Q3 2021 Pultegroup Inc Earnings Call
[music].
Good morning, My name is Julie and I will be your conference operator today.
At this time I would like to welcome everyone to the Q3 2021 Pulte Group, Inc Earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time press star followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star One again. Thank you Jim Suva you may begin your conference.
Great. Thank you Julie and good morning.
And welcome you to Pulte group's earning call earnings call for our third quarter ended September 32021.
Joining me to discuss Pulte group strong third quarter results are Ryan Marshall, President and CEO, Bob O'shaughnessy, Executive Vice President and CFO, Jim SaaS Keys Senior VP finance.
A copy of this morning's earnings release and the presentation slides that accompanies today's call have been posted to our corporate website Pulte group Dot com.
Also post an audio replay of this call later today.
As always I want to alert everyone that today's presentation includes forward looking statements about the company's expected future performance.
Results could differ materially from those suggested by our comments made today.
Significant risk factors that could affect future results are summarized as part of today's earnings release 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 Bryan Bryan.
Thanks, Jim and good morning, I look forward to speaking with you today about Pulte group's third quarter operating and financial results. In this morning's press release, you read that our home sale revenues in the third quarter increased by 18% over last year to $3 $3 billion, while our gross margin expanded 200 basis points to 26, 5%.
Combination topline growth and margin expansion helped drive higher earnings per share of $1 82.
This is an increase of 36% over the prior year's third quarter adjusted earnings of $1 34 per share.
Inclusive of these strong third quarter numbers through the first nine months of 2021, our home sale revenues were up 22% to $9 $2 billion, while our reported earnings per share are up 36% to $4.85.
The resulting strong cash flow being generated by our operations continues to put our company in an enviable position in which we can invest in our business returned funds to shareholders and still maintain outstanding balance sheet strength and overall liquidity.
More specifically consistent with our constructive view on the housing market, we have invested $2 $9 billion in land acquisition and development. So far this year are $2 9 billion of land spend is comparable to what we invest in for the full year in both 2020 and in the pre pandemic year of 2019.
<unk> and we remain fully on track to invest approximately $4 billion in total for the full year of 2021.
I would highlight that while we were investing more into the business, we remain disciplined and focused on building a more efficient and lower risk land pipeline at the end of the third quarter, our lots under option had grown to 54% of our total controlled lot position.
Compared to when I set the initial 50% option target we have over 65000 more lots under option and now view, 50% as the floor rather than the ceiling in terms of how we control Orlando assets.
Consistent with our capital allocation priorities, along with investing $948 million more in land acquisition and development through the first nine months of 2021 compared with last year. We have also returned $726 million to shareholders through share repurchases and dividends.
And if paid off nearly $800 million in debt this year, leaving us with a net debt to capital ratio of only five 7%.
Finally, consistent with our strategic focus our operating and financial performance has helped drive a return on equity of 26% for the trailing 12 months.
Like the broader economy, our operations continued to be impacted by the pandemic on one hand, we are managing through the disruptions COVID-19, and the Delta Varian have inflicted on our workforce, our trade partners and our global supply chain on the other hand, our results have certainly benefited from the remarkable demand.
And pricing environment, the homebuilding industry has experienced over the past 18 months either way to deliver our third quarter numbers during a global pandemic and with our supply chain that is clearly struggling reflects the commitment and tireless efforts of the entire Pulte group team.
Since we updated our production guidance in early September broader industry comments are validated the challenges within the construction supply chain are significant and don't have any quick fixes.
Based on a myriad of calls and questions. We have received I think it's hard for everyone to appreciate the full magnitude of the issues. We are facing when you're not dealing with them on a day to day basis.
For some products, it's simply the materials arent available sometimes you can switch to an alternative but when you can you wait.
For others, it's changing lead times, where order fulfillment has gone from six weeks to 16 weeks back to 11 weeks and then back to 16 weeks and for others. It seen allocations being imposed as manufacturers and distributors do their best to keep their major customers, which I would note. We are one at least partially.
Fully satisfied.
Our local divisions may not get much advanced notice of the shortage and resulting allocations. So we have to adjust on the fly.
In other cases, it's logistics when you're forced to ship materials to solve near term issues. This might be shipping, citing from the southeast to the southwest ore trades driving across the state for paint.
In one form or another these issues impacted our third quarter results and as Bob will detail will put additional pressure on our deliveries and margins in the fourth quarter.
It is difficult and frustrating as this is I can say that our suppliers have been outstanding partners and routinely bend over backwards to get us the materials, we need to solve our issues.
I can say that we've been clear with our teams that we have to be that we have to over communicate with customers to keep them informed of any scheduled changes. We also have to be flexible and creative in sourcing materials. Even if this means spending additional dollars to acquire needed resources and finally, we must maintain our standard.
On the quality and completeness of each home that we can deliver given.
Given the very problems impacting the supply chain, we would expect the solution that we would expect that solutions will be found over different time lines, depending on the suppliers underlying issue in the interim we will adjust our production estimates for the fourth quarter and work to position the business for more consistent cadence in the year ahead.
