres less owned land on the balance sheet, there's more options, there's more free cash being generated dividends are being paid there is share repurchase programs in place there's lots of debt all of those things I think warrant.
<unk>.
A much different.
Kind of look from the investment community that I think how the industry has historically been viewed.
Got it no interesting that is helpful color.
And then second one I wanted to drill down into the cancellation is actually I know you said it down to 8%, which is a nice downtick, but on an absolute basis, depending on how they are performing it's still a big enough number to move the needle but my question is in this market are you finding that you're actually able to price higher on those cancel.
Homes, and perhaps realize a higher margin and I imagine that that's atypical, but what if anything from that is contemplated in your gross margin guidance. Thank you.
Candidly.
Candidly, that's not a big determinant in our forward guidance because there is very little of it I mean at 8% that is low cancellation rate.
And I can recall in 10 years in the business.
It's down.
<unk> <unk> from last year and even from the most recent sequential quarter and I think what it shows is the strength of the market people who are.
Under contract want to close because they know how hard it is to find something else to buy if they werent to buy from us.
But to your point, yes, if a if somebody fell on a contract.
Halfway through the process with us at least today, we would be able to sell it for more than we had sold it to them for it.
But that's not that's not a big driver of our margin guide at all.
Okay.
Our next question comes from Carl Reichardt with <unk>. Please go ahead. Thanks. Good morning, guys. Thanks for taking the question Carl.
I wanted to ask about the general path at the community count through the balance of 'twenty, one and maybe into 'twenty two.
Yes, Carl good morning, Good day.
Good to hear from you this morning.
Certainly the increase in the business that we have guided to for 2021 is.
Given us the opportunity to close out of some communities a little earlier than we expected.
If you went back to the guide that we had previously given.
We had indicated that our.
Our community Count guide was going to be down in the 5% range.
We had to update that today to suggest that on a.
On a quarter over quarter basis. This quarter this year versus the same quarter last year.
Our expectation is that we'll be down 5% to 10% for the balance of the year.
So for the second third and fourth quarter debt.
That would be our guide we have not given any kind of indications on 2022 at this point.
Alright. Thanks.
And then just on the active adult.
When you're talking more about this but is the build times for active adult shorter or longer than the core product or it is contract to close shorter or longer and then as part of the strength in the margin guide for the balance of the year a mix shift in some meaningful way to higher margin active adult.
No real difference in the.
And the cycle time and in terms of the mix shift.
We will actually see is.
More of a mixed shift and its modest from move up to first time and entry level.
And so active adult will be pretty consistent year over year and for the balance of this year.
So it's really that mix shift to the <unk>.
First time that's.
Influencing the margin.
Our next question comes from Deepa Raghavan with Wells Fargo. Please go ahead.
Hi, good morning. Thanks.
Thanks for taking my question.
Well tag along on that community count.
Commentary, so you already get closing units.
Within your guide, but youre lowering your community count growth.
Yes.
<unk> is an increase.
Did that with debt right.
And if so are you able to comment on the size of net communities now and compare it to historical.
What I'm also trying to determine.
How much of that increase in absorption pool.
You witnessed in Q1 is kind of driven by larger community.
Sure.
Yes, good morning.
I think I understand most of the question.
The makeup of our communities are largely the same over the last three or so years.
Other than our big del Webb communities, our average community Count account size is about 130 lots. So we don't have.
Other than a few of the legacy large del Webb communities, we don't have.
Massive communities, where you can really juice the absorption rate.
And then in terms of community count.
The only other part of the question that I would that I would offer there is that we have been very aggressive in the amount of.
The incremental land spend that we're putting into the business.
We rebuild the land pipeline for 2022 and beyond.
The only other thing that is probably worth highlighting in terms of absorption paces as the mix shift of our business into entry level.
Bob highlighted on the prior question that we are seeing some of a shift from move up into entry level and Youll recall going back three years to four years four years now for five years.
When when I came into the chair as CEO, we talked about shifting some of our move up business into entry level, we've done that.
And as you see that coming through on the closing side those entry level communities typically come with higher.
Per per community absorption paces.
Got it no that's helpful.
My second follow up is on this day to pricing.
Obviously, it's pretty strong, but any thoughts going into next year.
Obviously do you expect to probably give back some of the price that you've gained from all the inflationary.
