Q1 2023 Pultegroup Inc Earnings Call
Speaker 1: I.
Speaker 1: I.
Speaker 2: Good morning. My name is Audra and I will be your conference operator today. I will be your conference operator today.
Speaker 2: At this time I would like to welcome everyone to the PULTY Group in Q1 2023 earnings conference call.
Speaker 2: Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. If you would like to withdraw your question, press star one again.
Speaker 2: At this time, I would like to turn the conference over to Jim Zumer, Vice President of Investor Relations. Please go ahead.
Speaker 3: Thank you, Audra. Good morning. I want to thank everyone for joining today's call. As you read in this morning's press release, both a group have an exceptional first quarter, and we are excited to discuss our operating and financial results.
Speaker 3: participating on today's call, Brian Marshall, President and CEO , Pablo Chaunessy, Executive Vice President and CFO , and Jim Osowski, Senior Vice President, Finance.
Speaker 3: The copy of our earnings release and this morning's presentation slides have been posted to our corporate website at poultagroup.com. We'll post an audio replay of this call later today.
Speaker 3: As noted in this morning's earnings release, to be more consistent with industry reporting practices effective with our first quarter 2023 reporting, the company has reclassified closing costs incentives and cost of sales to net revenues for all periods presented.
Speaker 3: This reclassification impacted companies reported home sell revenues.
Speaker 3: An associated average sales price, as well as home sale gross margin and S-T-N-A percentages, but had no impact on reported earnings.
Speaker 3: An analysis of the impacts on the current quarter, the incomparable prior year period, is included in this morning's press release and can be found in our webcast slides associated with today's call.
Speaker 3: For comments today reflect this changes for all periods referenced.
Speaker 3: Also, I want to inform everyone that today's discussion includes four looking statements that the company's expected future performance.
Speaker 3: Actual results could differ materially from those suggested by our comments today.
Speaker 3: 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.
Speaker 3: These risk factors and other key information are detailed on RSEC violence, including Augur shooter and transcripts, including child sexual violence.
Speaker 3: Now let me turn the call over to Ryan.
Speaker 4: Thanks, Jim, and good morning. Based on the improving demand dynamics, we experienced in the fourth quarter of last year. We were cautiously optimistic heading into 2023. I am extremely pleased to report that the market home metham that began building a Q4.
Speaker 4: continue to expand into the first quarter of 2023. Today's stronger market conditions combined with actions implemented by RL, standing field teams.
Speaker 4: To enhance our competitive position, help drive our first strong first quarter results that included a 15 percent growth and home sale revenues and 100 basis point increase in operating margin and a 28 percent increase in earnings per share.
Speaker 4: Along the actions we've taken has been the increase in production of spec homes. A strategy we begin implementing in the back half 2022.
Speaker 4: As discussed on previous earnings calls, we made the decision to increase spec starts as we saw the opportunity to realize a number of strategic benefits within our home building operations.
Speaker 4: With more units in production, we can better meet buyer demand as more consumers are seeking quick-movement homes as a hedge against rising mortgage rates.
Speaker 4: By maintaining a level of spec starts, we can commit to a more consistent start cadence.
Speaker 4: This is particularly valuable in today's environment when negotiating with our trades and suppliers.
Speaker 4: Keeping units in production allows us to turn assets more efficiently, which is critical to delivering high returns over the housing cycle.
Speaker 4: The importance of having an appropriate inventory of spec homes available can be seen in our first quarter signups, which on a gross basis increased 1% over last year to 8,900 homes.
Speaker 4: Of these signups, almost 60% were spec sales, so the decision to increase spec starts was the right one.
Speaker 4: That said, I want to be clear that our strategy is to keep starts directionally in alignment with market demand.
Speaker 4: We believe this balanced approach is consistent with both these historic business practices and allows us to turn our assets while maintaining a better margin profile.
Speaker 4: Our first quarter results show that we are successfully executing against this strategy.
