Q4 2023 PulteGroup Inc Earnings Call

Thank you for standing by and welcome to the Poultry Greek Inc. Q4, 2023 earnings Conference call.

I would now like to welcome Jim Zoom or Vice President of Investor Relations to begin the call Jim over to you.

James P. Zeumer: Thanks Bonnie.

James P. Zeumer: Good morning, Let me welcome participants in today's call. We look forward to discussing ultra group strong fourth quarter and full year financial results for the period ended December 31 2023.

James P. Zeumer: I'm joined on today's call by Brian Marshalls, President and CEO Pablo <unk>.

Speaker Change: Honestly executive Vice President and CFO, Jim SaaS Senior Vice President Finance.

Speaker Change: A copy of the earnings release, and this morning's presentation slides have been posted to our corporate website <unk> com.

Speaker Change: We will post an audio replay of this call later today. Please.

Speaker Change: Please note that consistent with this morning's earnings release.

Speaker Change: Our debt ratio at both the gross and net basis.

Speaker Change: Installation of our adjusted results to our reported financials.

Speaker Change: In this morning's release.

And today's webcast slides.

Speaker Change: I want to alert everyone that today's presentation includes forward looking statements about the company's expected future performance.

Speaker Change: Results could differ materially from those suggested by our comments.

Speaker Change: The most significant risk factors that could affect future.

Speaker Change: Results are summarized as part of today's earnings release and within the accompanying presentation slides.

Speaker Change: 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 to Brian Brian Thanks, Jim and good morning, I'm excited to speak with you today about Pulte group's outstanding fourth quarter and full year financial results over.

Ryan R. Marshall: Over the past few years, we have faced macro challenges ranging from COVID-19 to supply chain disruptions are skyrocketing mortgage rates through it all we remain disciplined and consistent running our operations.

We needed to have quickly adjusted key business practices to position the group for ongoing success.

Ryan R. Marshall: So this approach can be seen in the strength of our reported results.

Speaker Change: Bob will detail our Q4 performance. So let me highlight several of our key operating and financial achievements for the full year of 2023.

Speaker Change: By strategically increasing our spec production, we had more inventory available to meet the demand of first time home buyers and those consumers worried about mortgage rate volatility.

Bob: Increased house inventory was a critical support to Pulte group delivering 28600 homes in 2023 and record wholesale revenues of $15 $6 billion.

In the face of increased costs for land labor and materials, we carefully managed product offerings pricing and incentives and absorption paces to maintain high profitability, while ensuring we continue to turn our assets. The result, we reported outstanding full year gross margins of 29, 3%.

Bob: Which helped drive a 6% increase in earnings per share to a record $11 72 per share and a 27% return on equity.

We also continue to efficiently increase our land pipeline as we completed transactions to put approximately 40000 lots under control.

Bob: Inclusive of these lots, 53% of our total land pipeline is under option either with the land sellers through our expanding land banking structures.

Bob: Since making the decision to expand our use of land banking, starting 15 months ago. We have placed approximately 25 communities, representing $1 $5 billion worth of future land and development spend into such structures.

Bob: And finally, consistent with our stated capital allocation priorities, we invested $4 $3 billion into the business through land acquisition and development spend in 2023.

And returned $1 $2 billion to investors through share repurchases dividends and debt Paydown.

Bob: <unk> of our 2023 spend we have repurchased almost half of the 2013 shares outstanding since initiating the program over a decade ago.

Bob: Our remaining consistent and our business practices, and making market responsive adjustments where needed we reported another year of exceptional financial results.

Bob: Want to thank the entire multi group team for their tireless efforts in support of delivering superior homes and experiences to our homebuyers, while providing outstanding financial returns to our investors.

Bob: Consistent with the broader housing market, we saw home buying demand being negatively impacted during the early part of the fourth quarter as 30 year mortgage rates increase towards our 2023 peak of 8%. We then saw a buyer sentiment and demand improved as mortgage rates finally rolled over ultimately dropping more than a 100 basis.

As we move through November and December the decline in rates helped drive our December net new orders and absorption pace to be the highest month in the quarter.

Bob: The increase home buying activity in December was an important driver of the 57% increase in our Q4 net new orders and demonstrates the desire for homeownership remains high across all buyer groups.

Bob: It remains our view that the long term outlook for new home construction is extremely positive.

Bob: <unk> shortage of housing caused by years of under building has only been exacerbated by a lack of supply lack of resale inventory is the owners are financially or emotionally locked into their low growth low rate mortgages.

The lack of existing home inventory will resolve itself over time, we believe that land entitlement and labor availability challenges in it will be difficult to correct for the many years under building in this country.

Bob: Even our constructive views on the outlook for housing demand, we are investing in our operations with the goal of growing unit volumes by 5% to 10% annually.

Bob: Our decision to walk away from option lots as interest rates increased in 2022 will impact our community openings in 2024, leading to our growth this year being closer to the lower end of this range as we expect closings of approximately 30000 homes in 2024.

Bob: For those of you who have followed Pulte group story for the past few years, you know, it's never been about growth for growth's sake. Our focus is always on investing in our business to build shareholder value. So our objective is to grow our volumes, while maintaining high returns on equity.

Bob: To accomplish this we must continue to intelligently invest in high quality and high returning projects, while continuing to invest in our own assets through the ongoing repurchase of our stock.

Bob: As we have demonstrated for much of the past decade, we expect to continue to generate strong cash flows that will allow us to fund our business investment pay our dividend and return excess capital to our shareholders, all while maintaining our balance sheet strength and flexibility.

Bob: Our expectation of continued financial success is reflected in this morning's announcement that our board approved a $1 $5 billion increase.

Bob: Our share repurchase authorization.

Bob: With many forecasting interest rates to fall the economy to stay relatively healthy and conditions in the job market remained favorable there are certainly reasons to be optimistic about housing demand in the coming years.

Bob: Let me now turn over the call to Bob for a review of our fourth quarter results Bob.

Bob: Thanks, Ryan and good morning.

Bob: As Ryan mentioned in his comments market conditions changed meaningfully as the fourth quarter progressed.

Bob: As mortgage rates began to all our.

Bob: Our reported financial results for the period were influenced by these evolving market dynamics. So I'll note any important areas of impact in my prepared remarks.

Bob: Wholesale revenues in the fourth quarter were $4 2 billion compared with $5 billion in the prior year.

Bob: Our lower home sale revenues for the period, primarily reflects a 14% decrease in closings to 7615 homes.

Bob: Along with a 2% decrease in our average sales price to $547000.

I would highlight that our fourth quarter closings came in about 5% below our previous guidance as sales early in the quarter were negatively impacted by higher mortgage rates and the general softening in overall buyer demand.

Bob: As Ryan noted I'm buying demand accelerated in the back half of the quarter, but sales, particularly sales of finished spec homes that we closed in the quarter finished below our assumptions.

Bob: We could have captured incremental sales and closing value by offering higher incentives. So we didn't see that as a worthwhile tradeoff.

Bob: Given the buyer trends have remained positive in January I think we made the right choices as we have inventory available to meet the stronger demand.

Bob: Our mix of closings in the quarter were comprised of 40% first time, 36% move up and 24% active adult which is in alignment with our stated goals and the buyer mix for our business.

Bob: In the fourth quarter of 'twenty, two closings were 36% first time, 39% move up and 25% active adult.

Bob: Our average community count for the fourth quarter was 919, which represented 8% increase over last year's fourth quarter average of 850 communities and was in line with our prior guidance.

Bob: Looking at order activity in the quarter, our net new orders increased 57% over last year to 6214 homes.

The large increase over last year reflects both improved demand in 2023 as well as the extremely difficult operating environment in the fourth quarter of 2022.

Bob: As discussed previously demand conditions grew increasingly difficult early in the fourth quarter of this year as mortgage rates climbed to 8%.

Bob: But we experienced a notable improvement in buying activity as rates decreased over the back half of the quarter.

Bob: On a sequential basis, our absorption pace improved from November December and we would attribute much of this improvement to the decline in interest rates.

Bob: Along with stronger demand conditions year over year increase in fourth quarter net new orders benefited from a decrease in cancellation rate.

Bob: And the most recent quarter cancellations as a percentage of beginning period backlog fell to 9%.

Now from 11% in the comparable prior year period.

Bob: Looking at our order activity by buyer.

Bob: Fourth quarter net new orders increased 70% for first time buyers, 78% for move up buyers and 15% per active adult buyers.

Bob: Our order numbers indicate that demand improved across all buyer groups, which is a very positive dynamic when assessing potential housing demand in 2024.

Bob: As a result of our sales and closings activity.

Bob: <unk> backlog was 12146 homes, which is effectively flat with last year.

Reflective of the increased mix of first time buyers and their lower average sales prices.

Bob: Ending backlog value declined slightly to $7 3 billion.

Bob: Inclusive inclusive of the 7128 homes, we started in the fourth quarter. We ended the year with 16889 hubs in production.

44% of our production is spec, including 1263 finished specs, which puts us in a strong position to meet buyer demand as we head into the spring selling season.

Bob: At the end of the fourth quarter. Our construction cycle time was down to 130 days, which is a sequential improvement of about two weeks from the end of the third quarter.

Bob: Going forward, we continue to target getting our cycle time down to a 100 days or below by the end of the year.

Bob: Based on our production pipeline, we expect closings in the first quarter of 2024 to be between 6200, 6600 homes and given our units under production, we expect full year deliveries to grow by 5% to 30000 homes.

Bob: We currently expect the average sales price of closings to remain in the range of $540 to $550000 for the first quarter and the full year of 2024, which is consistent with our fourth quarter pricing.

Bob: At the midpoint this would imply price stability over the course of the year.

Bob: Our fourth quarter gross margin was 28, 9%, which is down approximately 50 basis points for both the fourth quarter of last year in the third quarter of this year, but likely remains the industry leader among the big builders.

Bob: As with the entire year, our fourth quarter margins reflect higher incentive and input costs.

Bob: Incentives, which primarily impact revenues.

Bob: <unk> 50 basis points sequentially from the third quarter.

Bob: Six 5%.

