Q2 2023 PulteGroup Inc Earnings Call
Speaker 1: I.
Speaker 1: I.
Speaker 1: And for for RE RE.
Speaker 2: and I will be your conference operator today.
Speaker 2: At this time, I would like to welcome everyone to the PULPIE Group Incorporated 2nd Quarter 2023 Earnings Conference Call.
Speaker 2: Today's conference is being recorded and all lines have been placed on mute to prevent any background noise.
Speaker 2: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number 1 on your telephone keypad.
Speaker 2: If you would like to withdraw your question, press star 1 once again.
Speaker 2: Thank you, and I will now turn the conference over to Jim Zumer, Vice President of Investor Relations. Let's get this day started.
Speaker 3: Good morning. Thank you for joining today's call to discuss multi-group exceptional second-core operating and financial results. Along with affirming the ongoing desire from a ownership and the strength of overall buyer demand, our second quarter number is to demonstrate the strategic value of full-degrees balanced and disciplined approach to business.
Speaker 3: Joining me on today's call to discuss our Q2 results are Ryan Marshall, President and CEO , although Sean is the executive vice president, CFO , Jim O'Shauss, the senior VP of finance.
Speaker 3: A copy of our earnings release and this morning's presentation slides have been posted to our corporate website at PulteGroup.com. We will post an audio replay of this call later today.
Speaker 3: I wanted for everyone on today's call that today's discussion includes forward looking statements about the company's expected future performance.
Speaker 3: Actual results could differ materially from those suggested by our comments.
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 in our ICC filings, including our annual and quarterly reports. Let me turn the call over to Ryan Marshall. Ryan? Thanks, Jim, and good morning. As you read in this morning's press release, Q2 was an outstanding quarter for Volta Group as we posted strong financial results throughout our P&L.
Speaker 4: Balance, cheap and cash flow statement.
Speaker 4: In fact, our second quarter revenues, gross and operating margins, and net income were approaching all-time highs for our second quarter.
Speaker 4: My record financial performance in turn drove strong cash flows that helped raise our cash position to $1.8 billion while dropping our net debt to capital ratio to almost zero.
Speaker 4: I am really proud of our home building and financial services teams for delivering these great results, which are even more impressive given the variable market conditions we've operated in for the past 12 months.
Speaker 4: Within these complicated market dynamics, I believe both the group's operating and financial success reflects the balanced and disciplined approach we take in running our home building business.
Speaker 4: We continue to successfully implement both a built-to-order model that serves our MOBA and active built buyers.
Speaker 4: in combination with a spec-based model primarily within our first time buyer communities.
Speaker 4: Our spec production is most heavily weighted toward our SENSEX branded communities, which operate under a managed spec production model.
Speaker 4: In other words, homes are started as spec, but we have aligned the starts cadence with our sales pace.
Speaker 4: Given Centax's focus on serving the need the first time buyers, our long-term plan is to maintain a spec-build model in these communities.
Speaker 4: By being more balanced across built-to-order and spec production,
Speaker 4: We maintain a more consistent cadence of home starts.
Speaker 4: and more consistent cadence of home starts. Meet fire demand more effectively.
Speaker 4: And we achieve the critical objective of turning our assets in support of higher returns.
Speaker 4: You can see the practical application of this managed approach in our Q2 numbers that specs total 36% of units under production at quarter-end.
Speaker 4: Of these units, we average just over one finished spec per community, which is in line with our stated goal.
Speaker 4: Along with being balanced between our built to order and spec production,
Speaker 4: We were appropriately diversified across all the buyer groups consistent with our long-term goal of having 40% first-time, 35% move-up, and 55% active adult.
Speaker 4: Why is this important?
Speaker 4: The different financial profiles associated with each buyer group can mean different responses to changing market dynamics.
Speaker 4: such as today's rising rate environment, which may hinder first-time buyers, but be less of a headwind among active adult consumers.
Speaker 4: Being balanced across built-to-order, spec, and buyer groups is also an important underpinning to the extremely high gross margins.
Speaker 4: we've been able to maintain. More directly, we have enough production to meet buyer demand, but not so much that we are no longer selling from a position of strength.
Speaker 4: I think we've achieved the right max as we increased orders and closings.
Speaker 4: All while two-thirds of our divisions were still able to raise prices in the quarter.
Speaker 4: Along these same lines, we continue to see pricing opportunities within our core built-to-order business that primarily serves our move-up and active adult buyers.
Speaker 4: In our most recent quarter, options in a lot of premiums exceeded $100,000 per home.
Speaker 4: These are high margin dollars that are not as prevalent among first-time buyers.
Speaker 4: And certainly we're an important driver of the strong 29.6% growth margin we reported in Q2.
Speaker 4: When the market started slowing in 2022, I said that we couldn't be margin proud, but rather we had to find price and turn our assets.
Speaker 4: delivering 24% growth in Q2 orders, and as Bob will detail, guiding to margins of 29% or better for the remainder of the year, we are achieving both high margins and high asset turns.
Speaker 4: which drove our 32% return on equity.