Speaker 4: as we realize strong sales while still delivering exceptional gross margins of 29.1%.
Speaker 4: Do you heard me say that we won't be margin proud?
Speaker 4: But we also won't sacrifice profits if we don't have to. By being more measured in our starts cadence, we can meet fire demand while not over-supplying the market. Case in point, we ended the first quarter with 1,500 fewer specs in production than we started the quarter.
Speaker 4: This gives us flexibility.
Speaker 4: to maintain or increase production volumes, which in today's market is an important labor when working with trades and suppliers.
Speaker 4: As it relates to overall housing demand, home sales are benefiting from recent declines and mortgage rates, but I also think just having a general sense of stability in rates is important to consumer confidence.
Speaker 4: Given improvements in demand conditions and the broader interest rate environment, as well as a generally limited inventory of existing homes, we are starting to see the pressure on selling prices ease in many of our markets. In fact, in well over half our markets, we have found opportunities to pull back on incentives.
Speaker 4: and or move prices higher in many of our communities.
Speaker 4: While the price changes are modest, it demonstrates the point that people desire home ownership and are willing to buy when they see a value.
Speaker 4: Earlier this month, there was an article in the Wall Street Journal that looked at the housing shortage in this country.
Speaker 4: The article raised the point that depending upon which expert you ask, the housing shortage ranges from 2 million to 7 million houses. While there are certainly debates about the number, I think there is broad agreement that we have a housing shortage.
Speaker 4: I believe this is one of the reasons home buyers are quick to respond when affordability pressures can be eased.
Speaker 4: Before turning the call over to Bob, let me take a minute to address impacts on credit availability, given recent disruptions in the banking industry, particularly among the regional banks.
Speaker 4: The short answer is that we have not experienced any disruptions.
Speaker 4: On the mortgage side, we are advantaged by having a captive financial services operation that routinely originates mortgages for between 75 to 80 percent of PULTY home buyers that require financing.
Speaker 4: On the project side, big builders such as PULTY Group, a self-fund, or have access to capital that smaller builders typically cannot match. In the end, it may be that recent disturbances in the banking sector may create opportunities for PULTY Group to put its more than $2 billion in total liquidity towards the market.
Speaker 4: And I would add that buyer demand has remained strong through the first few weeks of April .
Speaker 4: Well, we have and will continue to take steps to best position Polte Group for success within today's changing market dynamics.
Speaker 4: We remain measured and disappointed in our actions.
Speaker 4: From production rates and land spend to overheads and sherry purchases, we remain focused on delivering performance over the long term.
Speaker 4: Now let me turn the call over to Bob for a detailed review of the quarter. Thanks Ryan and good morning.
Speaker 4: As Jim noted at the beginning of the call, we have reclassified closing costs and incentives from cost to sales to net revenues for all periods present.
Speaker 5: The total incentive for reclassified amounts to $81 million in the first quarter of this year and $38 million in the first quarter of last year.
Speaker 5: This reclassification impact that I reported home sales revenue and associated average sales prices.
Speaker 5: as well as our reported home sale gross margin and SGA percentages.
Speaker 5: An analysis of the impact of this reclassification on the current corner and prior your periods is included in today's webcast slides.
Speaker 5: Where appropriate, any numbers referenced in my comments, current, past, or future.
Speaker 5: Where appropriate, any numbers referenced in my comments, current, past, or future are inclusive of this reclass.
Speaker 5: Let me now get started with the review of our first quarter results. Home sale revenues in the first quarter increased 15% over the prior year to a first quarter record of $3.5 billion.
Speaker 5: Higher revenues for the period reflect the 6% increase in closings.
Speaker 5: to 6,394 homes and a 9% increase in average sales price to $545,000.
Speaker 5: On a year-over-year basis, we realized higher average sales prices across all buyer groups.
Speaker 5: but by double till you gain the both move up and act at the top.
Speaker 5: In the quarter, we reported 6,394 closings, which represents a 6% increase over the comparable prior year period.
