Q2 2021 Pultegroup Inc Earnings Call
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Good morning, everyone and welcome to the Q2.2021 40, <unk> Group incorporated earnings Conference call.
All participants will be in a listen only mode.
Need assistance, please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to us.
At that time in order to ask a question you May Press Star then 1.
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Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Tim Zimmer Sir. Please go ahead.
Great. Thank you Jamie and good morning, I appreciate I appreciate everyone joining today's call to review Pulte groups.
Operator.
Operating financial results for the second quarter ended June 32021, joining.
Joining me to discuss <unk> group's strong second quarter are Ryan Marshall President and CEO.
Bob O'shaughnessy, Executive Vice President and CFO, and Jim SaaS, <unk> Senior Vice President Finance.
A copy of this morning's earnings release and.
Presentation slides that accompany today's call have been posted to our corporate website at Pulte group Dot com.
We will also post an audio replay of the call later today let.
Let me note that in addition to reviewing our reported Q2 results. We will also be reviewing adjusted results, which exclude a $46 million pretax insurance.
Terence benefit in it.
A tax benefit of $12 million, resulting from a change in valuation allowances associated with state net operating loss carryforwards are.
A reconciliation of our adjusted results to our reported financials is included in this morning's release and within today's webcast slides.
We encourage you to review these review.
New these tables to assist in your analysis of our business performance.
And 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 most significant risk factors that could affect.
Future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports now let me turn the call over to Ryan Marshall Ryan.
Thanks, Jim and good morning on today's call, we will be covering pulte.
<unk> financial results as well as updating you on several important initiatives, we continue to advance.
As Bob will detail in a few minutes Pulte group delivered another quarter of strong financial results looking at the business along with a 28% increase in net new orders, we generated significant topline revenue growth.
<unk> outstanding growth gross and operating margins and a 50% increase in adjusted earnings per share clearly theres a lot to be excited about in our results.
Clearly financial results are important, but I believe that running a successful homebuilding business means thinking about the long term and focusing on the key drivers that we believe.
Aleve creates shareholder value. These include attracting and retaining our highly engaged workforce that strives to provide a world class buying experience for our customers.
Following a disciplined capital allocation strategy.
Running an efficient homebuilding operation.
And realizing high returns.
And intelligently manage risks through time.
I am proud to say that consistently executing against these key drivers has been critical to the quality of the operating results, we have realized and the outstanding financial position we have established.
Consistent with our constructive view of the housing market we previously.
<unk> announced our intention to increase land investment in 2021 in fact through the first 6 months of this year, we've invested $1.8 billion in land acquisition and development.
This is up from $1.1 billion last year and $1.5 billion in 2019.
With the latter number including the acquisition of the American West assets.
Given our increasing land spend I want to emphasize that we continue to make these investments using the same disciplined approach and underwriting practices against which we have operated for most of the past decade.
And overlay to our.
Our investment process. We also continue to execute against our strategy of controlling more land via option.
Happy to report that 53% of our land was option at quarter end, which is approaching all time highs and we will of course seek to raise this percentage as market conditions permit.
Although on a smaller scale compared with land I would highlight that we continue to invest in our off site manufacturing strategy.
Pleased to report that we recently leased a facility in Florence, South Carolina that will expand our offsite manufacturing capabilities, we expect to begin delivering product from this.
Facility to parts of our south eastern operations in the first half of 2022.
The Florence facility is our second Offsite manufacturing plant and follows our earlier acquisition of ACG at the beginning of 2020.
These 2 plants are part of our long term strategy to address labor and related.
Related production challenges that we expect will continue impacting the future of homebuilding.
As part of our disciplined capital allocation policies. We are also continuing to return capital to shareholders through the first 6 months of this year. We've returned just shy of $430 million through share repurchases.
<unk> and dividends.
You will recall, our Q1 announcement of a $1 billion increase to our repurchase authorization you can see that we're already putting this authorization to use.
Having capital available to allocate comes from strong cash flows being generated from well Ron operations.
Bob will.
Provide the details, but I would like to highlight that our reported operating margins in the second quarter exceeded 18%.
With adjusted operating margins approaching 17%.
With an industry that historically achieved operating margin of approximately operating margins of approximately 10%.
Our performance over the last several years is clearly breaking with this old paradigm.
More broadly I think it's important to acknowledge that our entire industry is working to raise this performance bar.
And finally, we believe creating long term value for our shareholders comes from generating high returns over the housing cycle.
For the trailing 12 months Pulte group has delivered an outstanding return of 25, 7% on our equity.
Driving higher returns is something we've been talking about for the past decade. So we are proud to be delivering on that objective.
The returns, we generate or an outcome that reflect the myriad.
<unk> day to day decisions, we make as we allocate capital and run our business as I noted we are making these decisions today based on our favorable long term view of the U S housing market. Although we appreciate recent questions about near term conditions.
As a general statement I will tell you that housing demand was strong in the second.
Quarter and that these trends have continued into the first few weeks of July.
From Google website searches to community visits we continue to see a very high level of consumer interest in buying new homes given.
Given the unusual demand dynamics created by the pandemic, we are careful in comparing 2021.
2020, So we also look back to prior years for additional perspective.