Bob: On the cost side, lower lumber prices offset inflation and other material and labor.

Bob: Higher land and land development costs impacted margins in the period.

Keeping my prior comments that we expect pricing to be flat on a 24.

Bob: We anticipate that landed house cost inflation will result in gross margins to be in the range of 28% 28, 5% for each quarter during the year.

Bob: We reported fourth quarter SG&A expense of $308 million seven 4% wholesale revenues compared with prior year SG&A expense of $351 million.

Seven 1%.

Bob: A 30 basis point drop in overhead leverage can be attributed to the lower closings and revenues realized in the quarter versus the prior year.

Bob: It should be noted that we recorded 65 billion pretax insurance benefit in the fourth quarter as opposed to 2023 and 2022.

Bob: Based on anticipated closing volumes, we expect SG&A expense for the full year of 2024 to be in the range of nine 2% to nine 5% of home sale revenues.

Bob: Given our typical seasonality of closings, we expect SG&A expense in the first quarter to be approximately 10% of home sale revenues with overhead leverage improving as we move through the remaining quarters of the year.

Bob: For the fourth quarter, our financial services operations reported pretax income of $44 million, which is up from $24 million last year.

Bob: The improvement in pretax income reflects more favorable market conditions across our financial services platform coupled.

Bob: Coupled with higher capture rates, including an increased to 85% up from 75% last year and our mortgage operations.

Bob: Our reported pre tax income for the most recent quarter was $947 million compared with prior year pre tax income of $1 2 billion.

Bob: In the period, we recorded a tax expense of $236 million or an effective tax rate was 24, 9%.

Rejecting ahead to 2024, we expect our full year tax rate to be in the range of 24 24, 5%.

Bob: Looking at the bottom line, our reported fourth quarter results showed net income of $711 million for $3 28 per share.

In the comparable prior year period, we reported net income of $882 million.

Bob: Our $3 85 per share.

Bob: For the full year of 2020, we reported net income of $2 6 billion and our record earnings of $11 72 per share.

Bob: Reflective of our strong operating results in 2023, we generated cash flows from operations of $2 $2 billion.

Bob: Given our current expectations for operating and financial results, along with our plans to increase land divestments of $5 billion of occurring coming year.

We expect 2020 for cash flows from operations to be approximately $1 8 billion.

Bob: Turning to our investment in capital allocation activities, we invested $1 $3 billion in land acquisition and development in the fourth quarter of which 59% was for development of our existing land assets.

Bob: For the year, our land investment totaled $4 3 billion of which 59% was for development.

Bob: Given our constructive views on near and longer term housing dynamics.

Bob: As noted our plan is to increase our land spend to approximately $5 billion in 2024.

Bob: We would again anticipated roughly 60 40 split between development and land acquisition.

Bob: This increase in investments consistent with Ryan's earlier comments regarding positioning the business to routinely grow future delivery volumes.

Bob: 5% to 10% per year.

Inclusive of our fourth quarter investments. We ended 2023 with 223000 lots under control, which is an increase of 5% over the prior year.

Bob: Delighted that on a year over year basis, we lowered our owned lot count by 4000 lines, while increasing our lots under option by roughly 16000 lots.

Bob: As a result, our percentage of lots under option increased to 53% up from 48% last year.

Bob: Theres still a lot of runway ahead of us to achieve our goal of 70% optioned lots, but we're moving in the right direction.

Bob: Based on the investments, we've made and our anticipated community openings and closings in 2024.

Bob: We expect our average community count in 2024 to be up 3% to 5% in each quarter as compared to the comparable prior year period.

Consistent with our stated that our stated capital allocation priorities, we continued to return capital to shareholders in 2023.

Bob: To that end, we paid out a $142 million in dividends and have increased our dividend per share by 25% starting in the first quarter of 2024.

Bob: We also repurchased $13 8 million common shares at a cost of $1 billion or an average price of $72 50 per share which.

Bob: Which included $300 million of repurchases at an average price of $83 <unk> per share in the fourth quarter.

Bob: With the $13 8 billion shares acquired 43, we have repurchased approximately half of the shares outstanding at the time, we initiated the program back in 2013.

Bob: Having repurchased these shares at an average cost of $32 16 per share. We believe it's been a great investment for our share.

Bob: In addition to buying our stock in the fourth quarter, we took advantage of market conditions by using 35 billion cash on hand to pay down a portion of our debt.

Bob: For all of 2023, we retired $101 million of our 2026 and 2027 senior notes through open market transactions.

Bob: Going to lower our quarter end debt to capital ratio to 15, 9%.

Bob: 280 basis points from last year.

Bob: Adjusting for the $1 $8 billion of cash on our balance sheet. We ended the year with a net debt to capital ratio of one 1%.

Now, let me turn the call back to Ryan for some final comments.

Ryan: Thanks, Bob successfully navigating our business through the past 12 months of rising interest rates has been challenging the same could be said about the past 24, 36, and 48 month periods as we battle through Covid and the global collapse and supply chains.

Ryan: Im extremely proud of how our entire team responded to these these events and the exceptional operating and financial results Pulte group has delivered over an unprecedented period.

Ryan: Looking back over the five year period of 2019 through the just recently completed 2023, we grew volumes, 5% annually and deliver just under a 135000 homes.

To support our growth during this period and for future years, we invested almost $19 billion in cumulative land acquisition and development spend.

Through our disciplined land investment operational focus and organizational expertise.

Ryan: We capitalized on market conditions to grow earnings per share over this period at a compounded annual growth rate of 34%, while delivering an average annual return on equity of just over 26%.

Ryan: It's this type of strong financial performance during an extended period of market volatility that has prompted increased discussion about the need to reconsider how the large homebuilders valued.

Ryan: I think that if you want to be valued differently, you must demonstrate a fundamental change in how you operate the business and the results you deliver.

Ryan: Just for a year or two but over an extended period of time.

Ryan: What's different about the past five years.

Ryan: While investing $19 billion into our operation. We also generated almost $7 billion in net cash flow from operations. During the sustained period of growth. In fact, we recorded only one year of negative cash flow from operations and shifting our focus in 2012 from just.

Topline growth to driving high returns over the housing cycle.

Ryan: We paid off $1 $1 billion of debt, while cutting our leverage by more than half to end 2023, with a debt to capital ratio of 15, 9% and a net debt to capital ratio of one 1%.

Ryan: And we returned $4 billion to shareholders through stock repurchases and dividends.

Ryan: I'd add that the reality is we've been operating our business in just this way for really the past 10 years.

Ryan: I know stocks reflect performance. So I believe that if we can continue to both grow our business and deliver our lead that remains among the industry leaders, while generating positive cash flow and maintaining a low risk profile that our stock price and shareholders will ultimately be rewarded.

Ryan: Let me now turn the call back to Jeff Zimmer Great. Thanks, Ryan We're now prepared to open the call for questions <unk>.

Operator: Thank you for standing by, and welcome to the Pulte Group, Inc. Q4 2023 Earnings Conference Call. I would now like to welcome Jim Zeumer, Vice President of Investor Relations, to begin the call. Jim, over to you.

Jeff Zimmer: Explain the process, we'll get started.

Jeff Zimmer: Yes.

Jeff Zimmer: The floor is now open for your questions to ask a question at this time simply press the star followed by the number one on your telephone keypad.

James P. Zeumer: Good morning, and let me welcome participants to today's call. We look forward to discussing Toll-to-Group's strong fourth quarter and full year financial results. The period ended December 31, 2023. I'm joined on today's call by Ryan Marshall, the President and CEO, Bob O'Shaughnessy, Executive Vice President and CFO, and Jim Osowski, Senior Vice President of Finance. A copy of our earnings release and this morning's presentation slides have been posted to our corporate website at PulteGroup.com. We'll post an audio replay of this call later today.

Ask that you please limit yourself to one question and one follow up question.

Speaker Change: We will now take a moment to compile a roster.

Speaker Change: Our first question comes from the line of Carl Reichardt with <unk>. Please go ahead. Thanks.

Carl Reichardt: Good morning, guys hope you're doing well.

Brian I wanted to get.

Carl Reichardt: I wanted to ask a little bit more about January could you maybe expand on how business is denim, but I'm really interested in is have you seen enough traffic or sales rates to start to think about more broadly pulling.

James P. Zeumer: Please note that consistent with this morning's earnings release, we will be discussing our debt ratio on both a gross and net basis. A reconciliation of our adjusted results to our reported financials is included in this morning's release and within today's webcast slides. And finally, I want to alert everyone that today's presentation includes forward-looking statements about the company's expected future performance. However, actual results could differ materially from those suggested by our comments made today.

Carl Reichardt: Pulling incentives down or even starting to raise base across the footprint.

Carl.

Carl Reichardt: So Bob highlighted in the prepared remarks that we saw.

Carl Reichardt: Specific to the Q4 October November were really below expectations.

And it was driven by high rates, we had a great December our highest month in the quarter in terms of absolute sales and absorptions per community so that.

James P. Zeumer: The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slide. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now, let me turn the call over to Ryan. Thanks, Jim. Good morning.

Carl Reichardt: That was certainly an anomaly for.

Carl Reichardt: Typical December seasonal patterns and the strength has really continued into January Carl.

So we're feeling.

Ryan R. Marshall: I'm excited to speak with you today about Pulte Group's outstanding fourth quarter and full year financial results. Over the past few years, we have faced macro challenges ranging from COVID, to supply chain disruptions, to skyrocketing mortgage rates. Through it all, we've remained disciplined and consistent in running our operations but, when needed, have quickly adjusted key business practices to position Pulte Group for ongoing success. The benefits of this approach can be seen in the strength of our reported results.

Carl Reichardt: Pretty good about how the year is starting.

Carl Reichardt: In terms of kind of where it sets us up for a reduced discounts increased prices.

Carl Reichardt: We're going to watch it closely and I think we've demonstrated through past behavior that we're always looking at it.

Carl Reichardt: Find the sweet spot between.

Carl Reichardt: The pace and price it won't come as a surprise to you Carl that affordability with the buyers remains a challenge.