We will also continue to work in close partnership with our suppliers to manage through the supply chain issues as quickly and as intelligently as possible now let me turn the call over to Bob for a detailed review of our third quarter results.
Thanks, Ryan and good morning.
Teams have done an outstanding job navigating through the challenging production environment, which can be seen exceptional operating and financial results, we delivered in the quarter.
Starting with our income statement, our home sale revenues for the third quarter increased 18% over last year to $3 3 billion.
The increase in revenues was driven by a 9% increase in closings to seven seven homes in combination with an 8% or $37000 increase in average sales price to $474000.
The higher average sales price realized in the third quarter reflects meaningful price increases we've realized across all buyer groups with first time up 8% move up 10% in active adult up 8%.
The mix of homes, we delivered in the third quarter included 32% from first time buyers, 44% from move up buyers and 24% from active adult buyers.
In last year's third quarter, 30% of homes delivered for first time, 45% were move up and 25% were active adult.
Our net new orders for the third quarter were 6796 homes, which represents a 17% decrease from last year that was driven primarily by a 14% decline in year over year community count.
In addition to fewer open communities orders for the period were impacted by ongoing actions to manage sales paces to better align with current production volumes.
The actions to manage sales pace and outright restrict sales were more frequently targeted toward our first time buyer communities as we strategically work to build up spec inventory within our centex branded communities.
Looking at our third quarter orders in a little more detail or orders from first time buyers decreased 20% compared with last year.
This decrease was driven primarily by our actions to restrict sales as our first time community count was only down 6% compared with last year.
In contrast, our orders from move up and active adult buyers decreased 22% and 4%, respectively, which was driven by comparable 22% and 5% decreases in community count respectively.
In the third quarter, we operated from an average of 768 communities.
Insistent with the guide and our recent market update this was down 14% from last year's average of 892 communities.
Our Q3 community count should be the low watermark for the year as we expect our fourth quarter community count to increase to approximately 775 active communities.
Further our existing land pipeline should allow us to realize a meaningful ramp up in community count as we move through 2022.
As is our practice, we will provide more specifics on 2022 community count as part of our fourth quarter earnings call.
Our unit backlog at the end of the third quarter was up 33% over last year to 19845 homes.
The dollar value of our backlog increased an even greater 56% to $10 $3 billion as we benefited from robust price increases realized over the course of this year.
At the end of the third quarter, we had 18802 homes under construction of which 83% were sold and 17% respect.
We have almost 900 more spec homes in production than we did in the second quarter as we've been working to increase spec availability, particularly in our centex communities.
Given that 90% of our specs are early in the construction cycle and then we have only 109 finished specs. These units are about helping to position the company for 2022, rather than providing closings in 2021.
We faced similar dynamics within our production of sold units as two thirds of these homes are in the earlier stages of construction and we can see gaps in the supply of key building products needed to complete these homes.
Given these conditions, we believe it appropriate to update our fourth quarter.
<unk> for expected fourth quarter deliveries and currently expect to deliver approximately 8500 homes in the fourth quarter, which would represent an increase of 24% over the fourth quarter of last year.
It's difficult to say there are positives to be gleaned from the challenging production environment, but one of the outcomes of this that the limited supply of homes, coupled with ongoing strong demand has supported higher prices across the market reflected.
Reflective of these conditions, our average price in backlog increased 18% or $78000 over last year to $519000.
Although more than half of our quarter end backlog is expected to deliver in 2022, we will continue to see the benefit of rising prices in our fourth quarter as our average closing price is expected to be $485000 to $490000 at.
At the midpoint this would represent an increase of approximately 10% over last year.
Our reported homebuilding gross margin in the third quarter increased 200 basis points over last year to 26, 5%.
Given that our third quarter closings absorbed the elevated lumber prices from earlier this year expanding our gross margin by 200 basis points, a test to the strong pricing environment the industry experienced over the past year.
It's worth noting that the strong market conditions also contributed to another step down in incentives in the period as discounts fell to one 3%.
This is down from 3% last year and down 60 basis points from the second quarter of this year.
As our margin increased demonstrates strong buyer demand has allowed the company to pass through the higher labor and material costs, we've experienced that.
That said and as Ryan discussed we are knowingly incurring additional expenses to get houses built within today's challenged operating environment.
In addition to the incremental build costs, we are absorbing over the short term to get homes completed.
Our reported gross margins are being influenced by the mix of homes closed as.
As we also highlighted in our recent market update certain of the homes that we expected to close in Q3 slipped into Q4 and others have been pushed out of the fourth quarter into 2022.
These conditions are impacting our reported gross margins in the third and fourth quarters of 2021, but set us up to realize gross margin expansion as we head into 2022.
That said with the changing mix of homes. We currently expect to close in the fourth quarter, coupled with the added material labor and logistics costs. We are paying to get homes closed. We currently expect our fourth quarter gross margin to be 26, 6% or 26, 7%.