To that end, we monitor an array of traffic conversion and sign up trends in our local offer the operations provide insights on what is happening on the ground in their respective markets.
Just on all the metrics, we monitor and consistent.
<unk> with our business performance, we would say that the second quarter demand in the overwhelming majority of our markets was as strong or stronger than the first 90 days of this year I.
I would also tell you that buyer interest in the period was stronger than the second quarter of 2019 in other words price.
Due to the pandemic.
Buyer demand has been strong but customer feedback also hints at a sense of frustration with the lack of homes available for purchase and the rate of price appreciation that <unk> seen in the market.
With this as a backdrop I would also tell you that we purposely restricted sales through lot releases are.
Similar actions in roughly 75% of our communities across the country.
These actions were taken to better align our sales efforts with our current production capacity and to begin rebuilding spec homes closer to our historic level of 25% said simply we likely could have sold a lot more homes in the quarter.
Above the 28% increase in net new orders and 40% increase in absorption pace that we reported.
When we threat all of these data points together, we continue to see a strong demand environment with a very high level of interest in buying a new home.
As has been the case for multiple years the ongoing.
<unk> and demand reflects powerful macro forces, including favorable demographics and under supply of new and resale homes and improving economy and the support of interest rate environment while.
While meaningful constraints on home availability and price increases are likely influencing short term conditions we remained.
Strained very optimistic about the long term demand trends now.
Now, let me turn the call over to Bob for a review of our second quarter results.
Thanks, Ryan and good morning.
Im pleased to have the opportunity to review Pulte group's second quarter results, which show our ongoing gains in key operating and financial metrics.
Starting with the income statement wholesaler.
Remained revenues for the second quarter increased 31% over the comparable prior year period to $3.2 billion.
Our revenues for the period were driven by a 22% increase in closings to 7232 homes.
Along with a 7% increase in average sales price to $447000.
Sale rate of our second quarter deliveries showed nice gains over last year. They did come in below our prior guidance due directly to an incremental increase of roughly 2 weeks and our build cycle times and the majority of our markets.
The increase in build cycle times, primarily reflects ongoing disruptions in the supply chain.
Consistent.
Since made on recent calls the 7% or $31000 increase in average sales price in the second quarter reflects price increases realized in all markets and across both buyer groups.
Our mix of deliveries in the quarter included 32% from first time buyers, 41% from move up buyers and 27.
With comments from active adult buyers, which compares with 31% first time buyers, 44% move up buyers and 25% active adult buyers in the second quarter of last year.
Company's net new orders for the second quarter totaled 8322 homes, which is an increase of 28% over.
For the second quarter of last year in.
In the quarter, we saw a continuation of the trends we reported in the first quarter of this year, which included strong demand across all geographies and buyer groups with clear outperformance among our active adult homebuyers.
In the quarter first time orders increased 12% 2000 and 637.
Per cent move.
<unk> orders increased 15% to 3273 homes and active adult orders increased 81% to 2412 homes.
It's worth noting that the significant year over year increase in active adult orders reflect the dramatic pandemic induced slowdown in 2020.
But.
I would also highlight that the absolute order rate for these buyers is actually near 15 year highs.
Beyond any impacts of the pandemic has had on our year over year comparisons I refer back to Ryan comment that our divisions. We are actively restricting sales and upwards of 3 quarters of our available communities during the second quarter.
By design these limitations.
<unk> had the most significant impact in our first time and move up communities.
During the quarter, we operated from an average of 808 communities, which is a decrease of 9% from an average of 887 communities last year.
It's consistent with our previous guidance.
The cancellation rate for the second quarter was 8% which is down significantly.
Year and consistent with the first quarter of this year.
Benefiting from our strong Q2 orders are year over year backlog increased by 52% to 20056 homes.
Given the strong pricing environment the value of our backlog increased an even greater 70% to $9.8 billion.
From that.
Comments made during our first quarter earnings call. We started construction on 9800 homes in the period. This is more than double what we started in Q2 of last year and represents a sequential increase of 17% of the number of homes started in the first quarter.
As a result of the increase in our stock.
We ended the second quarter was 17344 homes under construction, which represents an increase of 58% compared to last year.
The homes under construction 2233, or 13% were spec units.
This percentage is up slightly from the first quarter.
<unk> remains below our longer term target of 25%.
Based on the fact that many of our units under construction are still early in the build cycle, coupled with existing supply chain challenges, we expect deliveries in the third quarter to be in the range of 7000.307600 homes.
These same forces.
We will also impact our total deliveries for the full year at this time, we expect full year closings of 30500 homes, which would be an increase of 24% over full year 2020 results.
As has been well reported favorable supply demand dynamics that supported price increases in new and existing homes across.
Across the country.
Positive conditions can be seen in our average price in our backlog, which is higher by 12% over Q2 of last year to $491000.
Given higher backlog prices and the anticipated mix of home deliveries going forward, we expect our average closing price in the third quarter to be between.
270 and $475000.
In the second quarter, we reported a homebuilding gross margin of 26, 6% compared with 23, 9% last year.
With 270 basis point increase which exceeded our guidance reflects the exceptional pricing environment, we've been experiencing.
<unk> for a number of quarters as well as the mix of homes closed in the period.
Beyond the 7% increase in the average price of homes closed.