Carl Reichardt: And so I think we're going to have to be thoughtful about what we do on both the incentive and the price increase front, but we're feeling pretty good about how the year started.

Ryan R. Marshall: Bob will detail our Q4 performance, so let me highlight several of our key operating and financial achievements for the full year of 2023. By strategically increasing our SPAC production, we had more inventory available to meet the demand of first-time homebuyers and those consumers worried about mortgage rate volatility. Increased house inventory was a critical support to Pulte Group delivering 28,600 homes in 2023 and record home sale revenues of $15.6 billion. In the face of increased costs for land, labor, and materials, we carefully managed product offerings, pricing, incentives, and absorption paces to maintain high profitability while ensuring we continue to turn our assets. The result?

Carl Reichardt: Alright, Thanks for that Brian and then I'll ask a couple of questions just on move up.

Speaker Change: Obviously, the entry level business. It has been strong providing move up a number of your peers have kind of shifted some of their investments more towards the low end that's been going on for quite some time.

Can you talk a little bit about how that how do you look at that business. This year is there any alteration in mixed in terms of communities.

Whether or not maybe your can rate in that business is improving faster than the other businesses. We're trying to see if the existing housing markets unlocking enough that you can start to see even more strength in that particular segment.

Speaker Change: Carl our mobile business performed incredibly well in the quarter, we had on a year over year basis, the growth was north of 70% So I.

Ryan R. Marshall: We reported outstanding full-year gross margins of 29.3%, which helped drive a 6% increase in earnings per share to a record $11.72 per share and a 27% return on equity. We also continue to efficiently increase our land pipeline as we complete transactions to put approximately 40,000 new lots under control. Inclusive of these lots, 53% of our total land pipeline is under option, either with the land sellers or through our expanding land banking structure. Since making the decision to expand our use of land banking starting 15 months ago, we have placed approximately 25 communities representing $1.5 billion worth of future land and development into such structures. And finally, consistent with our stated capital allocation priorities, we invested $4.3 billion into the business through land acquisition and development expenditure in 2023 and returned $1.2 billion to investors through share repurchases, dividends, and debt paydowns.

Speaker Change: I think that segment performed very well.

Speaker Change: The margins out of our move up as well as our our del Webb business continue to be some of our best gross margin. So we're seeing real financial strength there also.

Speaker Change: And then in terms of kind of community mix for Carl we're kind of right in line with where our long term strategic targets are.

Speaker Change: In terms of kind of that part of our business being about 35% of our overall mix. So we feel we feel pretty good about where that business is positioned.

Speaker Change: Yes, just maybe another point of clarification that not only were the sales strong it was our strongest absorptions on a same store basis.

So that that.

Speaker Change: <unk> actually has performed well to Ryan's point strong margins and absorptions.

Speaker Change: Thank you Bob Thanks, Brian.

Speaker Change: Our next question comes from the line of Matthew Bouley with Barclays. Please go ahead.

Matthew Bouley: Hi, good morning, everyone. Thanks for all the details and for taking the questions.

Matthew Bouley: Question on the AR on the high level growth algorithm that you gave Brian around that.

Ryan R. Marshall: Inclusive of our 2023 spend, we have repurchased almost half of the 2013 shares outstanding since initiating the program over a decade ago. By remaining consistent in our business practices and making market-responsive adjustments where needed, we reported another year of exceptional financial results. I want to thank the entire Pulte Group team for their tireless efforts in support of delivering superior homes and experiences to our homebuyers while providing outstanding financial returns to our investors. Consistent with the broader housing market, we saw home buying demand negatively impacted during the early part of the fourth quarter as 30-year mortgage rates increased toward their 2023 peak of 8 percent.

Matthew Bouley: The kind of 5% to 10% growth annually.

Matthew Bouley: Talking to the low end of that this year, because you walked away from some deals in 2022. So my question is is this kind of a sort of a one year hold so to speak and do you have the lands that you need today to kind of get back to your algorithm by 2025 or how should we think about getting to that level of growth.

Speaker Change: Going forward. Thank you.

Speaker Change: Matt. Thanks for the question, we feel really good about how we position the land pipeline, we've been investing for growth for a number of years and we've been trying to do it in a very responsible way specific to having less owned and more option land.

Ryan R. Marshall: We then saw buyer sentiment and demand improve as mortgage rates finally rolled over, ultimately dropping more than 100 basis points as we moved through November and December. The decline in rates helped drive our December net new orders and absorption pace to be the highest month in the quarter. The increased home buying activity in December was an important driver of the 57% increase in our Q4 net new orders and demonstrates the desire for home ownership remains high across all buyer groups. It remains our view that the long-term outlook for new home construction is extremely positive. A structural shortage of housing caused by years of underbuilding has only been exacerbated by a lack of resale inventory as owners are financially and, or emotionally locked into their low rate margins.

Speaker Change: The fact that over the last 15 months, we've made significant headway with our land banking platform has helped with that so we really like the number of lots that we have under control at 225000, plus or minus and we'd like the ownership structure.

Or the way that we have control of those lands, we think thats, a really capital efficient structure specific to your growth target number yes, we're going to be at the lower end for 2024 beyond that we feel that we've got.

Speaker Change: We've got the right structure to kind of be in that range for future periods.

Speaker Change: Yes, maybe I'd add to that.

Speaker Change: The land for 25 is under contract and probably in development right now and so.

Speaker Change: We have line of sight to 'twenty four 'twenty five you get out to 'twenty six we're still working through some of that but we've you can see from the approvals that we did in this most recent quarter or for the year of 40000 lots.

Ryan R. Marshall: While the lack of existing home inventory will resolve itself over time, we believe that land entitlement and labor availability challenges mean it will be difficult to correct for the many years of underbuilding in this country. Given our constructive views on the outlook for housing demand. We are investing in our operations with the goal of growing unit volumes by 5% to 10% annually. Our decision to walk away from option lots as interest rates increase in 2022 will impact our community openings in 2024, leading to our growth this year being closer to the lower end of this range, as we expect closings of approximately 30,000 homes in 2024. For those of you who have followed Pulte Group's story for the past few years, you know it's never been about growth for growth's sake.

Speaker Change: No no issues from our perspective in terms of lining up that type of growth rate.

Speaker Change: Got it okay. That's super helpful. Thanks, guys.

The second one.

Speaker Change: Back to the gross margin question.

Speaker Change: I think youre guiding 24 margins to be down roughly 70 basis points from where you exited the fourth quarter I think I heard you say Bob that its.

Speaker Change: You know kind of flat pricing and then you've got some headwinds in land labor and materials I'm. Just curious when you kind of unpack that a little bit and maybe specifically focus on the land side. How are you kind of thinking about those are headwinds to the margin and how does that kind of play.

Mike Dahl: Our focus is always on investing in our business to build shareholder value, so our objective is to grow our volumes while maintaining high returns on equity. To accomplish this, we must continue to intelligently invest in high-quality and high-returning projects while continuing to invest in our own assets through the ongoing repurchase of our stock. As we have demonstrated for much of the past decade, we expect to continue to generate strong cash flows that will allow us to fund our business investments, pay our dividend, and return excess capital to our shareholders, all while maintaining our balance sheet strength and flexibility. Our expectation of continued financial success. We have reflected this in this morning's announcement that our board approved a $1.5 billion increase to our share repurchase authorization. With many forecasting interest rates to fall, the economy to stay relatively healthy, and conditions in the job market to remain favorable, there are certainly reasons to be optimistic about housing demand in the coming years. I will now turn the call over to Bob for a review of our fourth quarter results. Thanks, Ryan, and good morning.

Speaker Change: Play into that guide in 24. Thank you Yeah fair question.

Speaker Change: I think we laid it out this way to try and answer that question I'll give you a little more color.

Speaker Change: We see pricing flat during the year now you might see different.

Pricing at different consumer groups.

Speaker Change: Yes. The first time is the most affordability challenge, that's where we saw actually.

The biggest decline in the current quarter, but.

But we think pricing is relatively flat through 'twenty four.

Speaker Change: We see modest call it 2% to 4% house construction cost increases.

Speaker Change: Kind of mid to upper single digit land increases, which is what we've experienced this year.

And so when you kind of mix that altogether.

Speaker Change: <unk>.

One other point I guess I'd offer to clarify is we're assuming incentive loads stay about the same at the six 5% that we saw.

Speaker Change: In this quarter. So when you marry that all up together, a little bit of a decline year over year, but still 28 to 28, 5% pretty pretty strong margin performance.

Mike Dahl: As Ryan mentioned in his comments, market conditions changed meaningfully as the fourth quarter progressed and as mortgage rates began to fall. A report of financial results for the period would be influenced by these evolving market dynamics, so I'll note any important areas of impact in my prepared remarks. Wholesale revenues in the fourth quarter were $4.2 billion compared with $5 billion in the prior year. Our lower home sale revenues for the period primarily reflect a 14% decrease in closings to 7,615 homes, along with a 2% decrease in our average sales price to $547,000.

Speaker Change: Perfect Alright, thanks, Bob Thanks, Brian and good luck guys.

Speaker Change: Thanks, Matt.

Speaker Change: Our next question comes from the line of John Lovallo with UBS. Please go ahead.

John Lovallo: Hey, guys. Thank you for taking my questions. The first one just maybe talking about January again curious how orders looked versus normal seasonality. If you will I think you know first quarter absorptions typically rise you know call it 40% to 45% sequentially is there anything that would preclude that from happening in your opinion outside.

If rates maybe in the first quarter of this year.

Mike Dahl: I would highlight that our fourth-quarter closings came in about 5% below our previous guide, as sales early in the quarter were negatively impacted by higher mortgage rates and the general softening in overall buyership. As Ryan noted, on-buying demand accelerated in the back half of the quarter, but sales, particularly sales of finished spec homes that would close in the quarter, finished below our expectations. We could have captured incremental sales and closing value by offering higher incentives, but we didn't see that as a worthwhile tradeoff.

Yes, John we didn't we didn't give a specific increase out of December we kept more of our commentary around the qualitative side of things, which I would reiterate we're very pleased with how things are performing in January that we would expect that strength to continue so.