Speaker 4: Beyond the company's specific benefits, we are realizing from how we run our business, we appreciate the favorable supply and demand dynamics resulting from the limited stock of existing houses available for sale.
Speaker 4: National Association of Realitzers Data for Tunes showed seasonally adjusted existing home sales of 4.2 million, which is down a staggering 1 million homes from June of last year.
Speaker 4: As has been well reported, there are millions of existing homeowners who are sitting on low rate mortgages established before the most recent cycle of dead rate hikes. I recently saw an FHA graph that showed that more than 50% of current mortgage holders have a rate below 4%.
Speaker 4: I haven't seen any rate forecasts that show the country getting back to 4% mortgages anytime soon.
Speaker 4: So it's likely that existing homes remain in short supply for the foreseeable future.
Speaker 4: FHA data along with mortgage rate forecasts
Speaker 4: suggests that there may be an extended period during which mortgage rates stay above 5%, which likely prevents an oversupply of existing homes being released into the market.
Speaker 4: Through the first six months of 2023, we generated $1.3 billion of net income and $1.5 billion of cash flow from operations.
Speaker 4: As a result, we increased our cash position by almost $700 million, while returning almost $500 million to shareholders through share repurchases and dividends.
Speaker 4: I think these numbers clearly demonstrate the powerful results our company is delivering. With a backlog of $8.2 billion worth of homes to be built,
Speaker 4: improving cycle times and a solid land supply, we are well positioned to deliver even stronger performance over the remainder of 2023. ???
Speaker 4: Now let me turn the call over to Bob for a detailed review of the quarter. Bob.
Speaker 4: Thanks Ryan and good morning.
Speaker 3: Our second quarter numbers speak for themselves in terms of demonstrating the strength of our operations and in turn overall housing demand. So I'll just dive right in.
Speaker 3: Our second quarter of OCEL revenues total $4.1 billion, an increase of 8% over last year. Higher revenues for the quarter were driven by a 5% increase in closing to 7,518 homes.
Speaker 3: In combination with a 3% increase in average sales price to $540,000.
Speaker 5: Our ability to meet stronger demand in the period with available spec inventory allowed us to slightly exceed our prior closing guide.
For the quarter, our mix of closings was comprised of 41% first sign buyers, 34% Booba buyers, and 25% active adult buyers.
The breakdown of our business remains in line with our stated targets of 40% first time, 35% move up, and 25% active adults.
The second quarter of last year, our closing mix was 36% first time, 38% move up, and 26% active adult.
Our net new orders of the second quarter increase 24% over last year to 7,947 homes. The double-digit increase in our orders benefited from the overall strengths of market demand in the period, along with our ability to capture this demand through a 14% increase in our average community count to 903 neighborhoods.
The strength of consumer demand is also evident in our cancellation rate. Cancellation is a percentage of big-getting period backlog with 9% in this quarter, which is down almost 350 basis points on sequential basis from the first quarter.
The 24% increase in our second quarter net new orders reflects an increase in our absorption pace to 2.9 homes per month, up from 2.7 homes per month last year, and resulted in higher net new orders across all buyer groups.
In the period, net new orders from first-time buyers increased 28% over the prior year to 3,150 homes.
orders for move-up buyers increased 33% to 2,897 homes.
In order to make the adult buyers increase 7%, 1,900 homes. The year over year increase in first time buyer order shows that our homes continue to offer a compelling value and meet the affordability requirements of this buyer group.
At the same time, our higher net new orders among move up and active adult buyers is a positive development and a test for the broad mixed strength of housing demand.
Consistent with our prior guidance, we expect year-over-year community count growth of 5 to 10 percent in the third and fourth quarters, each is compared to the comparable prior year period.
Our backlog at the end of the second quarter was 13,588 homes with a value of $8.2 billion.
In the second quarter of last year, our backlog stood at 19,176 homes, valued at a record peak of $11.6 billion.
We ended the second quarter with a total of 16,740 homes under construction, of which approximately 6,000, or 36%, were spec.
We continue to closely manage spec production as total spec under construction at quarter end were down 11% for last year.
Finished specks are also consistent with our historical carrier rate as we ended quarter with about one finished spec for community.
In the second quarter, we started approximately 7,400 homes, which is up 41 percent compared to the first quarter of this year.
Given the strength of Pulte Group's year-to-day orders and deliveries,
Coupled with the status of our backlog and production universe, we are establishing a full year 2023 delivery target of 29,500 homes.
Of this total, we would expect a deliver between 7,000 and 7,400 homes in the third quarter.
Our third quarter and full year delivery targets are benefiting from improved home construction cycle times.
As our operations are realizing meaningful improvements in cycle science at home, they are starting today.
Based on the mix of backlog homes, we expect to deliver in the third and fourth quarters. Some of them are anticipated step closings. We are projecting in those periods. We expect the average sales price on third and fourth quarter closing to be approximately $540,000.
Turning to margins, a reported gross margin in the second quarter was 29.6%.