This accounts in the period fell from 1.9%.
This is down from 3.5% last year and represents a sequential decrease of 60 basis points from the first quarter of this year.
Our second quarter margins also reflect a legal settlement of $5 million, which benefited gross margin by approximately 20 basis points.
As reflected in the increase in our increases in our sales prices and gross margin, we have been able to pass on the meaningful cost inflation, we have incurred over the course of the year.
At this point.
Perfect house cost to be up between 9 and 11% for the full year with the peak of certain costs driven by lumber flowing through in the third and fourth quarters.
Even with the ongoing rising build cost we still see opportunity for gross margins to move higher over the remaining 2 quarters of the year.
As a result, we expect our third.
We narrowed our margin to be 26, 8% with our fourth quarter gross margin expected to be 27, 3%.
Our reported SG&A expense for the second quarter was $272 million or 8.4% of home sale revenues, which includes a $46 million pretax insurance benefit recorded in the period.
Quarter, excluding this benefit our adjusted SG&A expense was $319 million or 9.8% of home sale revenues.
In the second quarter of last year, our reported SG&A expense was $197 million or 8% of home sale revenues and.
And excluding the impact of a $61 million pretax insurance benefit and <unk>.
<unk>.
$10 million of pre tax charges from actions taken in response to the pandemic adjusted.
SG&A was $247 million or 10% of home sale revenues.
Based on projected closings over the remainder of the year, we expect SG&A expense in the third quarter to be in the range of 9 to 9.5% of home sale revenues.
And now expect our full year adjusted SG&A to be 9.6% of home sale revenues, which represents a 20 basis point improvement compared to our previous guidance for the year.
For the second quarter, our financial services operations reported pretax income of $51 million compared with $60 million last year.
The decrease in profitability relative to recent quarters reflects the increasingly competitive market conditions that developed during the first half of the year.
In the second quarter, our reported tax expense was $136 million.
Representing effective tax rate of 21, 3%.
In the quarter, we realized a tax benefit.
$12 million, resulting from a change in valuation allowance associated with projected utilization of certain state net operating loss carryforwards.
Our reported net income for the second quarter was $503 million per $1.90 per share and our adjusted net income for the period was $456 million.
Benefit of $1.72 per share.
Companies reported net income in last year's second quarter was $349 million per $1.29 per share and our adjusted net income was $311 million.
For $1.15 per share.
Looking at the balance sheet, we ended the quarter with $1.7 billion of cash.
Cash and a debt to capital ratio of 22, 7%.
Which is down from 23, 3% at the end of Q1, and 32, 1% a year ago.
Given our large cash position, our net debt to capital ratio at the end of June was 4.5%.
As a reminder, our board of directors authorized a 1 billion.
Per dollar increase to our share repurchase plan in April of this year.
In the second quarter, we used $200 million of our authorization to repurchase 3.6 million shares which represents a 1.4% 1.4% reduction in our outstanding shares at an average price of $55.84 per share.
In the second quarter, we also invested $986 million in land acquisition and development, bringing our year to date spend to $1.8 billion.
As we remain constructive on the opportunities for long term housing demand, we continue to invest in our business through the same disciplined prostitutes, we've used to build our existing land pipeline.
Given.
Given our positive stance on the market, we are targeting full year investment this year of approximately $4 billion in land acquisition and development, which represents an 8% increase over our prior guidance.
Inclusive of the investments made in the second quarter. We ended the period with approximately 207000 lots owned and controlled.
Of.
These last 53% are controlled through options, which is approaching all time highs for the company.
While the owned option split can shift a little from quarter to quarter, we continue to make steady progress against our strategy to increase land options to enhance returns <unk> reduced market related risks.
Highlight that our percentage of lots.
Lots controlled via option has increased from 31% at the end of 2016 and.
And we will continue to seek optionality and an increasing percentage of our controlled lots.
Overall, we are pleased to performance of the business during the quarter and believe that we are extremely well positioned heading into the second half of the year now let me turn the call back to Ryan.
Before we open the call to questions I want to briefly touch on an exciting relationship that we just announced with invitation homes. As most of you know we haven't been evaluating different ways for Pulte group to get involved in the rapidly expanding long term single family rental business.
We were looking for an approach that leveraged our expertise in.
Acquisition and home construction with an acceptable level of risk and that generated sufficient margins and returns I believe that we have accomplished this through our collaboration with invitation homes the leader in single family rental.
As outlined in the release beginning in 2022 multi group expects.
<unk> to design and build of approximately 7500, new homes over a 5 year period for sale to invitation homes for inclusion in their single family rental leasing portfolio.
We have already agreed to projects in the states of Florida, Georgia, California, and Texas, representing an initial 1000.
Atlanta is.
Under the program structure, we are effectively a preferred provider of new construction homes to invitation.
Along with providing a strong margin and return opportunity. This relationship offers a number of other benefits.
The increased construction volume allows us to further expand local market scale within the.
Homes, we currently serve.
The increased inventory turn resulting from these sales can enhance overall project returns.
The increased volume can allow the company to potentially pursue larger land pieces and select locations.
And the relationship can also support pulte groups entry into select.
Areas that gets we have been assessing.
We have been diligent in our efforts to find the right entry point into single family rentals, and we're excited about this opportunity and the chance to work with an industry leader like invitation homes.