This would represent an increase of 160 to 170 basis points over last year's fourth quarter, and an increase of 10 to 20 basis points over the third quarter of this year.
We see the opportunity to build on this momentum as the strong pricing conditions, we've experienced coupled with the lower lumber cost. We expect in next year's closings should result in further gross margin expansion in 2022.
Our SG&A expense for the third quarter was $321 million or nine 6% of home sale revenues prior year SG&A expense for the period was $271 million for a comparable nine 6% of home sale revenues.
Given the sequential increase in closings, we expect to deliver in the fourth quarter, we should realize improved overhead leverage with SG&A expense in the upcoming quarter expected to fall to a range of eight 9% to nine 2% of home sale revenues.
Looking at our financial services operations, our third quarter pretax income was $49 million compared with $64 million last year.
As has been the case for much of this year higher origination volumes have been offset by lower profitability per loan given more competitive market conditions.
The company's reported tax expense in the third quarter was $145 million for an effective tax rate of 23, 3%.
The comparable prior year period, our effective rate was 14% as we realized tax benefit of $53 million associated with energy tax credits recognized in the period.
For the third quarter, our reported net income was $476 million or $1 82 per share.
This compares this compares with prior year adjusted net income excluding the impact of the energy tax credits of $363 million for $1 34 per share.
Moving over to the balance sheet, our business continues to generate strong cash flow, which allowed us to end the quarter with $1 6 billion of cash after significant investment in the business and continued shareholder distributions in the quarter.
In the quarter, we repurchased five 1 million shares.
2% of our outstanding common shares for $261 million at an average price of $51 seven per share.
$261 million in stock repurchases, a sequential increase of $61 million for the second quarter of this year.
As stated previously we are fully prepared to allocate more capital to shareholders as conditions warrant.
We also invested $1 $1 billion in land acquisition and development in the third quarter.
This brings our total land related spend in 2021 to $2 9 billion.
And keeps us on track to invest approximately $4 billion in land acquisition and development for the year, which would be an increase of almost 40% over last year.
We ended the third quarter with a debt to capital ratio of 22, 4%, which is down from 29, 5% at the end of last year.
Adjusting for our cash position, our net debt to capital ratio at the end of the quarter was five 7%.
We ended the third quarter with approximately 223000 lots under control of which 54% were controlled through options.
Our divisions and particularly our land teams have done an outstanding job building, a more efficient land bank, while helping to reduce market risk. We're extremely proud of their efforts and the success that they've realized.
Now, let me turn the call back to Ryan.
Book, ending the front of this call where I talked about supply let me finish the call by providing a few comments about third quarter demand, which is a very positive picture.
We continued to experience strong demand in the quarter with very consistent traffic and sign up numbers across the period I would also add that strong demand has continued through the first few weeks of October while sign ups in the quarter were lower compared with last year. The primary driver of the decline was the decrease in community count.
The impact community count had on order rates in the quarter, our divisions continue to manage or outright restrict sales pace to better match sales with our current production.
As Bob indicated this most recent quarter should be the low point of our community should be the low point of our community count. This year as we expect our community count to move higher on a sequential basis as we move through 2022.
Reflecting the strong demand conditions and relatively limited supply of new and existing homes, we were able to raise prices in the quarter across most of our communities.
The most typical increase in the quarter was in the range of 1% to 3%, although some of our divisions were able to push pricing in select communities a little more aggressively.
That being said, we continue to keep a close eye on affordability metrics within our local markets, especially given the recent rise in mortgage rates between an improving economy, a strong jobs market wage inflation and government stimulus checks consumers are in a very strong financial position and have proven they are prepared to pay today's higher today's.
Higher prices for everything from food to autos to homes.
We continue to see a very strong financial profile, among our homebuyers with the average FICO score remaining above 750.
And loan to value of 83% based on users of our mortgage company.
Looking at demand across the country I would tell you that generally where we have product available we can sell it and at a higher price than earlier in the year.
Although frustrated at times because of limited supply higher prices and longer build cycles consumers remain engaged in the home buying process and are anxious to get into a new home.
Just to wrap up while there are certainly challenges in the business Pulte group remains in an excellent position, both operationally and financially.
We have a strong and improving land pipeline that we continue to make more efficient through the use of lot options.
We have an opportunity to further expand margins based on limited supply strong buyer demand, resulting favorable pricing dynamics and lower lumber costs in 2022.
We have an outstanding homebuilding operation that is generating tremendous cash flow.
And we have an exceptional balance sheet strength and liquidity that can support our operations and gives us tremendous flexibility to capitalize on market opportunities let.
Let me close by again thanking our employees for their tireless efforts to serve our homebuyers and deliver outstanding business performance now, let me turn the call back to Jim.
Great. Thanks, Brian we're now prepared to open the call for questions. So that we can get to as many questions as possible. During the remaining time on the call. We ask that you limit yourself to one question and one follow up.
Julie I'll now open the queue for.
Questions and answers.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then.
Number one on your telephone keypad.