The improvement in our margin as compared to our previous guide was due to improved pricing on spec sales and increased closings from our higher margin markets, each as compared to our prior estimates. The improvement in our margin markets as compared to our prior estimates was due to improved
In addition, as we discussed in our prior earnings call, our aggregate growth margins are benefiting for our move up and active adult businesses for profitability is holding up better.
Based on current market dynamics, we expect to maintain the strong margin position throughout the remainder of 23.
and expect our gross margins to be in the range of 29.0% to 29.5% in both the third and fourth quarters of this year.
As we experience in the second quarter, the actual weeks of deliveries, both in terms of geography and fire groups.
May impact our reported numbers. Our reported SGNA expense of the second quarter was $315 million.
for 7.8% home sale revenues and included a $65 million pre-tax insurance benefit reported in the period.
In the second quarter of last year, our SGD expense was $351 billion, or 9.3% of home sale revenues.
Based on our delivering targets for the remainder of the year, we expect SGD8 to be in the range of 9.0 to 9.5% of home sale revenues in the third quarter, in the range of 8% to 8.5% of home sale revenues in the fourth quarter.
Second quarter pre-tax income generated by our financial services operations increased 16 percent over last year to 46 million dollars.
For I think conditions remain highly competitive in the mortgage industry.
The quarterly learning benefited from improved profitability with our title and insurance operations. After a rate, the second quarter improved to 80%, compared to 78% last year.
Our report attack extends to the second quarter as $233 million per effective tax rate at 24.4%.
We expect our tax rate for the remainder of 23 to be 24.5%. On the bottom line, our afforded second-clarinated income was of record $720 million, or $3.21 per share.
This was up from last year's reported net income of $652 million, or $2.73 per share.
Capitalizing on our outstanding financial results and result in cash flows, we've purchased 3.7 million common shares in the quarter and it costs 250 million dollars.
for an average price of $68.31 per share. Through the first six months of 23, we have used $400 million to repurchase 6.4 million shares, or 2.8% of our common shares outstanding.
We also invested $370 million in land acquisition and $523 million in related development during the quarter. In total, our land set in the period was $893 million, which is down from $1.1 billion to the second quarter of last year.
On the year-to-day basis this year we have invested $1.8 billion in land acquisition of government.
which keeps us on track to invest between 3.5 and 4 billion dollars for the full year.
At the end of the second quarter, we had 214,000 lots under control, with which 51% for health via option.
We've told a number of lots we control, and the percentage of lots we control via option both increased from Q1 of this year as we are working to rebuild our option lots of life after exiting positions in the back half of 2022.
We also ended the second quarter with $1.8 billion in cash and a gross bet to capital ratio of 17.3%.
Given our large cash position, our net debt-to-capital ratio is now below 3%.
Looking briefly at our full year results, on a year to date basis, we have generated a minimum of $1.3 billion. From the book value of our stock by 12%, and returned $472 million to shareholders.
At the same time, our financial performance has permitted us to reduce our financial leverage to historic lows and we've regenerated return on equity for the trailing 12 months at 32%.
At the same time, our financial performance has permitted us to reduce our financial leverage to historic lows and we have generated return on equity for the trailing 12 months at 32 percent. Thank you and I'll turn the call back to Ryan for some final comments.
Thanks Bob. As we've commented, one buyer demanded the second quarter was strong and continued to exceed the expectations we had coming into the year.
increase that pricing in many of our communities.
Further, an absorption pace of 2.9 homes per month for the period. Sales space for the second quarter was above last year.
and generally above our pre-COVID averages. Demand in the second quarter was fairly consistent from month to month and as you would anticipate with the 24% increase in orders we generally saw positive demand across our markets which has continued into the month of July .
That being said, on a relative basis, there are communities in our western markets
where we are still having to adjust pricing and or incentives to entice buyers into our communities and ensure we continue to turn our assets.
Given the higher interest rate environment, one of the changes we have seen is the slight increase in the number of cash buyers, particularly among our active adult customers.
And this buyer group moves into or plans to retirement. They are making the decision to carry less mortgage debt given today's higher rates.
At the other end of the price spectrum, final purchase decisions among first-time buyers are also being impacted by higher rates, as data suggests some first-time buyers are opting to go with less square footage or fewer options and upgrades.
This buyers need to purchase a home in today's dynamic market environment, because why our ability to offer significant mortgage incentive nationally is such an effective sales tool.
With that said, our first time buyers remain financially resilient as personal savings remain the primary source of down payment.
At the same time, we continue to see millennials are getting self-support from parents because they need help making the move into home ownership.
One final note as to buyer sentiment, recent feedback from our first-time buyers indicate that an overwhelming majority bought a new construction-focused home rather than an existing home because they felt it offered the best overall value.
We've been extremely thoughtful about the home designs where you're putting on the ground, and the incentives we were offering to help ensure we were offering compelling value to our customers.
These comments in combination with our 28% increase in sector quarter orders within the first time buyer group.
indicate our efforts are meeting with success.
In closing, I want to thank the entire Volta Group team for their efforts in delivering such outstanding operating and financial results.