Before turning this back to Jim <unk>.
Let me thank all of our employees for their work in delivering these exceptional.
New more results and more importantly, an outstanding home buying experience for our customers.
I also want to applaud our entire organization on faulty group being ranked among the 2021 best workplaces for millennials by Fortune and great place to work.
Following our being named or this.
Financial ranking further builds our position as an employer.
Of choice for all generations as.
As the CEO of Pulte group I appreciate what you do every day for our customers.
And for each other now let me turn the call back to Jim.
Great. Thanks.
New <unk>, we are now prepared to open the call for questions.
You can get to as many questions as possible during the remaining time of this call. We ask that you limit yourself to 1 question 1 follow up thank you and now ask jamey to explain.
Explain the process and open the call for questions.
Ladies and gentlemen, as mentioned we will now begin the question and answer session to ask a question you May Press Star and then 1 using a touch Karen telephone.
You are using a speaker phone we do ask you. Please pickup your handset before pressing the keys.
To withdraw your question you May press Star 2.
1 follow up.
And Lee do you have further questions you may reenter the question queue.
At this time, we will pause momentarily to assemble the roster.
Our first question today comes from Mike Dahl from RBC. Please go ahead with your question.
Good morning, Thanks for taking my questions Ryan really helpful.
Commentary just now I wanted to start with just your comments about demand.
At least as strong in the majority of your markets.
Over the course of <unk>.
Just kind.
It kind of.
You go across maybe from a buyer segmentation.
<unk> standpoint.
To what extent if any have you started to see.
<unk>.
The demand pool will get a little bit thinned out by affordability as you've continue to push price fairly aggressively.
Yes, Matt Thanks for the question.
As we highlighted in our prepared remarks, we really haven't.
<unk>.
Well to your point, we have raised price quite aggressively.
We've effectively limited sales.
Through restricting lot releases in other other processes as we use.
And over 75% of our communities. So we.
We just have not seen.
And Duane.
The quarter.
As I characterized it in my prepared remarks, we think demand was at least equal to what we saw in Q1 and in some communities and some locales even better.
Okay. Thanks, and just a follow up on that is my second question.
To your point.
<unk> got multiple pronged in terms of the.
The ways that you have kind of restricted and managed.
1 being a faithful lot releases, but I think keep also employed.
I believe new term at the bids.
Once they are released I was wondering if you could.
Comment a little.
More on to what extent you've.
Employed that practice is that across all of those 75.
Per cent of the communities that you are restricting or any additional details you can give us on kind of how that has 1 of the tools and whether thats being used more or less now versus a couple of months ago.
Yes, Matt It is 1 of the tools that we use.
We find that for certain buyer groups in certain communities that.
It works well.
Mike.
Sure.
I would tell you that we don't use it in every division in every community.
So it's 1 of the tools.
Give you an exact number of how many times, we use that versus other mechanisms.
I'm not sure that I've got that information at my fingertips, but.
Pretty high number of our divisions to use them.
And our next question comes from Alan Ratner.
<unk> from Zelman <unk> Associates. Please go ahead with your question.
Hey, guys. Good morning, Thanks for taking my questions and for all of the detail and commentary so far.
Ryan I'd love to first touch on the supply demand.
Environment right now I think you mentioned 75 per cent of community is limiting sales, which I think.
It was pretty consistent with what we've heard from a lot of other builders.
I'm curious, where you see that going over the next several months on 1 hand, it looks like your start pace improved quite a bit which is great on the other hand, it seems like a cycle times continue to get extended you trimmed that closing guide for the full year a little bit so.
It feels like a lot of those challenges if anything are.
Are not getting better maybe getting worse, a little bit. So is there an opportunity to kind of pull back on some of those limitations or do you actually maybe anticipate them accelerating or getting a little bit more more aggressive here over the next few months to allow the supply chain to kind of catch its breath a little bit.
Yes, good morning, and thanks.
For the questions.
As I think Bob highlighted in some of his commentary we characterize the supply chain as.
About the same.
There are different challenges that are popping up 1 get solved and then you've got another 1 to deal with.
It certainly has a long.
Long dated our cycle time, and that's what's contributed to us adjusting our full year closing guide for <unk> for the total year. So.
Yeah.
What we see today.
Not anticipating it getting any worse than what we're currently experiencing.
And our hope would be.
As the World continues to kind of reopen more employers are going back to work and kind of full capacity that some of those supply chain related challenges would be would get solved or would maybe get slightly.
Slightly improved.
So that's what I would share with you on the on the supply side as far.
Far as demand goes Allen.
Time will tell.
I would continue to reiterate what we experienced in the quarter.
Well into the third week of July.
Demand is strong.
And we continue to be impressed with.
Kind of the average.
<unk>.
Keep in mind I think.
Hello, This is being done against the backdrop.
Summer time, maybe.
The first kind of normal or semi normal summer that we've had in.
The better part of 2 years so.
Suffice to.
Just say I think there's been some other distractions out there to potentially.
Capture the attention of the consumer and we Havent seen it have an impact on demand at this point.
Second I would love to spend a second or 2.
If you can share in a bit more about the partnership with invitation homes.
Should we think about that as being.