Speaker 5: Our closings for the quarter came in above our guide as we capitalize on stronger demand for spec homes and improvement in select areas of our supply chain that allowed us to close additional homes in the period.
Speaker 5: I'd like to take a moment to thank our procuring and construction teams.
Speaker 5: working in partnership with our trade and suppliers for their contributions over the last several quarters.
Speaker 5: The reference during a time of extraordinary market volatility were instrumental to the operating success we've achieved.
Speaker 5: Looking at the mix of our closings in the quarter, our results included 39% from first-time buyers, 35% from move-up buyers, and 26% from active adults.
Speaker 5: In the first quarter of last year, the closing mix was 34% first time, 40% move up and 26% active adult.
Speaker 5: The higher percentage of closings from first-time buyers reflects our increased investment in that part of our business over the last several years.
Speaker 5: as well as an increase in the availability of spec homes in our first time communities, resulting from our decision to increase threat production in the back half of 2022.
Speaker 5: Looking at our orders in the quarter, our net new orders totaled 7,354 hulls, which is down 8% for the prior year.
Speaker 5: Our cancellation rate is a percentage of beginning backlog was 13% the first quarter, which we've stuck from 4% last year.
Speaker 5: On a sequential basis, the 13% cancellation rate is up less than 200 basis points for the fourth quarter. So cancellations are beginning to stabilize. In fact, on a unit basis, cancellations in this quarter amount to 1,544 hours.
Speaker 5: which is down sequentially from 1871 homes in the fourth quarter.
Speaker 5: By Buyer Group, net new orders to first-time buyers increased 18% over the prior year to 3,177 homes.
Speaker 5: While move-up orders decrease by 20% to 645 falls.
Speaker 5: and active adult orders were lowered by 22% to 1,532 homes.
Speaker 5: Our average community count, the first quarter, increased 13% over last year to 879.
Speaker 5: Aesthund the communities open in the period, our absorption pace of 2.8 homes per month was down for the prior year, but in line with our pre-pandemic sales rate, which averaged 2.7 for the 5-year period from 2016 to 2020. Aesthund land investments we need in prior years, we expect to operate out...
Speaker 5: The other outstanding community count, Colt Group, is well positioned to increase its market share within the improving demand environment.
Speaker 5: homes with a value of $8 billion.
Speaker 5: This comparison last year is Q1 record backlog at 19,935 homes valued at $11.5 billion.
Speaker 5: At the end of the first quarter, we had a total of 16,872 homes under construction, of which 15% were finished.
Speaker 5: The spec units represented 38% of our production, which is up from last year.
Speaker 5: consistent with our strategy to have specs available to meet fire demand for homes that can close sooner. Over the course of the first quarter we started production on approximately 5,200 homes.
Speaker 5: This start rate was down about 40% from the first quarter of last year, but up on a sequential basis from the fourth quarter of 2022, as we continue to drive an appropriate start cadence as we focus on turning our assets.
Speaker 5: Based on the roughly 17,000 homes we have under construction and their stage of production, we expected the deliver between 7,000 and 7,400 homes in the second quarter. Given the ongoing improvement in the overall operating environment, we're pleased by the level of production we've been able to realize.
Speaker 5: Thanks to the efforts of our outstanding operating teams. In addition to these higher unit volumes, we are also seeing the beginning stages of assortment in our production cycle.
Speaker 5: At this point, depending upon the market, the gains range from just a few days to a few weeks, but the trends are generally positive.
Speaker 5: Based on our strong Q1 results and the potential for cycle times to gradually improve.
Speaker 5: The production potential of homes will have a bill closed in 2023 has increased to 27,000 28,000 homes
Speaker 5: This is up for our initial guide of 25,000 homes. Obviously, the strength to sign up to the second quarter will go a long way and determine how much of this production universe actually converts into 2023 closets.