John Lovallo:

John Lovallo: We continue to be in.

John Lovallo: A situation, where there's there's low supply affordability has definitely gotten better you heard bobs comment about kind of what we've assumed with our incentive load.

Mike Dahl: Given that buyer trends have remained positive in January, I think we made the right choices as we have inventory available to meet the stronger demand. Our mix of closings in the quarter was comprised of 40% first-time, 36% move-up, and 24% active adult, which is in alignment with our stated goal for the buyer mix for our. In the fourth quarter of 22, closings were 36% first-time, 39% move-up, and 25% active. Our average community count for the 4th quarter was 919, which represents an 8% increase over last year's 4th quarter average of 850 and was in line with our prior guide. Looking at order activity in the quarter, our net new orders increased 57% over last year to 6,214 homes. The large increase over last year reflects both improved demand in 2023 as well as the extremely difficult operating environment in the fourth quarter of 2022. As discussed previously, demand conditions grew increasingly difficult early in the fourth quarter of this year as mortgage rates climbed to 8 percent.

John Lovallo: So I would expect us to have a strong Q1 and the one thing other thing I'd offer that's probably of note is we're starting to see some real signs of life in our western markets.

John Lovallo: Those have been that's been a part of the country that was slow for the majority of 2022 and most all of 2023, but.

John Lovallo: During the last 30 to 45 days were really starting to see those markets pick up which as you know.

John Lovallo: Welcome to the <unk>.

John Lovallo: <unk>.

Speaker Change: Makes sense.

Speaker Change: And then on the on the on the share buyback that was encouraging to see I think could be a good driver of returns as we move forward here over the past few years, you guys have done about $1 billion per year.

Speaker Change: The authorization now is closer to 1.8, how are you thinking about 2020 for buybacks relative to the past few years I mean should we expect north of $1 billion.

Okay.

Speaker Change: Do you honestly a bit differ we typically do we report the news on that I think you highlight we've done about $1 billion used last couple of years.

Mike Dahl: But we experienced a notable improvement in buying activity as rates decreased over the back half of the quarter. On a sequential basis, our absorption pace improved from November to December, and we would attribute much of this improvement to the decline. Along with stronger demand conditions, the year-over-year increase in fourth-quarter net new orders benefited from a decrease in cancellations. In the most recent quarter, cancellations as a percentage of beginning period backlog fell to 9%, down from 11% in the comparable prior year. Looking at our water activity by fire.

Speaker Change: We have 1 billion eight cash.

Speaker Change: We have offered that we project about 1 billion eight of cash flow from operations in the current year.

Speaker Change: So our capital allocation priorities don't change.

Speaker Change: Said, we're going to increase our land investment to <unk> 5 billion, that's up about 16% year over year.

Speaker Change: We increased our dividend 25%.

Yeah, that's not a huge cash element, but still I think reflective of our confidence in the business.

Speaker Change:

Speaker Change: We do have 1 billion eight of authorization.

Speaker Change: And like I said, we'll report the news.

Speaker Change: You saw this year, we bought back $100 billion of our notes because it was attractive.

Speaker Change: Rate environment has made that a little less attractive, but we always look at liability management as part of the equation, So really no change to our capital allocation priorities.

Mike Dahl: Fourth quarter net new orders increased 70% for first-time buyers, 78% for move-up buyers, and 15% for active adult buyers. These order numbers indicate that demand improved across all buyer groups, which is a very positive dynamic when assessing potential housing demand in 2020. As a result of our sales and closings activity, our quarter-end backlog was 12,146 homes, which is effectively flat with last year, reflective of the increased mix of first-time buyers and their lower average sales price. However, our ending backlog value declined slightly to $7.3 billion. Inclusive of the 7,128 homes we started in the fourth quarter, we ended the year with 16,889 homes in production.

Speaker Change: Okay. Thank you guys.

Speaker Change: Sure.

Speaker Change: Okay.

Speaker Change: Our next question comes from the line of Stephen Kim with Evercore ISI. Please go ahead.

Stephen Kim: Yeah. Thanks, very much guys first question relates to your your land on the balance sheet. It I think that your cash flow guide seems to suggest at least for my modeling.

Stephen Kim: A modest rise in your own lot count while you keep a year's supply of owned lots are fairly stable I was wondering if that's right and if there's any opportunity or desire to actually reduce your land holdings in years further.

Speaker Change: Yeah, Stephen So a.

Stephen Kim: A couple of things there we are increasing our land spend in 2024 from $4 3 billion to $5 billion.

Stephen Kim: Our mix of developed spend versus.

Stephen Kim: Land acquisition spend will continue to probably be about 60% development, 40% <unk>.

Mike Dahl: 44% of our production is spec, including 1,263 finished specifications, which puts us in a strong position to meet buyer demand as we head into spring selling. By the end of the fourth quarter, our construction cycle time was down to 130, which is a sequential improvement of about two weeks from the end of the third. Going forward, we continue to target getting our cycle time down to 100 days or below by the end of the year. Based on our production pipeline, we expect closings in the first quarter of 2024 to be between 6,200 and 6,600 homes. And given our units under production, we expect full-year deliveries to grow by 5% to 30,000. We currently expect the average sales price at closing to remain in the range of $540,000 to $550,000 for the first quarter and the full year of 2024, which is consistent with our fourth-quarter price. At the midpoint, this would imply price stability over the course of the year.

Stephen Kim: Then our long term desire is to have 70% of our land controlled via option.

Stephen Kim: We highlighted in the prepared remarks this year, we moved up 48% option to 53% controlled via option.

Stephen Kim: So I think both and we've demonstrated through our results over the past number of years as well as kind of articulated long term goals, we want to be land lighter.

Stephen Kim: To continue to do it the right way.

Stephen Kim: All with an eye towards delivering a lower risk model.

Stephen Kim: That's very capital efficient as well.

Speaker Change: Well I guess, Ryan I mean, you gave most of that information in your opening remarks. So I appreciate that but I guess, just my question I'm trying to incrementally.

I understand what Youre plans are a little bit more is to try to understand the actual amount of owned lots are.

Speaker Change: Are you looking to get to your 70% you know option versus owned mix.

Speaker Change: By keeping your owned lot count kind of flat or your supply flat with where you are or are you actually looking to reduce that in addition to increasing your option lot exposure to kind of get to that 70% eventually.

Mike Dahl: Our fourth quarter gross margin was 28.9%, which is down approximately 50 basis points from both the fourth quarter of last year and the third quarter of this year, but it likely remains the industry leader among the big builders. As with the entire year, our fourth quarter numbers reflect higher incentive and input costs. Transcribed by https://otter.ai, increased 50 basis points sequentially from the 3rd quarter to 6.5. On the cost side, lower lumber prices offset inflation and other material and labor costs, but higher land and land development costs impacted margins.

Speaker Change: Yes, Stephen in terms of years owned we'd expect to probably keep that right around the level that we're at maybe a slight decrease and then ultimately we would we would start to flip from.

Years, one two years option youll see a little bit of a trade in that mix.

Speaker Change: Okay that helps and then when you talked about land banking and continuing to increase that could.

Speaker Change: Could you describe for US the you know when you think generally about what youre seeing in the market in terms of pricing in terms of the.

Speaker Change: The way. These negotiations are going with your land bankers, what kind of anticipated haircut to gross margin do you typically get when you go from just sort of buying versus doing a land option and what's the benefit to your inventory turns that you typically think about so what's the trade off basically in your mind some rules of thumb for us.

Mike Dahl: Keep in mind our prior comments that we expect pricing to be flat in 2024. We anticipate that land and house cost inflation will result in gross margins being in the range of 28 to 28.5% for each quarter during 2021. We reported fourth quarter SG&A expense of $308 billion, 7.4% of home sale revenue, compared with prior year SG&A expense of $351 million or $7.1 billion. The 30-basis point drop in overhead leverage can be attributed to the lower closings in real estate realized in the quarter versus the prior year.

Speaker Change: Yeah, I don't know that there is a kind of hard and fast answer to that Steven it depends on the mix of the business that we've got.

Speaker Change: In terms of margin.

Speaker Change: It can be a couple of hundred basis points on a relative basis.

Speaker Change: And in terms of inventory turns.

Speaker Change: Certainly, it's going to be more efficient than a bulk raw transaction.

Speaker Change: But it depends on the life of the asset so you know it.

Speaker Change: In del Webb is going to be very different than it is in the centex business for us so.

Speaker Change: Didn't want to.

Mike Dahl: It should be noted that we recorded $65 billion of pre-tax insurance benefits in the fourth quarters of both 2023 and 2025. Based on anticipated closing volumes, we expect SG&A expenses for the full year of 2024 to be in the range of 9.2% to 9.5% of wholesale revenue. Given our typical seasonality of closings, we expect SG&A expense in the first quarter to be approximately 10% of homestale revenue, with overhead leverage improving as we move through the remaining quarter. For the fourth quarter, our financial services operations reported pre-tax income of $44 million, which is up from $24 million last year.

Speaker Change: Paint that with two broader brush.

Speaker Change: Okay, Okay that that that's fine I appreciate it okay. Thanks, guys.

Speaker Change: Okay.

Speaker Change: Our next question comes from the line of Joe Ahlers Meyer with Deutsche Bank. Please go ahead.

Speaker Change: Yeah, Thanks, very much good morning, everybody.

Speaker Change: Just a question on the assumption on the incentive load in the gross margin guidance I'm wondering if that represents more.

Speaker Change: The state of conservatism right now waiting to see what happens with rates further or.

Speaker Change: Or if it's more about your philosophy as rates fall you might allow that to flow through to affordability and drive volume versus letting it be a big margin benefit if you could just talk about that trade off.

Speaker Change: Yes, Joe.

Speaker Change: <unk>.

Speaker Change: I think the reason we've assumed this incentive loans stays about where it is just because of affordability continues to be challenged so we've got low supply, but interest rates are relatively.