Additive to your for sale business or some of that going to maybe I think it's competing for the same land.
And the same labor the same material and it doesn't seem like those constraints.
Better anytime soon so is the capacity there to fully make this a 1 plus.
Just 1 equal to or should we think about this as maybe a little bit more of a hedge and.
Maybe the business growth a bit but not not fully at that.
500 homes per year level.
Range, Yes, Alan it's a fair question.
Question.
And I would I'm going to give you a little bit of it is.
Bit of both answer.
We do believe that a fair number of these homes will truly be incremental to our existing access to larger land.
Parcels and allow us to.
Everything that we normally would have built for sale and then incrementally do some rental units as well.
Okay.
Certainly I think there will be some projects, where it becomes a little fungible.
And.
And some of the units will come out of what historically would have been our for sale portfolio.
We'll see how the partnership kind of plays out and what opportunities are there.
But we do we do believe that this will become part of our growth story and we're excited about that I'd highlight.
Alan as I think you know.
The price points of the homes that are typically typically go into the rental pools.
Are slightly smaller more in the entry level price point the cycle times are a little faster the construction is a little easier.
So we certainly we certainly think that aspect will help.
On the construction side of things.
Our next question comes from Ken Zenner from Keybanc. Please go ahead with your question.
Good morning, everybody.
Okay.
Obviously, we've had new homes.
Yesterday, I think it slowed sequentially and there's been some downward revisions on the government data, but you're still doing about 3.4 orders that slipped last quarter, but down but.
Above your kind of 2.5 plus range in the past.
Could you talk to the question is can you talk to how the higher pace.
Okay.
Is changing the industry norms for you guys perhaps.
And specific to that.
How we should think about.
How you're thinking how you're buying your land when you run your models.
Relative to community rising relative to the order pace.
So as we see it today, because you're talking about larger community, which obviously can have higher pace, but I'm just trying to understand how you're thinking is evolving COVID-19.
The industry is shifting.
Because they are obviously was that pivot away from higher community given last cycles.
Experience.
Yes, Ken It's a fair question I think this is going to perhaps be a boring answer we haven't changed our thought process in terms of how we are.
Seeking to access the land market and more importantly, what our return expectations are now obviously, when we look at potential transactions.
The current.
Current market influences, our thinking but as we highlighted in the prepared remarks.
We're mindful that the market is.
Moving at a pretty fast pace today, and so we always think what happens if it goes back to what has been the norm before that what does it do to our return expectations.
And.
So on balance our community sizes have gotten a little bit bigger, but not much honestly theres still 3 years on average our return screen as the same.
1 of the nice things and Ryan highlighted it about.
The relationship with invitation homes is.
Because they are going to.
Have a need for and a desire for delivery of certain cadence of homes.
Coupled with the homes that we're going to build for sale. It allows for kind of an accelerated.
Build and delivery rate that has a return enhancing and so it's actually lets us look at different communities.
And so a bit further on the question that Ryan minute ago.
It allows us to think about different land parcels and so it might be something that we would have passed on but for the relationship with invitation homes. So all those things factor in and so when our teams are out looking stuff that they used to say no to we now have a different.
Maybe you can kind of build and sell model that we can layer into.
That might broaden the universe of assets that we're looking at but again.
To be clear about this.
Our return expectations haven't changed and whether it's looking at things that were going to build solely for sale or include.
Rent.
Current portion we have the same return expectations around that and Ken I would also add and just kind of emphasize I think Bob touched on it we haven't changed kind of our philosophy in terms of the number of years of land that we want to own. We've also as we highlighted in this most recent quarter, we've gotten our land under option up to the highest that it's.
It's arguably been in the last decade at 53% of our lots are controlled via option. So.
I think we're sticking to the fundamentals and the principles that we laid out that we believe.
To the point that Bob made really manage risk and drive the best returns that we can get.
Right.
Right I appreciate that Bob just taking your answer I thought of a question I didn't think of related to the invitation homes. I mean, I think your business is running very steadily.
Obviously when you look at these parcels of land is there I'm just thinking about joint ventures or any obligations. If the world changes are.
Is there some type of guarantee in terms of them purchasing if youre buying the land or is the land for these lots held differently. Thank you very much.
Yes, Ken So we do not have a joint venture.
As Bob and I highlighted in my prepared remarks, we have a.
An arrangement with invitation homes.
<unk> that is on a.
That struck on a on a project by project basis. So.
We underwrite every project individually as do day, we have purchase and sale agreements that are Walt.
<unk> bigger in size pretty normal with what we typically do in purchase and sale type agreements.
So we.
<unk>.
In terms of the risk on our side risk on their side, we think we've effectively manage that and we're doing a pretty responsible way.
Our next question comes from Matthew Bouley from Barclays. Please go ahead with your question.
Thank you morning.
Thank you for taking the questions.
Just back on the sales restrictions.
Sounded like 3 quarters your communities.
I'm just curious if you could outline a little bit around what youre looking for to loosen those restrictions if theres any targets you may have that's something.
Like X per community or just knocking.
Cycle time back down obviously, it is going to be different everywhere, but just looking for any kind of guideposts on how to think about that thank you.
Yes, Matt Thanks for the question and you highlighted a number of them.
Other 1 that I would add to that is.