Your first question comes from Sherman Patterson with Wolfe Research. Please go ahead.
Hey, good morning, everyone and thanks for taking my questions.
First I wanted to touch on on gross margin is there any way you could just quantify the elevated costs you've incurred that will impact the fourth quarter and then in the prepared remarks, you mentioned 22 gross margin.
Likely moving higher which I think there's been a lot of investor uncertainty on that so.
With prices moving up lumber coming down other costs accelerated accelerating can you just help us think through the gross margin in backlog or kind of the incoming orders.
Yes, I'll start with the fourth quarter Truman, yes, we obviously have.
<unk> taken down our margin expectation.
For Q4.
Depending on which one.
Where are you.
Peg the margin it's call it 60 or 70 basis points from what we had originally guided.
And I would suggest the way to think about that is we've got mix change is very consistent with what we had in the third quarter as stuff is moved out of the fourth quarter into 'twenty two.
That's probably 30 basis points of it and then.
Incremental costs in <unk>.
Heard us talk about them in the prepared remarks.
To get things done today is about $2000 a house for US, which is about 40 basis points and so.
That's sort of the magnitude of what we're seeing in the fourth quarter. We didn't provide a guide for 'twenty two gross margins.
But we obviously did highlight the significant pricing that we're seeing in our backlog.
It's up $78000, a unit or 18%.
Plus we will have lower lumber costs that lumber is variable it's moved down it moved up a little bit we will see where that lands.
But we will see on a sequential basis as we get into 'twenty. Two some decreases so yes that certainly the the structure is there for lower margins will give you an estimate of what that is as we release our fourth quarter.
Higher margins did I say.
Say lowered my apologies higher margins in 2000.
Okay. Thank him for his art, Jim Jim had a horrified lookout at baseline and I apologize for that.
Awesome.
And we will give you some visibility to that as we release, our fourth quarter earnings and we will have obviously better visibility into the year at that point.
Okay, Okay, and then on the supply chain constraints I realize its kind of a moving target and it varies by the metro but.
I'm, just hoping you could run through where the most common pressure points are.
In the supply chain and on the material side.
Any highlights on the vendors are they giving you a timeline.
As to when they expect their internal capacity begins improving and actually increasing product in 'twenty two.
Yes, sure I mean, it's Ryan good morning, it really depends on the region trim and so you know in like the Florida regions. There are challenges with block.
Most of our homes that are built out of concrete block as opposed to lumber.
So we've been on allocation there for a number of months.
Windows I would tell you generally across the entire United in the United States are a pressure point paint is a pressure point.
And appliances would be some things that I think are common.
Rossi and triad and truck tire enterprise and then when you get into certain regions.
Things like sighting become a pain point, depending on how much of that we use and the construction of our homes in those regions.
In terms of kind of when things are solved Truman.
I tried to highlight in my prepared remarks, we think that the timeline of fixing things will be varied.
And it really depends on what the underlying issue is for that particular distributor and manufacturer.
There are some things that are obviously relying on micro chips like appliances, and I think that.
Those challenges are well detailed in some cases chemicals.
And things like resin.
The paint suppliers paint manufacturers have kind of highlighted some of the things that they've done.
In particular, Sherwin Williams recently purchased their own resin plants.
In order to help solidify some of the challenges they've had in obtaining resin.
And then in some cases, it's logistics and so there's just simply not enough.
Transportation capacity to move things from the ports to the distribution centers or from the factories to our job sites.
And so I think we're going to end up with is a mixed bag of results in a recovery timelines as we move through 2022.
And the relationships that we have with our suppliers are outstanding we're communicating actively with them and collaboratively solving problems I think we're being treated very well by our suppliers and they are bending over backwards too.
Take care of us and the significant volume that we do.
Of new homes so.
I'm going to remain optimistic but there is no doubt there are some headwinds out there that we're fighting through each and every day.
As Bob highlighted will talk more about 2022.
As we get to the end of the fourth quarter.
Which is when we customarily provide our guidance.
But there are there are some favorable things with community count growth opportunity for margin expansion et cetera, I think leave leave reason to continue to be optimistic.
Okay.
And your next question comes from Alan Ratner with Zelman. Please go ahead.
Hey, guys. Good morning, Thanks for taking my questions.
So first question I would love to dig in a little bit to the pricing environment.
I believe you indicated kind of the typical.
Price increases were about 1% to 3% in the quarter. Your average order price was up way more than that up 9%. So I'm guessing the delta there is mix, but I'm curious if you could just talk a little bit about what youre seeing in terms of pricing power now versus three months ago six months ago for you a few other builders kind of suggested maybe pricing powers and moderating a bit.
It doesn't sound like you're seeing that in your communities, but any color you can give there would be great.
Yes, Alan I would just good morning by the way I'd highlight that the demand environment continues to be very strong in most communities. We continue to have pricing power.
We're exercising that through price increases, obviously and in some cases were outright restricting sales.
Glitch.
As in the same kind of family of actions that we take to manage the demand that we have.