Speaker 5: While the average sales price in our backlog is 600,000, we currently expect the average sales price to our second cooler closing to be in the range of 525,000 to $535,000.
Speaker 5: That estimate reflects both the mix of home schedule to close, as well as the impact of anticipated spec closings which are primarily first time hubs that have a lower average sales price. We reported first quarter gross margin of 29.1%, which was 20 basis points below last year.
Speaker 5: We note that our reported gross margins in the first quarter benefited by a process of 70 basis points from the reclassions of closing the incentives.
Speaker 5: and cost of sales to net revenue. The benefit to our first quarter 2022 gross margin was 40 basis picks.
Speaker 5: I would highlight that in the current quarter, our margins benefited from our move up and active adult business where pressures on our selling prices have been relatively less impactful compared with entry-level homes.
Speaker 5: After several years of gross margin parity across fire groups, we are seeing a reversion to the historic trend of higher margins in our group up and active adult business.
Speaker 5: Based on the mix of homes we plan to close in the second quarter, we expect gross margins to be in the range of 27.5% to 28%.
Speaker 5: As with our closings and reported barges in the first quarter, deliveries in the second quarter will reflect the benefit of lower lumber costs that are flowing through our operations.
Speaker 5: In the first quarter, we reported SGA expense of $337 million for 9.6% of home-style revenues.
Speaker 5: In the comparable prior year period, our SGNA expense was $329 million.
Speaker 5: for 10.9% of all cell roads.
Speaker 5: Higher closings and associated revenues in this year's first quarter drove the improved overhead leverage relative to last year and our guide. With expected 2023 production volumes moving higher, we are carefully adding sales and construction staff, but still expect to maintain overhead leverage. As such, we expect second quarter SGA to be in the range of 9.0%.
Speaker 5: 9.5%. In the first quarter, our financial services operations reported pre-tax income of $14 million, which is down from $41 million of the prior year. Pre-tax income in the period was impacted by lower loan volumes, competitive pricing dynamics, and higher mortgage incentives being used throughout the industry.
Speaker 5: In Q1, our capture rate was 78% compared with 81% last year.
Speaker 5: Market conditions have clearly improved, but as we do under all market conditions, we continue to routinely reassess our own land position pending land transactions. Based on this review process, in the first quarter, we walked away from 5,300 lots that were previously held under option.
Speaker 5: and wrote off approximately $6 million in the Associates Deposit and Pre-Aquosition costs.
Speaker 5: In the first quarter, our report attacks expense for $170 million or defective tax rate of 24.2%.
Speaker 5: We expect our tax rate in the second quarter to be 24.5%.
Speaker 5: Our net income for the first quarter was $532 million, $2.35 per share, which is up for prior year net income of $455 million or $1.83 per share.
Speaker 5: In addition to significantly higher net income, our earnings per share benefited from the company's share repurchase program.
Speaker 5: In the first quarter, we repurchased 2.8 billion common shares at a cost of $150 million, or an average price of $54.30 per share. Consistent with our plans to continue returning excess funds to our shareholders, our Board has approved an additional $1 billion of share repurchase authorization, bringing the total available under the program to $1.2 billion.
Speaker 5: Along with returning funds to our shareholders, we continue to strategically invest in our business. In the first quarter, we invested $906 million in land acquisition and development.
Speaker 5: down from $1.1 billion in Q1 of last year.
Speaker 5: Given the stronger demand environment and the increase in our overall construction activities, we now expect to invest between $3.5 billion.
Speaker 5: and $4 billion in land act remission development in 2023.
Speaker 5: We ended the period with 210,000 lots under control. This is consistent with year end and down 10% from last year.
Speaker 5: Based on our activity over the past several quarters, 51% of those lots are owned and 49% are auctioned.
Speaker 5: We will continue to seek increased optionality of our land bank for the target of up to 70% of our lives being controlled via option. For reflecting the strength of our first quarter financial results in associated cash flows, we ended the quarter with $1.3 billion of cash which lowered our net debt to capital ratio to 7.2%.