As the number of months that a customer will be in backlog, while they're home is constructed.
We ideally like to target something in the kind of 6 to 7 month range.
Occasionally we'll go outside of that but we find.
You go much longer than 7 months it starts to have a negative impact.
Customer experience so.
We will look at that as well.
We also look at.
Overall cycle time, which we've highlighted as slightly getting expanded and then our lot availability and our lot development times kind of what.
The runway is in front of us we evaluate that.
And then you would add into that obviously production capability.
Trade availability should do we have the opportunity.
Do we have the opportunity to bring on more trades.
In some of our entry level community.
Communities net.
And that I would highlight that we are building more specs in those communities and so in those communities, we actually don't want to sell the home.
Until it reaches a later stage of production and so in those communities.
Trying to catch up.
We are certainly still selling and we're open.
And it's mostly in our Texas communities.
We're open and we're selling but we're intentionally really holding back.
As we put more homes into the spec pipeline.
Great really helpful color, there I think to that Ryan.
My follow up I wanted to ask about pricing power.
Actually.
And the first time buyer portfolio relative to I guess move up and active adult communities and obviously your first time is not entirely the lowest end entry level, but I'm just curious if you're seeing that that first time buyer you know, perhaps getting stretched at all.
Relative to those buyers that are selling.
Home and realizing the equity at that thank you.
Yes, it's fair.
Yes.
Stingley as the average sales price for our first time buyers is $3.38 in the most recent quarter, that's up 6% over the prior year.
The combined portal.
And in volume up 7% and just for perspective.
Our move up was up about 9% are active adult was up about 8%. So.
It's all day.
In the prepared remarks, we highlighted that it's kind of all markets all buyers the pricing is pretty consistent.
Portfolio.
Our next question comes from Stephen Kim from Evercore ISI. Please go ahead with your question.
Yes, Thanks, a lot guys.
<unk> put out a pretty aggressive start outlook.
Last quarter for this quarter and you.
You've pretty much hit it.
9800 start that thank you.
That is what you did in <unk>.
I was curious as to whether this is a level of start activity that you intend to sustain or perhaps even increase over the next several quarters.
If you could give us some visibility on that because obviously.
That's a level of starts which is running considerably higher than your closings.
And.
It seems like you've indicated that the lengthening the cycle time.
<unk> has started to level out basically.
Youre not seeing cycle times meaningfully increase still.
Were in the third quarter here.
So I just wanted to clarify what your outlook is for starts.
Yes, Steven Thanks for the question, we did have a really good start at quarter end.
Our field production and construction teams did an amazing job getting the 9800 homes in the ground in the quarter.
We'd highlighted last quarter and highlighted again today, that's not a rate that we would intend to run that.
Through the balance of the year.
The Q2 number was really meant to get.
Some of our outsized backlog into the production pipeline as well as to rebuild our spec inventory.
We've made meaningful progress against that.
Q3, and our Q4 start rate will certainly be up over prior year, although we probably expect it to be below the 90 to 100 that we did in Q2.
As we think about kind of production capacity, we we think we've got.
A lot of inherent ability and inherent capacity built into our system and certainly as we look to grow the company we look to.
Grow into future years, we'll we'll evaluate kind of what that spec or that's ultimate start rate should should ultimately be over several cycles.
Got it got it thanks very much for that and then your gross margin was pretty strong and you've given some.
Guidance that you're.
Going to have peak lumber cost basically running through in <unk> and <unk>.
And I'm curious as.
If you could help us understand what the year over year headwind from lumber you're expecting to be.
Embedded within your <unk> guidance.
And.
In terms of like in terms of basis points.
Our year over year headwind, whatever a couple of hundred basis points that kind of thing.
And then secondarily, if <unk> and <unk> was peak lumber is it fair to think that given what we've seen in terms of the lumber prices recently that 2022, the beginning of 'twenty 2.
Margin should benefit.
Kind of like the reverse of the headwind from higher lumber.
Number in <unk> and <unk>, maybe getting the benefit in first half of 2022.
Yes, Stephen It's fair question.
We're not going to give a guide on margins for next year fair to say that if lumber prices stay where they are it will be a tailwind.
In terms of apps.
Absolute impact on our margin.
I think we had highlighted this in the most recent call historically.
Would have thought the lumber pack.
Ex labor would have been 3% to 5% of the ASP.
We had highlighted that had run up to probably 6% to 8%.
So in real dollar terms on a $440.440000 ASP.
5% to $30.35000 in lumber costs in our house.
So you can kind of think through well if <unk>.
Pricing falls and depending on where you think lumber goes.
<unk> legs, OSB falling a different rate.
Benefit will be if we can get back to that 3% to 5% of ASP.
Pretty sizable.
Pricing is what lumber does how that happens again, we've seen different rates of change.
For different components, but yes, we will.
If things go as it appears they're looking it'll be a little bit of a benefit in fiscal 'twenty 2.
Yeah for sure. Thanks.
Thanks, David.
Our next question comes from Truman Patterson from.
From Wolfe Research. Please go ahead with your question.
Hey, good morning, everyone. Thanks for taking my question.
First just wanted to.
Touch on the Offsite manufacturing facility, you're expanding it to a second location.
I know historically, you haven't necessarily given any quant.