What I would tell you that we highlighted on average most communities were 1% to 3% there were certainly some communities that were well in excess of that.
Those kind of outlier communities combined with the fact that you do have some mix in there as well as I think contributes to the.
The incremental increase that you highlighted in your question.
In terms of kind of where things are at today pricing power wise relative to a quarter ago two quarters ago.
It suggests it's pretty comparable to where we were at in Q2.
A little.
A little weaker than where we were at in Q1 in terms of kind of month over month or week over week pricing changes.
We are keeping an eye on affordability, we highlighted that in our prepared remarks, I think it's something that while the consumer continues to be strong financially.
They don't have unlimited financial means and resources and so we need to we need to be mindful of that not only as a company, but as an industry.
Great I appreciate that Ryan.
Secondly, maybe more for Bob but the $2000 per house incremental costs, you talked about me I'm. Just curious when you kind of qualitatively talk about the 22 margin outlook in terms of improvement what's the assumption on that piece is are you assuming that thats a temporary headwind that goes away as the supply chain normalizes do you think that it even goes higher.
Builders are kind of crime and to try to get more specs on the ground.
Is the assumption embedded within the outlook for margin improvement next year.
Well to be clear, we haven't given a margin expectation for next year and part of the reason for that Alan is because we want to give ourselves the opportunity to really evaluate that question more fully.
Certainly the supply chain is not going to cure itself in the next three months probably not in the next six.
Anybody's guess as to how long beyond that and so there will be continued constraints.
You also have kind of working in the other direction that most builders are kind of pushing towards their year end in Q3 and Q4. So there is more kind of demand for service and materials and that will mitigate to a degree in the first half of next year.
So I think a lot of it will depend on how the supply chain.
Kind of.
Moves forward from here and again, it's one of the reasons that we are waiting until the fourth quarter not just convention, but also we think we'll get better information as we get into December January and can answer that question more fully.
Okay.
And your next question comes from the line of Michael Rehaut with JP Morgan. Please go ahead.
Good morning, everyone.
Thanks for taking my question.
First just wanted to.
Talk a little bit about capital allocation obviously.
Not just in terms of share repurchase, but maybe just to shift the question a little bit on.
Okay.
Lot optioning and lot owning.
A lot of progress.
Progress on lot optioning.
But actually if you look at the years owned.
Staying around 3839 in terms of three.
3837 times, a year zone supply.
Any thoughts around trying to get that metric down over the next two or three years and as a result, I would presume that it would free up even more cash.
To perhaps return to shareholders or.
Invest in the company in other ways.
Okay.
Hey, Mike Good morning, its Ryan yes in terms of capital allocation I'm really proud of what we were able to do in the quarter.
The health and the quality of the homebuilding operations continues to generate outstanding cash flows and so we were able to do a lot in the quarter.
We were very pleased with the total amount of land that we've been able to invest in in the year. We said it right at $3 billion year to date and are on track for four which will be a big year for the company.
We had an outstanding quarter of.
Returning funds to shareholders and that's something that is very consistent with an.
And right in line with our capital allocation philosophy of investing in the business and returning funds to shareholders. So I think.
Two kind of very solid check marks there as it relates to Mike Your question on land pipeline.
The thing that I'd highlight is that we've got 54% of our controlled pipeline under option.
We set a target of 50%, we've we've passed that number.
And it's something that that we really.
Are pleased with what our teams have been able to do to continue to maintain optionality.
Optionality with the overall land supply terms of your question on 337 year supply.
Mike.
That number would be calculated using the trailing 12 months closings.
I think thats certainly an acceptable convention in terms of how you would look at what the AUM pipeline is.
That number's less if you look forward and I realize we haven't given.
Visibility to what that forward number is but I think we've very clearly highlighted our desire to grow and you have seen.
The early end of that with the amount of capital that we've been investing into the business. So.
The other thing that I'd also.
Just mentioned and we've been consistent in stating that we haven't changed our land underwriting guidelines.
We continue to do.
Approved land deals that are right in line with our target of three years homeland.
Okay. That's helpful. Ryan I appreciate it.
I guess secondly in.
I apologize here for this question in advance because I know, it's a little bit of beating a dead horse, but we are getting some inbound client questions around it.
The understanding that you can't you're not giving you are not quantifying gross margins for next year.
You did say that you expect improvement and I believe you're talking about improving off of <unk> levels.
So I was just trying to get a sense of.
Is that all kind of on the <unk>.
Lumber benefit maybe exceeding other areas of cost inflation.
Or are there other drivers to that initial at least directional.
Guidance so to speak.
Yes, Mike.
It's a fair question and I realize that Theres a lot of interest in this area from investors.
We're anticipating getting to the end of the fourth quarter. When we can kind of give you more of a guide.
The biggest drivers price, Mike and I think you've seen that over the course of the year you see what's happened in our backlog and so.
That ought to give you.
Reasonable.
Reasonable information to use and how much is there.