Speaker 5: On a gross basis, our debt to capital ratio is 18.1% down from 21.5% at the end of the first quarter last year. Now let me turn the call back to Ryan for some final comments. Thanks Bob. I think there are a lot of positives to be taken out of our first quarter results, including
Speaker 4: We delivered record first quarter earnings driven by higher closings, continued strong growth margins and improved overhead leverage. Overall market conditions continue to improve as we experience strong demand and are finding opportunities to reduce incentives and or increase prices in many communities.
Speaker 4: Supply chain conditions are stabilizing and we've seen at least an initial turn towards shorter cycle times. At this point, the gains have been market specific, but we are optimistic that we've seen the high water mark in terms of construction cycle times. Our national and local teams are making strides and clawing back construction days.
Speaker 4: of our shares and clearly remain committed to the systemic return of funds to our shareholders.
Speaker 4: One other positive I would highlight is that PULTY Group was once again ranked among the Fortune 100 bus companies to work for. This is our third year on this prestigious list and we again moved higher climbing from number 43 last year to number 36 in the most recent ranking. We take pride and being included on this list because it is based on what our employees
Speaker 4: The amazing culture resident and faulty group doesn't happen by chance.
Speaker 4: but rather it comes from a committed effort by every employee to create a world-class culture.
Speaker 4: I am extremely proud of our team and I want to thank all of our employees, along with our trade partners and suppliers, for their tremendous work in helping to deliver another outstanding quarter of operating and financial results.
Speaker 3: Let me now turn the call back to Jim's owner. Thanks, Ryan. We're now preparing the open of call for questions. So then we can get to as many questions as possible during the remaining time of the call. We ask that you let me yourself to one question and one follow up.
Speaker 2: Sandra, if you want to get the process started, we're prepared for Q&A. Thank you. And as a reminder, please press star 1 if you would like to ask a question.
Speaker 6: We'll take our first question from John Lovallo at UBS. Good morning guys, thank you for taking my questions. The first one is you guys talked about some of the pressure on selling prices, easing, and the ability to pull back on incentives or maybe raise prices in some markets. I think 50% of the markets you said. Can you just help us maybe frame which markets you're seeing the greatest opportunity?
Speaker 4: continues to be a steady performer and then in terms of markets that are more challenging it would really be the Western markets particularly the ones in the high-press coastal areas during the California Seattle will probably be in the two that I would highlight.
Speaker 6: Got it, that's helpful. And then, you know, recognizing that you guys are not a spec builder. I mean, the quick move in effort has been, you know, it's been helpful and it's been meaningful. I mean, could you just help us outline sort of your thoughts on that today? Where do you see this going? And, you know, will this be, you know, perhaps a slightly bigger piece of the Pulte business then?
Speaker 4: entry-level business there was an opportunity to have more homes that were sooner deliveries which helped to alleviate, you know, it really helped to alleviate pressure around interest rate, rising interest rates, it helped to alleviate pressure around.
Speaker 4: certainty of when things were going to deliver. And we made the strategic decision to put more spec in the ground. To your point, we've historically not been a spec builder, but it's never been 0% of our business. We've always had specs as part of our business, but we made the decision to make it a bigger piece. It got as much as high as about 45% of our total.
Speaker 4: you do as we highlighted in our prepare very much.
Speaker 4: Match our spec production was what we think the market demand is and right now that's certainly Higher spec production than maybe what we've historically done It's working for us and I think this most recent quarter's results are you know a great example of how that strategy's working
our spec production was what we think the market demand is and right now that's certainly higher spec production than maybe what we've historically done. It's working for us and I think this most recent quarter's results are a great example of how that strategy's working.
We'll go next to Alan Ratner at Zellman. Hey guys, good morning. Nice quarter and thanks for the time. Following on that last question, I guess obviously it seemed like you saw a strong demand for the second Ventura you had on the ground. Would you say the momentum you saw on the market overall was similar in Europe ?
points.