I want to thank the entire Volte group team for their efforts in delivering such outstanding, operating, and financial results. On the numbers we show in our financial statements.
You continue to provide exceptional homes and home-buying experiences to our customers.
to provide exceptional homes and home-vine experiences to our customers. I will now turn the call back to Chip.
Thanks Ryan, and I'm here to open the call for questions. We can get to as many questions as possible during the fine remaining. We ask that you limit yourself to one question, one follow-up. Thank you, and I'll know ask Abby to explain the process of open the call for questions. Thank you. Thank you.
And as a reminder, if you would like to ask a question, press the star of the number one in your telephone keypad. Again, we ask that you please limit yourself to one question and one follow-up question. And we will pause for just a moment to compile the Q&A roster.
We will take our first question from John Lovall, little with UBS. Your line is open.
Ryan you mentioned that two thirds of your divisions had raised prices over the course of the quarter could you expand on that a little bit does that mean net average order prices were up and then can you talk about how that that make some price change was that reduction in incentives increasing base prices options upgrades lot premium just wanted to get a little more color on on the price increase activity.
You're actually you're actually putting into the mix right now.
Yes Carl.
Two things there we did we did see price increases in some of our communities and two thirds of the division. So it wasn't every division it wasn't every single community.
But we are seeing pockets of strength, where we are able to.
To your question I'll answer the end affirmative it as a net increase in net pricing and it's coming through all of the options that you listed so they're modest increases.
And those are I would note that those are off of.
What we would consider.
Adjusted kind of cash.
Current cycle floor pricing so.
We feel like we've seen a bit of strengthening in the.
The overall sales environment, that's allowed us to modestly increase pricing.
Okay. Thank you Ryan and then drill down on that on the first time buyer Centex spec business.
What kind of backlog conversion rate do you sort of target in that business, specifically and then can you mentioned, maybe a little bit more color on on cycle time improvement, where you have been where you are now and where you think you can go.
Sort of more normalized supply chain over the course of the next couple of three quarters.
Yes, Carl I don't have a specific number for you on backlog conversion of that specific buyer group, we could follow up with you offline on that.
The things that we're really monitoring there we're running.
With that spec business, specifically, we're running in a predictable and consistent monthly start rate.
And we've worked to match that start rate to what we believe our monthly sales rate.
Has been is and will be.
And so part of what you heard me talk about our in my prepared remarks around getting our start rate matched to the sales rate, which we think we have effectively gone.
And then.
Second question.
Cycle times currently.
Sure.
We're starting to see those come down.
Very much in line with our anticipated improvements throughout the year, it's not been easy it's been a lot of hard work by.
Our procurement teams, our construction managers and certainly our trade partners that have helped us to reduce those cycle times. So.
We are seeing at least a couple of weeks come out of the.
The cycle times, and certainly starts that are going in the ground today, we'd expect maybe you can get a little bit more by the time that those deliver.
That's been a big contributor to us.
Our success not only in Q2, but to the the updated and increased guidance for full year closings that we provided today.
Thanks, Brian .
Okay.
We will take our next question from Stephen Kim with Evercore ISI. Your line is open.
Great. Thanks, very much guys.
Great jobs beats go on nice to see.
I guess I had a question about just to touch on the.
The volume side of the story can you give us a sense for what kind of rate of growth in community count.
The current level of land spend.
That you're allocating here, what kind of growth in community count cannot support the general question looking out not specific to <unk>.
Necessarily.
Can you also regaining regarding volume can you give us a sense for what the absorption rates.
What the dispersion looks like across your three major segments.
Okay.
Yes Stephen.
I'm reluctant to answer your first question because we haven't provided any view beyond the third and fourth quarters.
And so.
I'm going to pass on.
And then in terms of the absorption paces.
We haven't provided that level of detail what I can tell you is that in the current operating environment.
<unk>.
Quickest growing part of the business is move up right now interestingly enough. So absorptions there grew faster we had absorption growth across all three demographics.
And so we had highlighted.
28% growth in the first time, 33% in the move up at 7% in the active adult but on a per store basis.
All of them were up.
The richest contributed to that actually was the move up space.
Yeah.
Okay.
And we will take our next question from Matthew Bouley with Barclays. Your line is open.
Hey, good morning, everyone. Thank you for taking the questions I guess ill just go back to the to the gross margin side.
Maybe just to put a finer point on it.
I think I heard you say that the I guess mix of sort of incentivize the built to order product from end.
End of 'twenty two sales.
Largely worked through at this point, so what exactly would be I guess, a worst headwind in the gross margin in the third quarter relative to the second quarter or is it entirely mix.
Mix of entry level or excuse me first time buyer spec or what exactly is the greater headwinds caused that sequential step down in margins. Thank you.
Yes, it's a couple of things one we are in inflationary environment. Our land is more expensive labor is more expensive materials more expensive you can see lumber is trending up.
Given the faster cycle times, some of that is going to come into our production in the back half of the year.
And then certainly the mix on a geographic basis matters and so.
We'll see some contribution from some margin.
Communities that.
We've had to adjust as we've gone through the year it's normal.