Highlighted the fact that our highest lumber loads are coming in Q3, and Q4 and we start to get benefits as we move into Q1.
Q2 of next year so.
There is a lot of benefit there on the lumber side.
As we're experiencing today not only in Q3, but also Q4, we've got some incremental cost that we're paying today.
And as Bob suggested to one of the prior questions. We've got to see what the next three to four months look like in terms of how much of that will continue.
To have to pay and they're essentially bounties.
Spending money above and beyond what we've contracted for in order to get the homes across the finish line at the quality standards that we expect so.
I know, it's less than a fulsome answer but.
We're going to leave it as we currently see room for margin expansion next year and probably leave it at that.
Your next question comes from Anthony Pettinari with Citi. Please go ahead.
Hi, good morning.
Good morning.
<unk> been building a second Offsite manufacturing facility in South Carolina I was wondering if you could talk about the progress there and then just from a big picture perspective, when you think about the kind of extreme supply chain pressure that you're seeing does that sort of validate the offsite manufacturing approach and increase the urgency there or does it present, new challenges for that model.
Where you might have to dial things back a bit.
Yeah, Anthony Thanks for the question we are in the process of fitting out that space in South Carolina, we would expect to be delivering product out of there in mid 2022. So that's on track at this point in time.
In terms of kind of broader supply chain.
Implications I would tell you that the primary reason that we continue to rollout and expand our offsite manufacturing capability is related to labor availability.
And we really believe that the automated nature of those off site facilities will help too.
Help us weather what will be a prolonged labor.
Headwind within the space over the next eight to 10 years as the current Labor Force continues to age out so.
The current supply chain challenges I think are more around raw materials and more around logistics and truck drivers candidly.
So.
Well, certainly having your own facilities or in a bit more control of your destiny.
Those factories need raw materials as well and clearly those are those are in short supply. So.
We remain very optimistic and bullish about what the offsite facilities can do for our business and remain on the path of building six to eight of these facilities over the next number of years.
Okay. That's very helpful. And then is it possible to say what percentage of your communities are still restricting sales.
Other than the lower community count impacting some of the early traffic in October.
Are there any other trend that you call out between buyer type or geography.
See as driving some sort of cooling or normalization of demand.
Yes, we are.
Still restricting sales and more than half of our communities today.
And even in the ones, where we're not we're seeing strong traffic such that.
When we bring lots to market, we're able to sell them.
I don't think I'm looking at Brian and Jim any other trends I've nothing nothing of note now.
The only other trend I would highlight is that we've actually seen continued strength as we've moved out of Q3 and into October.
I think I think normally you would see some some seasonality in sales paces and trends.
We're quite pleased with with the activity that we've seen so far.
Sitting here in the third week of October.
Okay. That's very helpful I'll turn it over.
And your next question comes from Matthew Blair with Barclays. Please go ahead.
Good morning, Thanks for taking the questions.
So on the active adult business obviously.
Kind of a less severe community decline and it sounds like less sales restrictions in those communities.
Perhaps given the depths of.
They'll buy product and lots of you've got there is it fair to assume that the mix of active adult to liberty deliveries should therefore be higher in 2002, and I'm curious if you could remind us how the margin and return profile.
That product might look compared to the rest of the business. Thank you.
In terms of forward mix.
<unk> by quarter candidly.
The current quarter it was about 29% of our sign ups.
<unk>.
Prior year was about 25%. So you may see a one or 2% or 3% kind of mix shift.
Interestingly given given the way the market has behaved there isn't a significant difference today in the margin profile of that business versus the move up or entry level.
So I don't think it causes any significant changes and hasnt really for the last couple of years.
The market is pretty strong across the board you saw.
8% price increase first time, 10% move up 8%.
Active adult so we're seeing kind of that rising tide lifts all boats.
Got it okay. That's very helpful. There Bob Thank you for that.
Second one just on the topic of of the sales restrictions and supply chain, obviously the reduction to delivery guidance for Q4, I am curious, how we should think about that kind of balance of.
These production bottlenecks, which kind of unpredictable how long this will last versus.
The rebuilding of spec inventory that you've now been doing for quite some time is it realistic that as we get into the spring.
You might see.
<unk> mall are even greater than normal uptick in both spec sales and deliveries.
Associated with that just as you worked so hard on kind of rebuilding inventory homes. Thank you.
Yes, Matt It's Ryan we have we have worked hard to get more stuck into the pipeline I think we've been highlighting for the last two or three quarters that ideal for us is to be 25% to 30% of our total.
Inventory.
Of our total inventory spec.
We've got a thousand more specs in the pipeline today.
Then we did.
A year ago, So we're very happy about that.
Still only 17% of our total production so we're.
We're a full.
10.
Kind of 13% below where are we to optimally optimally like to be so it's better.
We highlighted the fact that.
That.
Where we have restricted sales more is in our first time communities that also happens to be where we're rebuilding that stock pipeline. So.
Look if we can continue to have some success. There we can move those units along we can get them closer to being ready for delivery.