Mike Dahl: The improvement in pre-tax income reflects more favorable market conditions across our financial services platform coupled with higher capture rates, including an increase to 85%, up from 75% last year, and Art Moore. Good job. Our reported pre-tax income for the most recent quarter was $947 million, prepared with prior year pre-tax at level 1.5. In the period, we recorded tax expense of $236 million for an effective tax rate of $24.2 million.

Speaker Change: Higher.

And because of the low supply I think there is there is still some pressure on.

Speaker Change: Prices being elevated historically so.

Speaker Change: We've talked a lot in 2023 about how successful we were in helping to solve some of the affordability challenges with the incentive dollars that we put toward the four which Morgan forward mortgage commitments will continue to use that as a tool in 2024.

Speaker Change: Now as rates fall, we think.

Speaker Change: The cost of those forward mortgage rate commitments will become less.

Mike Dahl: Projecting ahead to 2024, we expect our full-year tax rate to be in the range of $24 to $24.5. Looking at the bottom line, our reported fourth-quarter results show an income of $711 billion, or $3.28 per share. In the comparable prior year period, we reported net income of $882 million, or $3.85 per share.

Speaker Change: We've made an assumption that we reallocate some of those incentive dollars to other things that help to.

Speaker Change: Solve the affordability challenge and get a get a buyer under their own so.

Is it conservative time will tell.

Speaker Change: I think what you've seen from US historically is we're not afraid to raise price, we're not afraid to cut discounts.

And we're always looking to optimize pace and price. You've also heard me talk the last several quarters, we're not going to be margin proud.

Mike Dahl: For the full year of 2023, we reported net income of $2.6 billion and record earnings of $11.7 billion. Reflective of our strong operating results, in 2023, we generated cash flows from operations of $2.2 billion. Even our current expectations for operating and financial results, along with our plans to increase land investment to $5 billion in the coming year. We expect 2024 cash flows from operations to be approximately $1.8 billion. Turning to our investment and capital allocation activities, we invested $1.3 billion in land acquisition and development in the fourth quarter, of which 59% was for the development of our existing land assets. For the year, our land investment totaled $4.3 billion, of which 59% was for development.

Speaker Change: So we're doing things to be responsive to what the market is to do.

Derive an outcome that yields the best return for our shareholders.

Speaker Change: And Youll see us actively managing all things pace price incentives.

Forward mortgage commitments et cetera.

Understood. Thanks, Thanks, a lot for that and I. Appreciate your comments about the valuation sounds like do you think that cash flow is a bigger part of that potentially even then just percentage of option lots or any any metric on the land side. It's about the cash flow I tend to agree and so just wondering if you are internally.

Speaker Change: You can think about your leverage in the context of cash flow or profits and not so much on what it makes up relative to your inventory balance and kind of thinking almost more like a manufacturer distributor because right now youre not depth of about 13 days of operating profit just thinking about the potential for using more debt going forward. Thanks.

Mike Dahl: Given our constructive views on near and longer-term housing, As noted, our plan is to increase our land spend to approximately $5 billion in 2020. We would again anticipate a roughly 60-40 split between development and land acquisition. This increase in investment is consistent with Ryan's earlier comments regarding positioning the business to routinely grow future delivery volumes by 5% to 10% per year. Inclusive of our fourth quarter investments, we ended 2023 with 223,000 lots under control, which is an increase of 5% over the prior year.

Speaker Change: Okay.

Speaker Change: Yes, that's an interesting question.

Speaker Change: I'm not sure we can think like a manufacturing company completely the risk profiles are different.

Speaker Change: But having said that I think there.

Based on the strength of the operation based on the cash flow that we've consistently shown despite growth, which historically is not the way this industry has behaved.

Yeah, we believe there is an opportunity.

Speaker Change: For people to take a little bit differently about the equity.

Speaker Change: In terms of how we manage the leverage on the balance sheet a lot of that left to do with.

Mike Dahl: I would highlight that on a year-over-year basis, we lowered our own plot count by 4,000 miles while increasing our lots under option by roughly $16,000. As a result, our percentage of lots under option... 53%, up from 48% last year. There's still a lot of runway ahead of us to achieve our goal of 70% option plots, but we're moving in the right direction, based on the investments we've made and our anticipated community openings and closings in 2024. We expect our average community count in 2024 to be up 3% to 5% in each quarter as compared to the comparable prior year. Consistent with our stated capital allocation priorities, we will continue to return capital to shareholders in 2022. To that end, we paid out $142 million in dividends and have increased our dividend per share by 25% starting in the first quarter of 2024. We also repurchased 13.8 billion common shares at a cost of $1 billion, or an average price of $72.50 per share, which included $300 million of repurchase and an average price of $83.03 per share in the fourth quarter.

Speaker Change: Our opportunities to invest in the business and what we do on the share repurchases.

Speaker Change: But even you look at the rating agencies.

Speaker Change: They've been slow, but they've been responsive to.

Speaker Change: To kind of I think seeing the value of it.

The business model.

Speaker Change: And also the way the debt gets looked at so would we.

Speaker Change: Use more debt for something without question EBIT, where for the right thing.

Speaker Change: That's helpful. Bob Thanks, so much.

Speaker Change: Our next question comes from the line of Michael Rehaut with J P. Morgan. Please go ahead.

Michael Jason Rehaut: Thanks I appreciate it.

Michael Jason Rehaut: Wanted to circle back just on <unk>.

Michael Jason Rehaut: And you know.

Where we are today and to the extent that what was that.

Michael Jason Rehaut: Potential for those to decline.

Michael Jason Rehaut: How we should think about the impact on 24, so when you talked about I.

Michael Jason Rehaut: I think assuming in 2020, 465%.

Michael Jason Rehaut: Of a low rate for incentives and I believe you said that was similar to the fourth quarter.

Speaker Change: Just remind us where you were in the fourth quarter versus the third.

Mike Dahl: With the 13.8 million shares acquired in 2023, we have repurchased approximately half of the shares outstanding at the time we initiated the program back in 2013. Having repurchased these shares at an average cost of $32.16 per share, we believe it's been a great investment for our shareholders. In addition to buying our stock, in the fourth quarter, we took advantage of market conditions by using $35 million in cash on hand to pay down a portion of our debt. For all of 2023, we retired $101 million of our 2026 and 2027 senior notes through open market transactions.

Speaker Change: Earlier in the year.

Speaker Change: And to the extent that perhaps incentives ticked down a little bit in the first quarter of 'twenty.

Speaker Change: Or.

Speaker Change: There'll be a three Q4 can you impact.

Speaker Change: To get a sense for them.

Speaker Change: The lag.

Yeah, Mike I'll take the first part of that and then I'll have Bob do the last piece so.

So we're up 50 basis points from Q3.

Speaker Change: We are 6% in Q3 of the six 5% in Q4.

In terms of what that means for 2024.

Bob: You know I think I addressed on our prior call, we're going to actively be managing our incentive load book, we've shared with you what our assumption is.

Mike Dahl: Helping to lower our quarter, and that's a capital raise, to 15.9%, down 280 basis points from last year. Adjusting for the $1.8 billion of cash on our balance sheet, we ended the year with a net debt-to-capital ratio of 1.1%.

Current form.

If theres opportunity to Peel those back we'll do it and we'll certainly share that with you.

Bob: In terms of kind of the quarter that it would impact.

Bob: Right now about 50% so around 50% of our sales are spec.

Ryan R. Marshall: Now, let me turn the call back to Ryan for some final comments. Thanks, Bob. Successfully navigating our business through the past 12 months of rising interest rates has been challenging. The same could be said about the past 24, 36, and 48-month periods as we've battled COVID and the global collapse in supply chains. I am extremely proud of how our entire team responded to these events and the exceptional operating and financial results Pulte Group has delivered over an unprecedented period.

Bob: So those are closing in the following quarter spec sales now with either be late Q1 closings or early Q2 closings. If it's a dirt sale Q1 closings typically end up in Q.

Bob: Q3, or early Q4 closing so.

Bob: We've factored all of those assumptions into the margin guide that we gave for the year, which is 28% to 28, 5% to repeat that and then.

Bob: I don't know if you have any incentive load for Q on Q2.

Bob: That's the only piece.

Bob: It was about 6% in each of the first second and third quarters.

Ryan R. Marshall: Looking back over the five-year period of 2019 to the recently completed 2023, we grew volumes 5% annually and delivered just under 135,000 homes. To support our growth during this period and for future years, we invested almost $19 billion in cumulative land acquisition and development spend. Through our disciplined land investment, operational focus, and organizational expertise, we capitalized on market conditions to grow earnings per share over this period at a compounded annual growth rate of 34% while delivering an average annual return on equity of just over 26%. It's this type of strong financial performance during an extended period of market volatility that has prompted increased discussion about the need to reconsider how the large home builders are valued. I think that if you want to be valued differently, you must demonstrate a fundamental change in how you operate the business and the results you deliver, not just for a year or two but over an extended period of time.

Bob: And it was four 3%.

Bob: In the fourth quarter of last year.

Speaker Change: Great No. That's helpful. Thank you for that.

Speaker Change: Secondly, I'd love to kind of shift a little bit to the SG&A side.

Speaker Change: Gave guidance for the.

Speaker Change: Our first quarter, but <unk> been running.

Speaker Change: Last couple of years, you know plus or minus around 9%.

Speaker Change: Low 9%.

Speaker Change: Obviously, we've heard a little bit about.

You know a higher commission rates coming back maybe in a more choppy market at points in the past year or so.

Speaker Change: Overall solid market, but still we've heard a little bit about commissions, maybe coming up a little bit.

Speaker Change: How should we think about.

Speaker Change: SG&A in the potential for further leverage over the next couple of years against they are.

The growth algorithm that you talked about in.

Speaker Change: If commissions, let's say or stable from here.

Speaker Change: Could we see an 8% at some point or getting closer to an 8% number.

Speaker Change: Just love your thoughts on that.

Speaker Change: Yes, Mike.

Speaker Change: I think we've always been.

Ryan R. Marshall: What's different about the past five years is that while investing $19 billion into our operation, we also generated almost $7 billion in net cash flow from operations during the sustained period of growth. In fact, we have recorded only one year of negative cash flow from operations since shifting our focus in 2012 from just top-line growth to driving high returns over the housing cycle. We paid off $1.1 billion of debt while cutting our leverage by more than half to end 2023 with a debt-to-capital ratio of 15.9% and a net debt-to-capital ratio of 1.1%.