<unk>.
And I know, it's a non answer but mix always matters in that conversation.
Got it Okay. That's helpful. Thank you for that Bob and then.
I guess secondly, just back on that last point around the improvement in move up.
Obviously looking at the second quarter of last year, I mean, the comp is a little bit easier, but clearly a nice step up there.
Any finer detail you gave a lot of color at the top around.
Just what's kind of locking in.
Existing home sellers at this point.
You are seeing this nice tick up in your move up business. So kind of what do you think is sort of driving that and do you expect that to continue relative to entry level. Thank you.
Yes, Matthew I think thats the biggest drivers, there's such a shortage of supply.
Fewer options or that the move up buyer to choose from and so.
As a percentage of the available choices that are out there new homes have become a much bigger piece of it.
And I think you are seeing our move up business benefit from that.
I would I would.
Sure that we've got great communities, we've got excellent design the quality of the homes that we're building I think are really speaking to that move up buyer that's looking to add.
Add more space or get a newer more energy efficient or technological advantage at home. So I think those things are working to our advantage as well.
This higher interest rate environment, our ability to offer.
Our national mortgage rate incentive program to the move up buyer is meaningful as well.
That's a tool that we're able to effectively leverage that.
Resale market is not at the same degree so I think a number of factors there with the headline being theres just less inventory out there.
Got it thanks, Brian Thanks, Bob Good luck guys.
And we'll take our next question from Alan Ratner with Zelman and Associates. Your line is open.
Hey, guys. Good morning, Thanks for taking the questions.
First I'd love to drill in a little bit on the topic from Steves question about land spend.
If you look at your closing guide, it's gone up about 20% for this year since since the start of the year and your land spend guide Hasnt really changed still kind of in that three $5 billion to $4 billion range I know that's a big range. So maybe the answer is here coming in closer to the high end versus the low end.
I'm just curious as you think about the next few years I mean, three five to 4 billion, probably is pretty close to a replacement level of land may be a bit below but.
As you think about the land market today, and what Youre seeing there is that an area where you feel like.
At some point youre going to have to put pedal to the metal and get more aggressive on land spend to drive future growth and I guess, Alternatively is there risk of a similar dynamic unfolding from a few years ago, where if demand stays at these levels and you don't see the opportunities in the land market do you start to limit sales again and do things to it.
Kind of keep it keep it a little late on that to prevent gaps.
Yeah, Alan Thanks for the questions Brian .
Couple of things, maybe I'd start with there.
For starters, we actually did increase our projected land spend number about a quarter ago. So when we went into the year I think we were right around three two to $3 3 billion and we put that up with the high end in.
As high as $4 billion.
Certainly down from last year and that was intentional when we look at our controlled lot supply, we've got 215000 loss plus or minus.
Under control.
Over half of those were controlled via options. So we feel pretty good about kind of what's in the pipeline.
<unk>.
What's in the pipeline and what that will mean for the business.
Market share and growth are certainly part of our story and part of the things that we're trying to do with our strategy.
And to your question Alan around what are we seen in the land market.
And tell you that we're able to get deals done it is a competitive market and there certainly isn't anything.
Thats been liquidated or fire sold but.
But we are we're able to our land teams are doing a nice job finding.
Good opportunities and we stayed consistent with our disciplined underwriting process, which has yielded the types of results in quarters that we've delivered over the last several years. So our plan is to stick with that.
To continue to stay very balanced and disciplined in running a good business and Dan.
Really laser focused on picking our spots with where we are investing more capital. So.
To this point I don't think we need to do anything.
Along the lines of put the pedal to the metal I think we're going to continue to be.
Our foot on the gas.
We're going to.
We continue to focus on monetizing the 214000 loss.
<unk>.
We'll see what the market holds but I think that will give us an opportunity to continue to run a very nice business that will grow at market.
Got it and I really really appreciate that that's helpful.
Secondly, I do have a question about Florida, you guys are pretty large in Florida, and there's been a lot written of late about the issues with property insurance in the state in some pretty staggering increases there and I know some of that can be certainly sensationalized, but I'm curious are you seeing that become more of a <unk>.
Concern among homeowners or potential homebuyers today in the state and B are you aware of anything that the industry might be doing to kind of.
Deal with this issue because it seems like it could have some long term ramifications.
Yeah, we.
We haven't seen it become a problem for buyers to make the decision to move into our Florida communities and in fact, our Florida business has been one of our.
Strongest best performing regions and we've got a we've got a very diversified business in Florida that ranges from.
Entry level.
Two a heavy move up business in Tampa, and Orlando and then when you get into South Florida.
Our active adult consumer and second home buyers are.
R R.
Very prevalent we've got various businesses there.
Part of our financial services operation, we have an insurance company.
We aggregate when we talk about the you know.
The numbers that business, if they generate as part of our overall financial services portfolio, but we find that.
Our captive insurance agency does a nice job helping to solve some of those problems.
Florida is one of those places and all of.
I think over over the years Theres been an ebb and flow of insurers that are in the market. They leave they come back having lived in Florida personally for a long time I saw it happened over the last 15 years with my own insurance companies, but.