That's when you would put those on the market for that buyer group and certainly our hope would be that we've got more available to sell as we move through Q4 and into Q1 next year.
And your next question comes from Mike Dahl with RBC capital markets. Please go ahead.
Good morning, Thanks for taking my questions.
Hey, Mike.
I'm wondering to follow up first with a question around pricing power because it does seem like your your comments and your results.
Suggests.
A little more.
A little more positive tone around pricing, then I think some peers.
Alluded to earlier have talked about.
More recently and that's consistent in the work that we've tracked as well so.
I guess the question is when you look at kind of the sales restrictions when you look at your balance.
Price versus pace.
Do you think that you're acting in a way that's different than peers right now still pushing a little more price and layering on a little more in terms of restrictions in some of your peers.
Yes, Mike I am not I am.
Not in a position to make a great comparison, there with specific data other than anecdotally.
One thing I would highlight is I think it has the benefit of our built to order model.
And our build to order model I think we continue to give customers the ability to choose their lot their floor plan.
And to personalize the home and the way that they see the most value and so I do think that our strategic pricing model, which we probably haven't talked about as much over the last couple of quarters because.
Things have been so frenzied I think that does continue to give us some pricing power.
Our competitive advantage relative to our peers would be probably the biggest thing that I would I would highlight.
Related to that model a big component of it is the option in the lot premiums and Thats up 7% year over year. So we've seen some some nice growth.
From those two things, which are as I think you all appreciate the contributors to our overall margin and profitability.
Got it got it okay. That's helpful and my follow up it's somewhat related slight variation, but.
When we look at the pace.
I can add a little below three a month in terms of.
Borders and.
Closings just right around three months.
Even even some peers at.
Kind of the middle of the <unk>.
Higher end of the price spectrum right now I think are putting up pace and construction starts.
What you can across the finish line.
But I guess I'm wondering are there some things that youre seeing in the market, where youre, just saying that that just doesn't make sense, we're going to.
We've paid up to 2000, but this extra piece just we can't justify it so will either keep the restrictions or we're going to push out the deliveries depending on whether youre looking at.
Orders or closing, so I guess without talking specifically about your.
Any of your competitors are there certain areas in the market that youre just.
Choosing not to be as aggressive to get things closed today versus what.
Theoretically could.
Yes, Mike there was a lot in that question. So let me unpack a few pieces and I'm going to start with absorptions per community.
What I'd start with is I'd reiterate the continued strong demand that we've seen from consumers not only in the quarter, but what's continued into October.
And our.
Our orders and absorptions in the quarter while.
Maybe lower than what we would have liked.
I'd want to highlight a couple of things number one.
Except for entry level, the absorption that we had in the quarter were consistent with what we had in the prior year. So Bob highlighted that in his prepared remarks.
The change there was completely driven by the community count decline.
The exception to that is entry level, where we had more we.
We had lower absorptions and lower sign ups relative to the drop that we saw on community count.
The area that I'd, probably highlight is taxes.
Texas is a state where we have a lot of entry level centex communities and that happens to be.
<unk>, where we have significantly restricted lot sales as we rebuild that spec pipeline. So.
All in all we feel really good about the way that homes are selling on the underlying demand that continues to be there in terms of cost.
Mike I would tell you I think we're doing things, where we believe we can make a difference. So if we can get the material. If we can put it on the truck if we can send somebody the other side of the state to pick it up and get it we're going to do it.
And.
I think the added costs are to simply compensate.
People for the extra time and effort that's going into getting it done so I don't I don't feel that we're doing.
Anything unreasonable or being held hostage to do anything.
We're also really thinking about our customer and thats something that we put.
First and foremost and everything we do we're really proud of the quality of the homes that we build and so.
We're not going to deliver incomplete homes or rush things across the finish line.
We don't believe meet our quality standards, and we're kind of unwavering on that so in terms of kind of how much we're paying relative to what our competitors are paying I think.
My senses, we're very competitive there I don't think we're doing anything.
That would be out of line relative to the competition.
So.
So we feel pretty good about what we've been able to do given the operating conditions that not only this industry is in the whole world zone.
Okay. Thanks, Brian.
And your next question comes from Stephen Kim Kim with Evercore. Please go ahead.
Yes, Thanks, a lot guys I wanted to drill in on the <unk> gross margin guide you talked about I think 70 basis points.
I think about 70 basis points lower than what you had done previously and you had indicated I think that 40 basis points of that was sort of these extra costs.
Maybe 30 basis points with mix.
So within the <unk>.
Extra cost I wanted to clarify that this is actually what I guess, you could call scrambling costs like to scrambling around to try to get these homes closed.
And whatnot not general lies general input cost inflation.
Because of that you would expect to sort of persist, but sort of scrambling around kind of cost you would expect to dissipate. So I just wanted to clarify that 40 basis points of extra costs.
Is in fact, not just generalized input cost inflation.
If you could provide maybe some additional color around what kind of.
These these unusual costs youre doing like are you warehousing products just to make sure that you have them on hand, when you need them. If you could give some color around that that would be helpful.