Quantitative measures on margin performance or anything like that I was just hoping you could give us an update either any quantitative.
On the margin side or.
Just qualitatively what you are seeing better cycle times lower warranty costs.
Yes.
Any sort of update or metrics you can put around that would be helpful.
Hi, Truman it's Ryan good morning, we're really excited about the second location for our ACG operation to your point, we have not provided kind of margin guidance at this point, we still even with the second facility, we think the amount.
Non of our business that it's impacting is still pretty small.
As we continue to scale, we get to a third plant a force plan and its starting to impact a bigger part of our business I think that that.
That insight will become more relevant and certainly more appropriate.
Okay.
Qualitatively I think.
Is the thing that I would expound on an elaborate on we're really happy with what it's doing for our operation.
In terms of the quality of the product that's coming out of the facilities, it's top notch.
We've got a really talented team of designers and operators that are running that plant.
<unk>.
The.
The construct the ability of those components that are happening in the field are really exceeding our expectations and it certainly saving a significant cycle time.
On the on the frame shell components of the homes, depending on how many of the components are actually going in so.
So.
Talented group of folks that are on and the ACG operation for us.
We're going to continue to grow it from here.
Our hope would be.
In the coming.
6 to 9 months, we can have.
Some type of an investor.
<unk> day, or some type of an event, where we can show kind of show you all firsthand kind of what this factory does for us.
Okay. Okay. Thanks for that.
Ryan.
When I think about you all are.
Rating your land investment quite a bit this year and thats.
<unk>.
<unk>, how your company looks a couple of years out when I think back over the.
The past handful of years, you seem like you've been a little bit more flexible as to which end markets you're willing to go in and just purely based off of returns whatever drives the highest returns so.
With that in mind are there any areas.
Areas.
Recognizing how large of an investment you are making this year entry level move up active adult is it.
In line with where <unk> been historically are there any.
Product categories that youre rotating towards geographies anything along those.
Is that help us out.
In terms of consumer groups, chairman very consistent with where we've been targeting historically.
As a refresher 35% of the business first time entry level.
40% of the business with our Pulte branded move up family communities in 'twenty.
5% in active adult so really no change to that focus in terms of markets.
Not a whole lot of change there either other than we have highlighted that we've recently reentered Denver.
We are in the triad area of North Carolina.
And we've started.
So I'm kind of expand into some of the markets like Colombia, and Greenville as well.
Leveraging some of our existing operations, so youre starting to see a little bit of incremental land spend in a few of those places, but other than that its largely consistent with our current footprint.
Alright, thanks for taking my questions.
Do good luck on the upcoming quarter.
Thanks, Jeremy.
Our next question comes from Michael Rehaut from Jpmorgan. Please go ahead with your question.
Alright, Thanks, good morning, everyone.
First question I had was on.
And the active adult business, obviously, a really strong result from an order growth standpoint, and actually looking at it on a 2 year stack from doing the math right. It looks like orders were up 40% versus 2019 second quarter versus first time up 30%.
The question is.
Obviously, you've had the first time buyer.
Really strong.
More broadly speaking over the last 2.3 years.
I think that by and large continues today.
But the active adult obviously has historically allowed for rate.
Customer diversification.
<unk>.
At the same time, you've had somewhat of a longer land position for that business.
And over time, you've shifted from cash.
The bigger battleships too.
The more nimble.
No.
Physicians.
Maybe 500000 lot type community.
Just kind of curious how you see the business.
Over the next 2 or 3 years.
Is the stronger growth rate that I referred to allowing you guys, maybe cycled through land a little more quickly and.
<unk> allow that business to even.
In a overall consolidated pulte.
Continuing to shift more towards that lot optioning.
And improve your overall financial profile.
Yes, Mike we're excited about what the del Webb.
Brand is doing for the company and specifically the recent performance we had a great quarter.
On a year over year basis day absorptions were up 76%.
Now admittedly that's against a pretty soft quarter last year, when that consumer wasn't traveling but.
On an absolute new orders.
Order basis, we reached levels that we haven't seen in a long long time, so we like the way the brand's performing and we think we've got some great assets.
Our newer vintage del Webb communities or even better located than what the historical ones were and some of those historical battleships given that we've had them for a long time theyre in pretty.
Locations as well.
As time has allowed them to mature and they've become closer in.
The other advantage that we have with some of those legacy communities as we do have land there.
We're able to develop that land and run those communities at a little faster rate than.
In the current environment, which is certainly helping with return and overall inventory turn.
So in terms of kind of what the brand does for us over the next 2 to 3 years.
As we've highlighted in some of our comments, we're very constructive on the overall, how U S housing market.
We believe with that market staying.
Healthy that will.
Bode well for this active adult consumer as well as they are typically selling their resale home and looking to move and do other things so.
We're certainly bullish on the entire business, but I think.
Maybe maybe extra pause.
The active adult component.
Okay. That's helpful. I appreciate it.
Second question, you know, perhaps just thinking about sales pace in.
In the back half of the year you know you're just kind of mentioned that you you would expect 3 Q4 Q starts paid.
To be below the rate you did in the second quarter.
You know historically in the back half of the year.
Sales pace has.
Moderated.
Roughly 10% sequentially in the third quarter, another 15 off of that.