Wouldn't renew they leave for a few years and then inevitably they'd come back and they bought the business again so.
Yes, we will keep an eye on it.
California is the other state that there is there's been a lot in the news media recently about a lot of insurance companies that have left.
The state due to large losses so.
Certainly things that we'll want to keep an eye on.
I like that.
<unk>.
There are.
There is a view that new homes performed better.
They're in a from a flood standpoint there.
Up to spec out of the floodplain higher than homes that have been developed in recent past. The drainage systems are more prevalent there built a current code you've got new electric all theyre more energy efficient. So there is an argument to say, there's potentially less risk with with newer constructed homes.
Thanks for the thoughts appreciate it.
We will take our next question from Mike Dahl with RBC capital markets. Your line is open.
Yeah.
Good morning, Thanks for taking my questions.
One more follow up on the van side.
And you mentioned youre not necessarily seeing like liquidation opportunity as the market is competitive there were some thoughts or hopes that.
Yes, some of the regional banking fallout might shake some some land loose maybe you can comment on that but then also.
In terms of successes that Youre land teams are happening given the competition out there has it been more.
That youre getting youre getting to your underwriting box because of your current pace and price has improved.
Or has it been that buyer app.
I have also adjusted downward I'm sure, there's some glenn but kind of on average.
Helping more at this point is is that buyers that sorry that seller solar assets.
Adjusted or is it more of that.
And our current pace and price.
More things hit the box.
Yeah as always.
Ryan said it lands not on sale, we have not seen.
Opportunities on large scale things from banks or.
Private market transactions of any substance.
And in terms of the current activity levels.
I think it's a combination of both and it probably depends on where you are in the country. There are parts of the country, where we have seen some willingness to negotiate on land because the market's a little stickier than it was 18 or 24 months ago.
But by and large no.
The market is pretty firm.
And we are.
We have not changed our underwriting screen at all.
Based on activity levels that we see and can project, we're able to make the underwrite.
But theyre not on sale.
Okay, Okay that makes sense, Bob and then just.
A follow up maybe I'll broaden that out.
When we think about some of these dynamics could you just touch on more specifically.
Sticks and bricks cost growth in the quarter, how we should be thinking about that.
In the second half I know you alluded to lumber some lumber increases maybe creeping on that maybe any more quantification of it.
And Greg and then on the watch side, how should we be thinking about inflationary dynamics in your lab cost here over the next handful of quarters.
Yes, I think on the land side and we always answer it. This way, we don't have any ramp up or ramp down in our land portfolio.
And so you have the normal inflationary aspect, we see comes if we buy land in three year increments.
We develop it we then build on it costs it off.
And so we've seen a pretty steady increase.
I wouldn't want to put a particular percentage on it because it varies up when we are in the if you think over the last five years the way pricing has moved.
On the on the vertical side.
And even on the horizontal development side, so get outside of the acquisition side of the <unk>.
We came into the year projecting call it 12% to 14% increase in costs.
We've been able to dial that down highlighted on the last call. We were at 9% we're still there.
So our total house cost is up about that year over year, and that's going to be inclusive of.
Our lumber save earlier in the year it started to tick back up.
Materials and labor is the real driver of that.
We've been able to work with our trades to try and find efficiencies Ryan talked about it we want to be a production.
Consistent cadence of starts consistent.
Just to see in the production cycle that makes it easier for the trades and now that the supply chain is healthier we've been able to reduce some of the cost increases through efficiencies not on the purchasing side for materials, because again that inflationary aspect there and when you kind of a wash all that together.
We're seeing cost stuff like I said about 8% to 9%.
Very helpful. Thanks, Bob.
We will take our next question from Truman Patterson with Wolfe Research. Your line is open.
Hey, good morning, everyone. Thanks for taking my questions.
First you all generated almost one 5 billion in operating cash flow in the first half of the year.
Clearly <unk> been rebuilding your spec pipeline.
Kind of cutting back on some land investment, but you should still generate some pretty healthy net income in the back half of the year I'm, just really hoping you can run us through some of the pluses and minuses.
On your full year 'twenty, three operating cash flow potential.
Yeah, we haven't given a guide on that trail, but youre exactly right I mean think about it we generated $1 billion to $5 through the first six months of the year and if you.
Put I think the closing volumes and the cost estimates for margins and for SG&A, the operating margin on that business.
Sales price of $5 40.
Is pretty rich and.
Certainly inventory levels can and will change.
But we think actually that we have an opportunity to reduce our investment in house over the balance of the year because of the improvement in cycle times.
So.
To your point, we're going to generate as much cash back half of the year.
Fair enough fair enough and then just wanted to follow up on a prior question but.
Given the healthy demand rebounds, so far it looks like your absorption levels are at pretty healthy levels, a little bit above what we'll just call it kind of historical <unk>.
Averages over the past.
Decade, if you will.
Could you just run through.
Whether there were any geographies or consumer segment, where youre actually perhaps curbing absorptions again as of the second quarter.
Yeah sure I mean.