Yes.
Summarized it correctly.
Yes, I wouldn't have thought of scrambling costs, but it's not bad.
Descriptor.
And our more recent commentary told folks that we saw kind of 9% to 11% inflationary.
Costs and we're still there and this is just the things we're doing above and beyond that to get stuff done.
And you heard Ryan talk about some of those in his prepared remarks.
Iteratively paint suppliers don't have pain, so we're asking people to drive to go buy paint and retail stores.
Thats not normal it's not the way we do business, we are shipping trusses from market to market be again, because there was a trust factory buyer in market be that limited the production capability there.
And there are myriad examples of that and there are different for different types of construction they are different in different markets for us.
You kind of mash it altogether and that's the $2000 a unit so.
On some units that might not be much at all on others that might be $8, depending on the circumstance.
Blend to that $2000 I might I might steal scrambling cost. So thank you for that Steven and I would highlight you mentioned it we're warehousing things like windows.
If we can get them.
We're ordering them earlier than we need them you are putting them in a storage unit or a warehouse and we're polling.
Those windows when we need it so that's part of those incremental costs as well.
Great and then just to make sure that I'm crystal clear on it is $2000.
Is that the total amount of these sort of unusual cost or is that simply the increment from what you had previously thought you might have to.
To absorb these kind of special cost three months ago.
These are incremental costs as we've kind of.
Right. So that's just the change from three months ago Thats not necessarily total indirect I imagine three months ago, you anticipated. Okay got it just to make sure and then.
In.
The 30 basis points that relates I think you indicated mix and I just wanted to make sure I understood. What that mix was because you've indicated that margins are pretty similar across the three product types may.
Maybe there is some regional differences, but just want to understand what that mix was and then also one thing you didn't really specifically mentioned in the 30% and 40 basis points with lumber is lumber going to hit for Q.
Worse than you had expected three months ago and is it going to be a heavier sort of drag on your margins than it was in <unk>.
Yes, Stephen the mixed commentary is not on product that's on geography, we had highlighted that in the market update in our conversations then.
Essentially what has happened is the.
The margins on some of the units that got pushed from Q3 into Q4 were higher margin units and similarly, the ones that got pushed from Q4 into next year are higher margin units.
Part of that is just where they are in the production cycle part of its geography in terms of where they are.
We always highlight that mix matters.
We will get that margin, it's just a little bit later than we thought.
And in terms of lumber no.
We have pretty good visibility into our lumber pricing, we know what the lumber packs are going to be on are we knew what they were on Q3, we know what they are in Q4, yes, we have pretty good visibility into what they're going to be next year.
And so that wasn't the lumber component.
It Hasnt changed in what we thought and what we're guiding.
But there is more in Q4 than there was in Q3, which I think we've also highlighted for a number of quarters Stephen that the highest load was coming in Q4.
And Thats Thats incorporated in has been incorporated into the guidance that we've given.
And your final question comes from Erik Bass hard with Cleveland Research. Please go ahead.
Okay.
Thank you.
Two things first of all that.
The change in <unk> gross margin, that's that's helpful to clarify.
I think the delivery numbers different than <unk> and relative to what you said 45 days ago.
Can you just explain what what changed in regards to that relative to the 45 days ago.
Yes, Eric Thanks for the question it is different than what we highlighted 45 days ago and I think it's just the continued disruption.
That is going on in the supply chain world.
So every day as we move things down the production line.
We're making an assessment as to whether or not it will deliver in the quarter.
There were homes that were in production, where we were anticipating getting certain supplies that we needed in order to meet a Q4 delivery.
And once you cross.
Certain kind of critical path dates you start to run out of days.
Where you can compress schedules and so candidly things things slide.
Our run rate at this point in time as you know.
100 to 150 homes a day. So you lose 234 days of time due to delays in the numbers.
The numbers have been adjusted as we've indicated today.
Okay. That's helpful. And then secondly that the conviction and community count growth <unk> the bottom the improvement.
From here.
Just a little bit of color for why you have the conviction and the progress of the magnitude of the progress.
Yes so.
Got great visibility into the land that we own in the.
Specifically, which communities that land is allocated to.
We've got good visibility into how those communities are moving through the entitlement and the development process.
Certainly those are subject to or run the risk of delays just like the vertical side.
But given what we see in our pipeline and adjusting for what we think will be headwinds next year. We are very confident that we will see community count growth and expansion into next year. So.
We will give you the specific numbers at the end of Q4, Eric Budd.
We're confident enough that we've hit the low the low point.
We can give you at least to preview that we will see expansion in Q4 and nice expansion into next year as well.
Great. Thank you.
Thank you. This is all the time, we have for questions today, I will turn the call back over to the presenters for closing remarks.
Alright. Thank you Julie I appreciate everybody's time. This morning, certainly be available over the course of the day to answer any follow up questions and we'll look forward to speaking with you on the next fall.
This concludes today's conference call you may now disconnect.
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