In the fourth quarter.
At the same time, obviously, you've talked about the fact that demand well exceeds your ability.
I too will exceed supply.
As you are limiting lot pay per lot releases etcetera.
How should we think about sales pace in the back half with all of that.
Considered I mean.
It is a kind of reversion towards.
That historical sequential declines no roughly speaking, how we should be thinking about things or.
Should we be considering you know a different dynamic given the strong continued strong.
And backdrop that you've described.
Yes, Mike were not going to give any guidance on order rates for Q3 or 4.
But I would I would tell you that given the current environment and how strong demand is and the fact that we are intentionally and purposely restricting sales.
Demand difficult to use historical models to kind of predict the next couple of quarters. So we like the way we're operating.
We are very optimistic and bullish on consumer demand.
We're going to continue to sell.
As many as we think we can.
Kind of produce and our land.
Pipeline, new kind of our developed land pipeline will allow for.
But at.
At this point, that's probably all I can give you in terms of kind of future order growth.
Our next question comes from Susan Macquarie from Goldman Sachs. Please go ahead with your question.
Thank you good morning.
Everyone.
My first question is around the SG&A, you've obviously done a good job of.
Leveraging that in the guidance is lower than where we were coming into the year can you talk about the key drivers of that and how we should be thinking about it going forward as you continue to expand the business.
Yeah, Susan it's Bob.
Thank very consistently.
Answered this question over time.
As the business grows we certainly expect that we will get leverage from that.
And I think if you kind of go back probably 5 years.
And look with the exception of sort of a pothole that got created because of the the basic elimination of spend during the pandemic.
<unk> seen a very consistent.
Inverse trend as our revenues have increased.
Our SG&A as a percentage of those revenues has decreased.
In relative kind of step order to the size. So I think we've done a very nice job through time.
Managing against our expense our expenses against our revenue stream and so I think it's a pretty good blueprint for what you can and should expect from us going forward.
We've said it before.
We likely will never be the cheapest company in terms of SG&A spend there are things that we invest in whether it's IP or marketing related things that we think benefit the business.
And contribute to both our the engagement of our work force the experience of our consumers.
Yes.
The gross margins that we generate.
So we think we run a pretty tight ship, we think we're leveraging as we grow I think that's how you should think about it as we go forward.
Okay, Alright, that's helpful.
Next question is around capital allocation and I know you mentioned that your forecasts.
Tumors or estimate about $4 billion of land spend this year, which is up about 8%, obviously, you've got plenty of cash on the balance sheet, you've been buying back the stock what else should we be kind of expecting in terms of capital allocation anything thats changed.
Changed in there.
Yes. Good news is nothing has changed.
We still have a desire to invest in the business. When we're constructive we are today I think you'll see that both in terms of the year over year growth and even the increase that we've highlighted for investment this year up 8% versus what we thought at the beginning of the year.
Which is a pretty sizable increase.
Over the prior year.
We've obviously demonstrated a willingness to work the dividend through time.
The share repurchase authorization and the activity during this most recent quarter.
And you should expect us to be doing.
On some level all of.
Are those things going forward.
Our next question comes from Keith.
Roger Vaughan from Wells Fargo. Please go ahead with your question.
Hi, good morning, everyone.
Thanks for taking my question.
Brian I'll start with a.
Level question.
The industry seems to be struggling to meet even this 1.5 million starts for this year given the supply chain constrained.
Do you think we will be ready for a higher number next year say $1.8 million starts or so.
No.
Any any high level thoughts on what needs to happen to get us to a higher number and is that even realistic to expect a 1.8 next year.
Yes.
Candidly I think the supply chain challenges are bigger than just housing.
I think nearly every industry.
Across the globe is dealing with with shortages of various materials.
Sometimes those are major parts and pieces and sometimes there.
Microchips that cost less than a dollar.
So I think in terms of does the industry.
We have capacity.
We do.
I think we have the land pipeline I think we had the labor base.
I think theres, just some sand in the gears related too.
Certain materials the things that are having the biggest impact on us right now our windows to a lesser degree.
Certain lumber components and components needed to manufacture lumber related issues, our lumber related pieces.
And then.
Candidly I think in terms of the ability to incur.
Increased start rate bigger than the current.
Challenge and it's going to be land.
And entitled developed land. So we've all really worked to put more on the balance sheet to move things through the entitlement process, but.
Over the long pole I think thats the constraint that we should be focused on as opposed to what I think.
They are mostly short term supply chain issues.
Got it.
But equally from a land perspective lump on rate.
Pretty much under our control of the housing industry may not necessarily be.
The California industry within what is in your control look at land 1.
Fly channel not necessarily off the table for on the table.
Well I can only control what goes on inside of our shop I know that we've got a healthy land pipeline as indicated by the 207000 lots we control.
In terms of kind of what the entire industry has and where.
Is that in the overall entitlement development process.
I'd, probably leave that up to economists that are smarter than I am.
And ladies and gentlemen, with that we will be ending today's question and answer session I would like to turn the floor back over to Mr. Taylor for any closing comments.
Where that anytime and thank you I appreciate everybody's time. This morning, certainly available for the remainder of the day to answer any other questions and we will look forward to speaking with you on our next quarterly call.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending.
May now disconnect your lines.