Speaker Change: Thoughtful and how we spend SG&A dollars.

Speaker Change: We have historically made.

Speaker Change: Some extra investments in the quality of the homes that we build and deliver and the customer experience that we provide for our homeowners.

Speaker Change: And we invest incremental dollars and the culture of our.

Speaker Change: Our workforce. So we've we've tried to maintain balance within the SG&A structure as well.

Not trying to run.

Speaker Change: Kind of the leanest and.

Speaker Change: The lead on the lean and were also not trying to overspend I think we're trying to be very balanced.

Speaker Change: Turns of leverage for 2024, specifically.

Ryan R. Marshall: And we return $4 billion to shareholders through stock repurchases and dividends. I'd add that the reality is we've been operating our business in just this way for the past 10 years. I know stocks reflect performance, so I believe that if we can continue to both grow our business and deliver ROE that remains among the industry leaders while generating positive cash flow and maintaining a low-risk profile, then our stock price and shareholders will ultimately be rewarded. I now turn the call back to Jim Zeumer.

Speaker Change: Kind of given the guide, which is kind of in the low.

Low nines.

Speaker Change: And that's really reflective of kind of what Bob guided to on the average sales price, which we're expecting to be flat and against that you've still got wage inflation for kind of our internal employees running close to 354%. So.

Speaker Change: There is some.

Speaker Change: Pressure there is there is pressure on the SG&A front that we're not necessarily getting the benefit of on the ASP.

James P. Zeumer: Great. Thanks, Ryan. We're now prepared to open the call for questions, so, Mandeep, if you would explain the process, we'll get started. Now open to your questions. To ask a question at this time, simply press the star followed by the number one on your telephone keypad.

Speaker Change: Increased side so.

Speaker Change: Or kind of where it goes into the future.

Speaker Change: Time will tell but we've given the best visibility that we can for 2024.

Bob I don't know if you've anything to get out on the SG&A.

Speaker Change: Bob Bob keeps us honest I'll tell you that.

Speaker Change: We're not overspending anywhere.

Another under boss watch.

Operator: We ask that you please limit yourself to one question and one follow-up question. We'll now take a moment to compile our raw data. Our first question comes from the line of Carl Reichardt. With BTIG, please go ahead. Thanks. Morning, guys. Hope you're doing well.

Speaker Change: Great. Thank you.

Speaker Change: Okay.

Speaker Change: Our next question comes from the line of Sam Reed with Wells Fargo. Please go ahead.

Hey, Thanks, so much guys for taking my question here I wanted to drill down a little bit on the first time buyer you guys have given a lot of good color on pricing.

Carl Reichardt: Ryan, I wanted to ask a little bit more about January. Could you maybe expand on how business has been? And what I'm really interested in is, have you seen enough traffic or sales rates to start to think about more broadly pulling incentives down or even starting to raise the base across the footprint. Carl, you know, Bob highlighted in the prepared remarks that, you know, we in specifically Q4, October, and November were really below expectations.

Sam Reed: Sounds like price didn't move lower for this buyer group a bit again during the quarter, maybe help us unpack the relative split perhaps between higher incentives for this buyer group as you try to make money.

Homes more affordable versus perhaps some of the other other affordability leverage that you might be calling like smaller floor plan et cetera kind of any color here would be appreciated.

Ryan R. Marshall: And it was, it was driven by high rates. We had a great December, the highest month in the quarter in terms of absolute sales and absorption per community. So that was certainly an anomaly for typical December seasonal patterns.

Yes, I would tell you you know if you look.

Sam Reed: Year over year pricing at $4 22 to that buyer is down 6% year.

Sam Reed: Year over year was down about 1% versus the trailing quarter. So the third quarter of this year and.

Ryan R. Marshall: And the strength has really continued into January, Carl. So we're feeling, you know, pretty good about how the year is starting in terms of kind of where it sets us up for reduced discounts and increased prices. You know, we're going to watch it closely. And I think we've demonstrated through past behavior that we're always looking to find the sweet spot between pace and price. It won't come as a surprise to you, Carl, that affordability for buyers remains a challenge. And so I think we're going to have to, you know, be thoughtful about what we do on both the incentive and the price increase front. But, you know, we're feeling pretty good about how the year started. All right. Thanks for that, Ryan.

Sam Reed: And I would tell you it is largely.

Sam Reed: Incentive related and.

Sam Reed: So we're not we haven't in the last three months or the last 12 months at a radical redesign of the product that we're offering to people communities when they get.

Sam Reed: Entitled You have product approvals.

Sam Reed: So to a degree you can see people, saying I want the smaller floor plan I would tell you that's not the driver of the price change. It as you had said that load that we've introduced so it's that.

Sam Reed: 220 basis points, which for that buyer is about call. It $8000. That's the price decline.

No that's helpful and maybe one more on pricing here just from a slightly different vantage points you guys have given good color in the past on options and lot premiums and the impact on S. T. I wanted to say it's been around 100 K are north of 100 K across your entire mixed throughout.

Carl Reichardt: And then I'm going to ask a couple of questions just on MoveUp. Obviously, the entry-level business has been strong for volumes. MoveUp, a number of your peers have kind of shifted some of their investments more towards the low end. That's been going on for quite some time.

Throughout 2023 curious as to where that trended in Q4, and maybe give us a sense as to your outlook for that piece of the price component into 2024.

Ryan R. Marshall: Can you talk a little bit about how you look at that business this year? Is there any alteration and mix in terms of communities? And whether or not maybe your can rate in that business is improving faster than the other businesses? We're trying to see if the existing housing market is unlocking enough that you can start to see even more strength in that particular segment. Thanks.

Speaker Change: Yeah in the in the fourth quarter. It was $105000 per unit, so it's down about $4000 versus the prior year.

Speaker Change: And so I think that speaks to the sales team and I give them a lot of credit.

Speaker Change: Where we've needed incentive has been less around.

Ryan R. Marshall: Yeah, you know, Carl, our move up business performed incredibly well in the quarter. We had, on a year over year basis, growth of north of 70%. So, you know, I think that segment performed very well.

Speaker Change: Options and lot premiums and more oriented towards financing.

Speaker Change: So we didn't see a big change there, which I think is a real positive. It also.

Speaker Change: <unk>.

Speaker Change: For that move up and active adult buyer and we've highlighted the relative strength from them in this quarter.

Mike Dahl: The margins from our move up, as well as our Dell Web business, continue to be some of our best gross margins, so we're seeing real financial strength there also. And then in terms of kind of community mix for Carl, we're kind of right in line with where our long-term strategic targets are, in terms of that part of our business being about 35% of our overall mix. So we feel, you know, we feel pretty good about where that business is positioned. Yeah, just maybe another point of clarification that not only were the sales strong, but it was our strongest absorption on a same-store basis. So that consumer actually has performed well to Ryan's point, strong margins and, Thank you, Bob. Thanks, Ryan. Our next question comes from the line of Matthew Bouley with Sparklaze. Please go ahead. Good morning, everyone.

Speaker Change: And the relative pricing.

Speaker Change: Strength, there so just like our.

Speaker Change: First time was down about 6% or move up pricing was actually flat quarter over quarter and our active adult was actually up 3% and I think it's reflective of the way we go to market the way we sell lots that we've got.

Speaker Change: The options that people put in houses. So our teams are still doing a really good job of.

Speaker Change: Providing value for that which people desire.

Speaker Change: Helpful color all around I'll pass it on guys. Thanks.

Our next question comes from the line of Ken Zenner with Seaport Research partners. Please go ahead.

Good morning, everybody.

Speaker Change: Again.

Ken Zener: I've got two very simple questions first is on land banking what percent of closings do you expect.

Matthew Bouley: Thanks for all the details and for taking the questions. Question on the high-level growth algorithm that you gave, Ryan, around the kind of 5 to 10 percent growth annually. You know, you're talking to the low end of that this year because you walked away from some deals in 2022. My question is, is this kind of sort of a one-year pull, so to speak?

To be from finished once you reach 70%.

Speaker Change: Option one scenario.

Speaker Change: Generally yes.

Speaker Change: A question.

Speaker Change: Certainly the land banking would be finished lots, but for the optionality that we have with individual sellers. Many of those were self developing and so I don't I don't have any.

Speaker Change: Jim do you have my Mike and this is a little bit of a gas can roughly 20% to 25% of our total closings. Once we get to 70 30 will be finished lots.

Matthew Bouley: And, you know, do you have the land that you need today to kind of get back to your algorithm by 2025? Or how should we think about getting to that level of growth going forward? Thank you.

Ryan R. Marshall: Yeah, Matt, thanks for the question. We feel really good about how we positioned the land pipeline. We've been investing for growth for a number of years, and we've been trying to do it in a very responsible way, specific to having less owned and more optioned land. You know, the fact that over the last 15 months, we've made significant headway with our land banking platform has helped with that. So we really like the number of lots that we have under control at 225,000, plus or minus. And we like the ownership structure, or the way that we've controlled those lands. We think it's a really capital efficient structure, specific to your growth target number. Yeah, we're going to be at the lower end for 2024.

Speaker Change: The rest will there'll be a lot of optionality in there, but to bobs point a lot of our options we take down.

Speaker Change: Raw land.

Speaker Change: Chunks and then we self develop those.

Speaker Change: Still highly efficient.

Speaker Change: A different form of.

An option structure.

Speaker Change: Right I assume thats kind of reflected here.

Entry level exposure as well second question is talk to options again could you update us.

What percent of your ASP is coming from auctions and then comment on the margin benefit you get from that if you could so we could discern.

You know your operating construction costs versus your strategy of bringing in these options. Thank you.

Speaker Change: So I want to make sure I understand the 4000 $105000 of scale how much of it is options.

Speaker Change: Oh right.

Right.