Look we're always balancing our production machine with.
Amount of developed land that we have in front of us as well as what.
Our trade capacity is but.
Other than <unk>.
A unique community here or there that is way over subscribed we're not.
We're not in the type of allocation restriction mode saw during COVID-19.
Right Alright, thank you.
Thanks, Kevin.
And we will take our next question from Anthony Pettinari with Citigroup. Your line is open.
Hi, This is Ashley <unk> on for Anthony Thanks for taking my question I, just wanted to ask relative to sort of the sequential price growth on asps.
Net orders you saw in the quarter does that pretty much like for like or maybe what there might have been some mix impact and that's sort of more broadly would you say pricing power has gotten stronger at all versus where you were where you were seeing on the last call in April .
Yes, I think we highlighted that some of that in our prepared remarks and there is a question earlier than we have in certain geographies and certain communities have been able to modest modestly increased prices from what was arguably a pricing floor. After we made adjustments late last year. So.
Part of that is related to.
And effective use of the mortgage incentive which we've used to help solve some affordability challenges and part of that is there's a real shortage of inventory in the market is allowing us to make some modest price increases so.
All of that is kind of reflected in.
The results that we have for Q2 as well as the guidance for the balance of this year.
Great. Thanks, and then.
What are your thoughts on kind of the sustainability of progress you've made on cycle times and costs are kind of heading into 'twenty four of housing activity is heating backup.
Do you anticipate maybe.
Pressure on cycle times.
Yes, we actually believe that we still got opportunities to continue to do more on Bob highlighted the question that you just answered a minute ago for Truman.
As it relates to cash as we.
Feel that we've got opportunity to continue to reduce cycle time, not only in the balance of this year, but well into 'twenty four.
It's predominantly coming from a healing of the supply chain and removing a lot of the efficiencies that crept in.
Given but.
We had a broken supply chain.
Trades were incredibly inefficient so.
We're making progress we're pleased with it but were probably nowhere near where we'd like to be our target still remains getting back to pre COVID-19 cycle times, which.
Where I think the company can operate.
Okay. Thank you I'll turn it over.
Okay.
And then we will take our next question from Susan Macquarie with.
Goldman Sachs. Your line is open.
Thank you good morning, everyone.
So.
My first question is thank you is it about the supply chain.
And the rise that we are seeing generally and start within single family. How do you think about the industry's ability to continue to improve and perhaps sustain some of that.
Overall demand continues to move higher and are there any areas, specifically that youre more focused on or where we could perhaps see some issues bubble up again.
Yes through the supply chain.
Supply chain is mostly healthy.
There are certainly pockets of places where.
We are.
Continued focus but.
I think labor, while tight generally available and we're making.
We're using it efficiently and it's working.
<unk> chain, we feel pretty good about the one area that I'd highlight is electrical components, specifically around switch gear that goes into multifamily buildings, so town homes and condos.
Those are <unk>.
More unique and subtypes customized products that are difficult to find in the cycle.
Uh huh.
Lead time to get those things order is continuing to extend the other one would be transformer. So transformers that go into the horizontal land development side of things. Those are also in short supply. So couple of things on the electrical component side other than that I would tell you that labor and supply chain or our.
Operating pretty effectively.
Okay.
And then with that.
The business longer term as you are starting to come off the peak.
Pete that we've seen more recently, but do you think about the longer term operating dynamics on the ground today.
Relative to where we were coming into the pandemic are there things that you think you can hold onto.
Ken perhaps stabilize a touch higher than that 20, low 20% range that you were in before Covid.
Okay.
Yes, Susan I'll try its Bob.
We are.
Seeking to be efficient with our capital.
We've got.
Share repurchase activity, we highlighted we've got $400 million that we've done this year already.
We're creating a lot of equity with through the earnings business.
So I think yes.
The modeling that you are trying to do.
<unk>.
It doesn't really factor into our decision, making right, we're making investment decisions on the ability to generate a return over time.
Do I think that there is an opportunity to do better than we've done historically, yes of course.
We can be more efficient with our balance sheet.
We highlighted earlier this year that we had 1 billion extra capital tied up in.
In house.
Yes.
Long talked about trying to increase the optionality of our land book, which would be an opportunity for us as well.
Yeah, we're at 50% today, 51% sorry.
So I think if we can make progress on those fronts, we have an opportunity to continue to generate really strong returns through time.
Okay. Thank you for the color.
We will take our next question from Joe <unk> with Deutsche Bank. Your line is open.
Thanks, Good morning, everybody.
Just to follow up on that last question, perhaps if you could just talk if you've got in your mind, an upper limit on the idle cash that you might carry on your balance sheet going forward and then also just maybe talk about your appetite for increasing leverage just given the stability in your business.
Yeah, I don't I don't know that there's no I wouldn't.
Want to put guardrails around anything we do we've been pretty clear.
And it's <unk>.
10, plus years now in terms of how we're going to allocate our capital.
We have also been I think pretty clear that we don't take a point in time.
Assessment of that.
We have.
Business plan and a model that we've created and we <unk>.