And our pricing power that you are getting at this point in time, just curious what are your expectations exiting the year, especially next year and what are some of the drivers you would point to as we play to this day.
How pricing is stronger on that.
So the rest of the year.
Yes, we havent given any guide on our expectations for pricing next year.
I would share is that currently we're sitting at a guide of 6% to 8% on a year over year basis. We've for the last three years to four years. Prior to 2021 were in the 1% to 2% year over year increase range. So we've seen unprecedented increases in cost.
No.
My hope would be that but that would that.
Would start to temper.
Certainly a big driver of this year's increases as lumber and we're at kind of unprecedented highs for lumber.
Our analysis suggests that there is plenty of raw material to constrained really seems to be on the saw mills and we are seeing some additional capacity start to come online. So if we can see.
Some moderation in the lumber market.
And the industry can kind of continue to run a pretty efficient levels that we're at today My hope would be that we.
Could we could see some pullback in overall cost increases next year relative to where we've been sitting this year.
Our next question comes from John Lovallo with Bank of America Merrill Lynch. Please go ahead.
Hey, guys. Thank you for fitting me in here.
First question is.
Lumber lumber cost as you mentioned or I've been pretty well telegraphed and I think for structural panels as well.
Where else are you guys seeing in inflation.
Cement availability and price has been was becoming more of a problem and I'm curious also on which might be seeing on the labor front.
Yes, well cement very very local Ryan because the distribution range is pretty tight and yes, where you've got markets, where you've got activity youre going to see.
Pricing and that's very consistent with what we typically see.
In terms of the.
The labor.
Labor market certainly it is a busy market out there people have choices on where to work Ryan mentioned earlier in the call.
We've obviously stepped up our production.
We've got good relationships with our trades, but it costs money to make people come to our job site today and so that's built into that increase to the 6% to 8%.
Not characterize it as hateful at the moment.
There is.
There is capacity out there.
For some of the trade you have to pay to get them on the job site, though.
But those are the.
As always lumber and labor are going to be the two primary drivers of the cost for us.
Got it that's helpful and then.
Can you quantify the weather impact on the Texas.
In Texas on closings and was that the entirety of the Miss in the quarter.
Yes.
Mike the Miss that we had relative to our guide was largely driven by the weather in Texas. It was unlike any winter storm.
The Texas has seen in its shut that operation down for the better part of two weeks.
And.
So our our expectation is we'll work to get the majority of that back in the second quarter.
John.
We think other than that the.
The production machine as I'd indicated in one of the early questions is running quite well and we like the rate of starts that we're seeing out of the business.
Sure.
Our final question comes from Alex Barron with housing Research Center. Please go ahead.
Yes, thanks, guys and congratulations on the great job here.
I'm, hoping you can elaborate on the comment about active adult.
Coming back and it sounded like it was related to the to the vaccines, but.
If you could elaborate on what youre hearing from the field on.
On that topic.
Yeah, Alex it's Ryan Thanks for the question, we're really excited about what we're seeing out of the active adult performance.
I think anecdotally, we're saying that we're seeing that buyer re emerge.
In all aspects of their life because of their confidence around the vaccine. So I think that's certainly a positive.
Delighted.
A few questions ago that the strength of the move up market.
We think also really helping that business because it's very easy for that active adult buyer to sell their home right now.
They are selling at very high prices and so I think thats given.
That buyer a lot of confidence on a lot of flexibility to go out and make the the future investment that they want to make further for the retirement home and that's benefiting that Delaware business for us.
Okay, great and sorry, if I missed it but.
Did you guys give sort of a breakdown of.
Price increase per segment per buyer segment, I'd like to know which ones are doing which one is doing the best right now.
Yes, we did that but we can.
First time entry level was up 2% year over year move up was up 4%. We had mentioned in the prepared remarks active adult was up 6%.
Yes, its interesting because theres a lot of movement under the Hood on that right now in terms of geographic closings.
So mix matters.
What I would tell you is the pricing environment is pretty strong.
Yes so.
Underneath that where the closings came from the size of the product.
It.
Important so but the headline numbers are two four and six for entry level move up and active adult.
This concludes our question and answer session.
I'd like to turn the conference back over to Jim Zimmerman for any closing remarks.
Okay. Thank you Sir I appreciate everybody's time. This morning, we will certainly be available over the course of the day for any other questions 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.