Ryan R. Marshall: Beyond that, we feel that, you know, we've got the, you know, the right structure to kind of be in that range for future periods. Yeah, maybe I'd add to that, you know, the land 425 is under contract and probably in development. So, you know, we have line of sight to 24, 25, you get out to 26, you know, we're still working through some of that, but, you know, we've, you can see from the approvals that we did in this most recent quarter or for the year, 40,000 lots. No issues from our perspective in terms of lining up that type of growth rate. Got it. Okay, that's super helpful.

Speaker Change: Your total ISP you have a certain auction exposure more at and move out.

Speaker Change: And adult but.

Speaker Change: But could you talk to the margin impact of that as well. Thank you.

Speaker Change: Yes, so of the of the $105000 of option and lot premium $80000 as options $25000 Thats lots of premium.

Speaker Change: I could say for instance lot premiums are pure margin.

Speaker Change: I'm not sure that that's fair right.

Speaker Change: Pricing doesn't really work that way.

Speaker Change: But in terms of the options then typically it's going to have a relatively rich margin mix call. It 50%.

And so it will.

Speaker Change: It is accretive to the overall margin.

Speaker Change: And the way the way, we try and go to market, Canada I don't know if this answers it better.

We put a base price house that we think is.

Matthew Bouley: Thanks, guys. Now, second one, back to the gross margin question. I think you're guiding 24 margins to be down at roughly 70 basis points from where you exited the fourth quarter. I think I heard you say, Bob, that it's, you know, kind of flat pricing and then you've got some headwinds and land labor and materials. I'm just curious if you kind of unpack that a little bit and maybe specifically focus on the land side. How are you kind of thinking about those? Headwinds to the margin, and how does that kind of you know play into that guide in 24?

Speaker Change: Kind of market standard and what people can and should expect to pay for that house.

Speaker Change: Then we start talking to that okay, which lot to you'd want what are you willing to pay for that lot. That's what generates $25000 and then okay. Now in the house, if we're offering optionality and we don't for everyone right. So for the Centex buyer. We may have curated packages are no choices at all.

Speaker Change: But for the folks that can do structural options or fit and finish that's what's driving that $80000 of incremental revenue.

Mike Dahl: Thank you Yeah, fair question, you know, and I think we laid it out this way to try and answer that question. I'll give you a little more color. You know, we see pricing flat during the year now. You might see different pricing at different consumer groups. You know, the first time it's the most affordability challenge. That's where we saw the biggest decline in the current quarter, but we think pricing is relatively flat through 24. We see modest, call it two to four percent house construction cost increases, kind of mid to upper single digit land increases, which is what we've experienced this year. And so when you kind of mix that all together, we're assuming incentive loads stay about the same at the 6.5% that we saw in this quarter. So when you marry that all up together, a little bit of a decline year over year, but still 28 to 28.5%, pretty strong margin. Perfect. All right. Thanks, Bob. Thanks, Ryan.

Speaker Change: Thank you very much.

Speaker Change: Okay.

Speaker Change: Our next question comes from the line of Alan Ratner with Zelman and Associates. Please go ahead.

Hey, guys. Good morning, Thanks for all the detail so far.

Alan Ratner: Question on cycle times, so Ah congrats on the improvement there sounds like you know you expect to see further improvement in 'twenty four.

Curious to get to the 100 day target from 130, where you're at right. Now you guys are targeting 5% growth. We've heard some other builders may be a little bit higher than that.

Alan Ratner: Is there a level from a labor perspective, where builders try to push start to more significantly that you think cycle time improvement might stall a bit yeah.

Alan Ratner: Are there any constraints that you could foresee or is the unleashing of kind of the normalization of the supply chain just kind of independent of whatever the start pace might look like in 'twenty four.

Matthew Bouley: Good luck, guys. Our next question comes from the line of John Lovallo with UBS. Please go ahead.

Alan Ratner: Yes.

Speaker Change: It's a fair question.

Speaker Change: Based on the total amount of production that's happening.

John Lovallo: Hey guys, thank you for taking my questions. The first one, just maybe talking about January again, curious how orders looked, you know, versus, you know, normal seasonality, if you will. I think, you know, first quarter absorptions typically rise 40 to 45 percent sequentially. Is there anything that would, in your opinion, preclude that from happening, outside of rates, maybe in the first quarter of this year? Yeah, John, we didn't give a specific increase out of December, you know; we kept more of our commentary around the qualitative side of things, which, you know, I'd reiterate, we're very pleased with how things are performing in January, and we'd expect that strength to continue. So, you know, we continue to be in a situation where there's low supply, but affordability has definitely gotten better.

Speaker Change: I don't see the industry stressing the labor availability I'm not suggesting there is a whole bunch of excess labor roaming around out there, but at least for the big builders I think we've got great.

Trade relationships.

Speaker Change: And.

I think we will continue to get.

Not only schedule performance, but.

Speaker Change: But the labor on our job sites I think the pressure likely comes on dollars and four.

Speaker Change: Or more so than time.

You know.

Speaker Change: If we're running into labor.

Speaker Change: Pitches because of our volume increase I think it's probably dollars more than time.

Speaker Change: A lot of the the.

Speaker Change: The decrease that will take it will be because we're getting things on a predictable schedule like we used to pre COVID-19. So.

Speaker Change: <unk>.

Thats working better which allows us to take some kind of dead days out of our schedule that we had built in for things to go wrong for a time when we were just literally waiting for.

Ryan R. Marshall: You heard Bob's comment about kind of what we've assumed with our incentive load. So, yeah, I'd expect us to have a strong Q1. The one thing I'd offer that's probably of note is we're starting to see some real signs of life in our Western markets. You know, those have been a part of the country that was slow for the majority of 2022 and almost all of 2023. But, you know, in the last 30 to 45 days, we're really starting to see those markets pick up, which is, you know, a welcomed outcome. Makes sense.

Materials to show up so.

Speaker Change: It's a little bit of add a little bit of we're.

We're just getting back to the cycle times that we had pre COVID-19. So.

Speaker Change: We trimmed out about 30 or so days in 2024, we'll get it in 2023, rather the only thing we can get another 30 or so days by the end of 2024, and we'll be back largely in line with pre Covid our cycle times.

Speaker Change: Okay.

Speaker Change: Great I appreciate those added thoughts, Brian and then I guess in a similar vein I was curious if you could just give an update on the the ITG.

John Lovallo: And then on the on the share buyback that I was encouraging to see, I think could be a good driver of returns as we move forward here. Over the past few years, I think you guys have done about a billion per year. You know, the authorization is now closer to 1.8.

Ryan R. Marshall: Growth plans, there and kind of how that's been trending and what your current thinking is as far as additional market expansion. If there is any.

Mike Dahl: How are you thinking about 2024 buybacks relative to the past few years? I mean, should we expect north of a billion? You know, honestly, I'm going to defer. We typically do we report the news on that. I think you highlight we've done about a billion dollars a year the last couple of years. We have a billion eight cash. We have offered that we project about $1.8 billion of cash flow from operations in the current year. So our capital allocation priorities don't change. We've said we're going to increase our land investment to $5 billion. That's up about 16% year over year. We increased our dividend by 25%.

Ryan R. Marshall: Yeah.

Speaker Change: <unk> go well, we have two plants today.

Both are.

Ryan R. Marshall: Focused in the southeast part of the U S and our growth plans are still largely on target to have approximately eight eight factories. So we havent announced anything new.

Similar to our share buybacks, we'll probably report the news on that as opposed to give.

Ryan R. Marshall: We're looking forecast.

Speaker Change: And I guess, if I could sneak one in on that.

For us to conceptualize what impact that has on your business and obviously, it's concentrated in a handful of markets right now but are there certain metrics that you can share with us whether it's cycle times or cost margin etcetera that you can kind of demonstrate on a case study basis, how how that's contributing to your business right now.

Mike Dahl: That's not a huge cash element, but still, I think, reflective of our confidence in the business. You know, we do have a billion dollars of authorization, and like I said, we'll report the news. You know, this year, we bought back a hundred million dollars of our notes because it was attractive. The rate environment has made that a little less attractive, but we always look at liability management as part of the equations, so really, Okay, thank you, guys. Our next question comes from the line of Stephen Kim with Evercore ISI. Please go ahead.

Speaker Change: Yeah, Alan So thats, we havent given a bunch of guidance on that just because it is concentrated into a couple of markets and we don't we don't feel it's appropriate to extrapolate to the entire enterprise yet as we get further down the path we will share more.

Conceptually, it's exactly what you highlighted we're getting cycle time improvements, we're getting better quality and there are some raw material cost savings that we believe we're getting as well.

I appreciate that thanks a lot.

Speaker Change: Our next question comes from the line of Susan Mcclary with Goldman Sachs. Please go ahead.

Stephen Kim: Yeah, thanks very much, guys. The first question relates to your land on the balance sheet. I think that your cash flow guide seems to suggest, at least for my modeling, a modest rise in your own lot count while you keep a year's supply of owned lots fairly stable. I was wondering if that's right and if there's any opportunity or desire to actually reduce your land holdings in the future. Yeah, Stephen, so there are a couple things there.

Susan Maklari: Thank you good morning, everyone and thanks for fitting me in.

Susan Maklari: My first question is just around the stocks you know you mentioned that you had about 44% I think of your production.

As you think about the year and the way that the demand may come together any thoughts on where that may move or how youre thinking about it longer term.

Speaker Change: Yeah, Susan I wouldn't anticipate.

Ryan R. Marshall: We are increasing our land spend in 2024 from $4.3 billion to $5 billion. Our mix of developed spend versus land acquisition spend will probably continue to be about 60% development, 40% land act. And then our long-term desire is to have 70% of our land controlled via option.

A change from the percentage, we're probably on the higher end of the range.

Speaker Change: We will have in spec right now.

Speaker Change: Specific to the fourth quarter, we put more spec starts in the ground and and what we sold and that was intentional.

Speaker Change: We wanted to have some additional inventory going into the spring selling season, which we have so as we move throughout the year.