That being said, there is a higher likelihood of the entry-level buyer transacting at this point in time because they don't have a home to sell. And so they're not hampered by the low interest rate that they may be hanging on to with their existing home.
But look, as we've talked in prior calls, life continues to happen for buyers, marriages, more kids, relocations, job promotions, all the things that I think create a need for a family and a potential buyer to move into a different home for whatever reason.
are really pulled back on incentives. And I think that demonstrates some of the strength we're seeing. We intentionally don't build a lot of spec in those price points. We find that that buyer group they prefer to have the built order model. But when it comes to our entry level first time send tax business, we're leaning in more with the spec first strategy. And it's worth it.
entry level is a bit of a lower margin, but higher term business for you. How should we think about the margin going forward assuming the mix of the business kind of continues on this current trajectory? You guided from margins to be down about 100 bits sequentially, which probably is some of that mixed impact there.
But can you quantify exactly what that mix looks like today and what it would look like if this mix holds steady here overall for the business? Yeah, Alan, it's Bob. We haven't given a guide. You know, there's a lot of moving pieces out in the market. So we've got pretty good visibility based on our backlog and the sales activity we're seeing. You know, the commentary was, you know, if you think about the last several years...
There's been sort of a compression in margins and you saw it both in our results and our peers Where some of the folks that were selling entry-level had higher margins than they historically would have But that was based on availability, pricing dynamics, a lot of different things.
What we've now seen is sort of in our book of business.
And I think you see it more broadly in the market. You know, that differentiation in margins between first time move up an active adult for us pretty consistent in the most recent quarter with what I would characterize as the norm from several years ago. Yeah, obviously still very strong on margins.
can see it both in our results and in our guide. So as you go forward, you heard Ryan say about 40% of our businesses targeted at that entry level. That's a little bit richer than it was four or five years ago for us. That was conscious on our part. So if you think about mixed-adjusted over time, we'll see a little bit more contribution.
From a margin perspective worth it to always highlight. We don't underwrite the margin We are focused on return and you made the point I'd agree with you. That's a business that typically spins a little faster So we're able to get the returns out of that business By virtue of that that velocity coupled with the margins that we're able to generate Understood appreciate that Bob. Thanks a lot guys
perspective, worth it to always highlight. We don't underwrite to margin. We are focused on return. And you make the point. I'd agree with you. That's a business that typically spins a little faster. So we're able to get the returns out of that business by virtue of that philosophy coupled with the margins that we're in for the generate. I understand. Appreciate that. Thanks, Lackas. You found it.
We'll go next to Stephen Kim at Evercore ISI. Thanks very much guys. Lots of interesting stuff here, encouraging news.
Let me start with your orders. I'm kind of curious as to whether you think that absorption is per community over the course of the next year or so can be higher than the roughly 2.4 or 3.4.
you know, per month over the course of the year that you did pre-pandemic. And you talked about a production capacity of 27 to 28 grand, you know, up from what you said last time, but curious, does this assume any continued improvement in cycle times?
What we've seen reflected in our results is that we started a fair number of homes that were speculative last year they were available.
A huge incentive I mentioned earlier, we have a national rate buy down and it is probably most appealing to that buyer group.
But.
We're we're looking at opportunities, where we can provide a very very small number of our total deliveries to the build for rent operators invitation being a big part of that so we're happy with how how it's performing.
Being something that the range once we get to full capacity of about 5% of our annual deliveries.
Hi, good morning, Thanks for taking my question.
Yes, candidly no most of the folks that we work with are pretty well capitalized they're big developers in their market.
And the truth is that we self develop a great deal of the land that we control anyway.
Yes traffic I think was pretty consistent with what we expected conversion was better and the incentives that we had to provide to get that conversion were better than our expectations, which is what really contributed to the margin outperformance.
And that does conclude today's question and answer session I will turn the conference back over to Jim for any closing remarks.
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