Iterate through time.
That we used to make the decisions on how to invest that capital and just a refresher in the business first I return, we will pay a dividend.
We use excess capital to buy back stock, we will manage that against leverage.
Yes.
Reduce the expected leverage in the business. If you think back a decade ago, we said between 30%, 40% gross debt to cap, we adjust that 20 to 30, where under that today.
I think you could see us do lots of things.
And I wouldn't want to say well you know if we have more than X dollars of cash we're going to do something different we.
We will continue down the same path, we spend time with or working through.
The different capital decisions, we make.
And I think that's exactly what we'll do going forward.
Got it thanks, Bob and then just maybe if you could talk about the improvement relative to pre pandemic and your gross margins and your returns on inventory.
There's a number you could quantify around production improvements and even more specifically if the actions you've taken getting back into the off site construction space. If there is anything to call out there and maybe just an update on how ICT is doing.
Yeah.
Yes, let me take the ITG piece, we're really pleased with how that business is operating and we have two two factories are up and operational but her.
Doing well for us we're very pleased with what we're getting there.
We've talked about once we get some additional factories up and open and it's covering a bigger percentage of the business, we will share more detail.
The cycle time gains the cost savings that we're seeing from that business, but we're really pleased with what that team is doing.
In terms of.
The first part of your question.
You guys are big trucks, it's interesting.
I would tell you where you are asking if there are productivity gains if I understood. The question correctly, you're asking if the productivity gains that we've gained by virtue of the.
The pandemic that we might be able to save post pandemic I would tell you exactly the opposite is true.
We have a less efficient business and it shows up in our cycle times.
The supply chain dynamics caused us to lose production efficiency, you heard Brian say that a minute ago, we think we've got opportunities to improve from here.
That's great I appreciate that thanks, guys. Good luck.
We will take our next question from Alex Barron with housing Research Center. Your line is open.
Yes, thanks, guys.
Just two.
Ask again on the ICT is there any plan to roll this out to more markets near term.
No Alex.
When we made our first acquisition around our off site.
Our off site manufacturing efforts. We said we believe we can have up to about eight plants that will impact about 70% of our overall production volume.
That's still the path that we're on.
We're we haven't announced any new openings.
The strategic direction of eight plants overtime and 70% of the business still holds for us.
Okay.
Got it.
I'm not sure.
But given your land position and owned and option.
I gave the total control, but I can give you the on the 104000 lots the option is 110000 loss.
Total control of 214000 walks.
Got it and in terms of direction.
<unk>.
Obviously, a lot of builders I guess yourselves included tennis slowed down acquisition of lots at the end of last year, but are you guys seeing.
No.
The next few months is something that will reaccelerate or just still kind of holds.
At current levels.
Yes, Alex we gave you kind of gave our updated land guide, which is $4 billion, which is a lot of money.
It's not an insignificant investment our overall land portfolio.
<unk>.
Roughly half of that is new acquisition. The other half of that spend is on development on loss you already own.
214000 loss.
Certainly ample runway of supply for our go forward business some.
Going back to some of the the answers that I gave on similar questions earlier.
We're really confident our land acquisitions team to continue to find good spots negotiate.
What we believe are fair in market prices that will continue to help us generate.
Industry, leading returns on gross margins and help us continued growth business.
And we will take our next question from Rafe <unk> with Bank of America. Your line is open.
Hi, good morning, Thanks for taking my question.
Can you just talk about the specific drivers of the quarter over quarter step up in gross margin in the second quarter, and then what true upside relative to your guidance from a quarter ago.
Okay.
Alright, you're meaning sequentially right correct.
Yes, so we had highlighted that.
A couple of things influence it relative to our guide one is we got better pricing on specs than we were projecting.
And the second was the mix of communities that we got closings from slipped a little bit different than we thought so.
You can see from the sales environment.
The market was pretty strong.
We were able to translate that in the specs that we saw.
And really those are the two primary drivers as to why we called it out in the prepared remarks.
Got it Okay. That's helpful and then you've spoken a little bit about the underwriting strategy going forward.
Should we think about your option mix going forward and like what's the longer term target relative to the current.
51%.
Yes, we've been pretty clear yeah, we had targeted 50%.
A year or so ago, we increased that to a target of 70%.
We had gotten to a point I think it's the richest we were at 56%.
We blocked from about <unk>.
60000 lots over the back half of 2022.
Which pulled us back down closer to 50% now we're starting to rebuild against prepared remarks, we had highlighted.
We've been able to increase that in this most recent quarter.
And again the target is still remains to try and get to be about 70%.
Great. Thank you.
Yeah.
And ladies and gentlemen that is all the time, we have for questions today and I will now turn the call back to Mr. Jim <unk> for closing remarks.
He said everybody joining us on the call today.
And available the remainder of the day, you've got any questions otherwise, we'll look forward to speaking with you on our next quarterly call. Thank you.
Yes.
Ladies and gentlemen, this concludes today's conference call. We thank you for your participation you may now disconnect.
Yeah.
Yeah.
Yeah.
Yeah.