Ryan R. Marshall: You know, we highlighted in the prepared remarks this year that we moved that 48% option to 53% controlled via option. So we're, you know, I think both in, we demonstrated through results over the past number of years, as well as kind of articulated long-term goals, we want to be land lighter. We're going to continue to do it the right way, all with an eye toward delivering, you know, a lower risk model that's very capital efficient as well. Well, I guess, Ryan, you gave most of that information in your opening remarks, so I appreciate that. But I guess the gist of my question, trying to incrementally understand what your plans are a little bit more, is to try to understand the actual amount of owned lots. Are you looking to get to your 70% option versus owned mix by keeping your owned lot count kind of flat, or your supply flat with where you are?

Speaker Change: Probably right in line with where we're at or a tad lower.

Okay. That's helpful and then.

Speaker Change: Generally about the potential for rates to come down this year and that possibly driving some increase on the existing home side of the market.

Speaker Change: And what the implications of that could be especially perhaps on the move up in the active adult parts of the businesses and any initiatives you have relative to that.

Speaker Change: Okay.

Speaker Change: Yeah, Susan I E.

With the rate cuts that are forecasted.

Susan: I don't see it being at a level that's going to unleash.

Susan: A tidal wave of resale inventory so.

Susan: Is it better than where we're at today certainly.

Susan: Will that start to free up some resale inventory I think so and I think that's probably helpful against the backdrop of we continue to be under supplied in the country. So on balance I don't think it has much impact at all on what we're projecting for our business in 2024.

Stephen Kim: Or are you actually looking to reduce that in addition to increasing your option lot exposure to kind of get to that 70% eventually? Yeah, Stephen, in terms of years owned, we'd expect to probably keep that right around the level that we're at, maybe a slight decrease. And then ultimately, we would start to flip from years owned to years options, so you'll see a little bit of a trade in that mix. Okay, that helps. And then when you talked about land banking and continuing to increase that, could you describe for us the, you know, when you think generally about what you're seeing in the market in terms of pricing, in terms of, you know, the way these negotiations are going with your land bankers, what kind of anticipated haircut to gross margin do you typically get when you go from just sort of buying versus, you know, doing a land option? And what's the benefit to your inventory turns that you typically think about?

Speaker Change: Okay. Thanks for the color and good luck.

Speaker Change: Yes.

Speaker Change: Yes.

Speaker Change: Our final question.

Speaker Change: Comes from the line of Ralph <unk> with Bank of America.

Ralph: Where we've reached the time allotment for this morning's call. Please go ahead.

Ralph: Great Great. Thank you, Rob and thanks for taking my questions.

Ralph: Can you in terms of the additional 30 days of Bill cycle improvement Youre expecting for 2024 can you talk about what the build cycles are in homes that youre. Starting today like are you already at that 100 day level and is that improvement embedded in your cash flow guide.

Ryan R. Marshall: So what's the trade-off, basically, in your mind, some rules of thumb for us? Yeah, I don't know that there's kind of a hard and fast answer to that. Stephen, it depends on the mix of the business that we've got. You know, in terms of margin, it can be a couple of hundred basis points on a relative basis. And in terms of inventory turn, you know, certainly it's going to be more efficient than a bulk raw transaction, but it depends on the life of the asset.

Ralph: Yes.

Speaker Change: It's a it's a fair question homes that were starting today, we will deliver.

Speaker Change: And it's kind of late.

Speaker Change:

Speaker Change: Phones are starting today will deliver in Q2 basically so.

Speaker Change: No we're not at the 100 days yet.

Speaker Change: That being said there are some markets in some communities, where we're we are at the 100 days and in fact, we were at the 100 days last year.

Ryan R. Marshall: So, you know, it, you know, in Dell Web, it's going to be very different than it is in the Centex business for us. So, I wouldn't want to.

Speaker Change: When you blend it all together, we think it'll be a Q4 before we're at the 100 days that we've highlighted is our goal.

Stephen Kim: You know, paint that with too broad a brush. Okay. Okay. That's fine.

Speaker Change: And Brexit our guide does factor in what we see in terms of cycle time started the year the cash flow guidance to your question.

Stephen Kim: I appreciate it. Okay. Thanks, guys. I'm gonna sleep.

Joe Ahlersmeyers: Our next question comes from the line of Joe Ahlersmeyers, with Deutsche Bank. Please go ahead. Yeah, thanks very much. Good morning, everybody.

Speaker Change: Got it. Thank you that's helpful. And then you really helpful color in terms of the land inflation, you're expecting in your gross.

Joe Ahlersmeyers: Just a question on the assumption on the incentive load in the gross margin guidance. I'm wondering if that represents more just a state of conservatism right now, waiting to see what happens with rates further, or if it's more about your philosophy as rates fall, that you might allow that to flow through to affordability and drive volume versus letting it be a big margin benefit. If you could just talk about that tradeoff. Yeah, Joe, we've, you know, I think the reason we've assumed that the incentive load stays about where it is is just because affordability continues to be challenged. So we've got low supply, but interest rates are relatively higher. And because of low supply, I think there's, you know, there's still some pressure on prices being elevated, you know, historically. So, you know, we talked a lot in 2023 about how successful we were in helping to solve some of the affordability challenges with the incentive dollars that we put toward the forward mortgage commitments. We'll continue to use that as a tool in 2024.

Speaker Change: Gross margin for two.

Speaker Change: 2024.

Speaker Change: And you have the land that you need through 2025 on the land that you're contracting today. What are you seeing in terms of inflation is it at a similar level or are you actually seeing that come down and then can you kind of help us understand the difference between development cost inflation relative to what youre seeing for raw land.

Speaker Change: Yes so.

Speaker Change: Sorry, I forgot the first part of the question.

Speaker Change: Okay.

Speaker Change: You spoke about the land inflation and Oh I'm.

Speaker Change: I'm sorry.

Speaker Change: Yeah.

Speaker Change: Listen it's interesting land prices don't come down very often they are sticky.

Speaker Change: And we've seen and we've highlighted sort of sequential increases in loss costs.

Speaker Change: I would tell you that the land we're seeing today is consistent with that you know prices are pretty robust and it's a pretty competitive landscape out there.

Speaker Change: We underwrite to return and so we look to see can we get return out of that.

Speaker Change: So I think no change honestly in the land market.

Ryan R. Marshall: Now, as rates fall, we think, you know, the cost of those forward mortgage rate commitments will become less. We've made an assumption that we can reallocate some of those incentive dollars to other things that, you know, help to solve the affordability challenge and get a buyer into their home. So, you know, is that conservative?

Speaker Change: In terms of the.

Speaker Change: Inflationary aspect.

What we are seeing is that that that labor constraint.

Speaker Change: Influences the development of land just like it does building of houses.

Speaker Change: And with general cost inflation that we received last year in particular.

Ryan R. Marshall: Time will tell. I think what you've seen from us historically is, you know, we're not afraid to raise prices, we're not afraid to cut discounts, and we're always looking to optimize pace and price. And you've also heard me talk about the last several quarters: we're not going to be margin proud.

Speaker Change: It was influencing the stance of pipe.

Everything that we do to do the development of the communities was running pretty hot too.

Speaker Change: So again, we've highlighted we think it's going to be a little bit more expensive in terms of our lot increased this year for 24.

Speaker Change: Again, I think that just reflects all the activity that's going on and some of the cost inflation that we saw in 2003 feeding into our lives this year in 2004.

Ryan R. Marshall: So we're doing things to be responsive to what the market is to derive an outcome that yields the best return for our shareholders. You know, and you'll see us actively managing all things, pace, price, incentives, forward mortgage commitments, etc. Understand. Thanks. Thanks a lot for that.

Speaker Change: Good news is the vertical we're seeing a.

Speaker Change: Pretty benign market, whereas that had been run at pretty hard last year, obviously, so the slowdown in inflation.

Speaker Change: We feel it now in the house, hopefully, we'll feel that a little bit later and land it would be an opportunity for us for sure.

Speaker Change: Great Great. Thank you I appreciate all the color.

Joe Ahlersmeyers: And I appreciate your comments about the valuation. Sounds like you think that cash flow is potentially a bigger part of that, potentially even more than just a percentage of option lots or any metric on the land side. It's about cash flow. I tend to agree.

Thanks, Greg.

Speaker Change: I would now like to turn the call over to Jim zoom or for closing remarks.

Jim: I appreciate everybody's time. This morning, I will certainly be available over the rest of the day do you have any additional questions. Otherwise we look forward to speaking with you on our next earnings call.

Mike Dahl: And so, just wondering if you are internally starting to think about your leverage in the context of cash flow or profits and not so much about what it makes up relative to your inventory balance. It's kind of thinking almost more like a manufacturer or distributor because right now, you're in that depth at about 13 days of operating profits. It's just thinking about the potential for using more debt going forward. Yes, that's an interesting question. You know, I'm not sure we can think like a manufacturing company completely. The risk profiles are different.

Speaker Change: This concludes today's call you may now disconnect.

Speaker Change: Okay.

Speaker Change: [music].

Mike Dahl: But having said that, I think there... You know, based on the strength of the operation, based on the cash flow that we've consistently shown despite growth, which historically is not the way this industry has behaved. Yeah, we believe there is an opportunity for people to think a little bit differently about equity, um, in terms of how we manage the leverage on the balance sheet. A lot of that will have to do with our opportunities to invest in the business and what we do on the share repurchase. But, you know, even the rating agencies, they've been slow, but they've been responsive to kind of, I think, seeing the value in the business model and also So would we? Would you use more debt for something? Without question, if it were for the right thing.

Speaker Change: Okay.

[music].

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Yeah.

Speaker Change: [music].

Mike Dahl: That's helpful, Bob. Thanks so much. Our next question comes from a line by Michael Rehaut with J.P. Morgan. Please go ahead. Thanks. I wanted to circle back just on incentives and where we are today and, you know, to the extent that there's the potential for those to decline. How we should think about the impact on 24. So when you talk about, I think assuming in 2024, six and a half percent of a load rate for incentives, and I believe you said that was similar to the fourth quarter. You can just remind us where you were in the fourth quarter versus the third and earlier in the year. And to the extent that, you know, perhaps incentives ticked down a little bit in the first quarter of 24, should we be thinking that there'll be a three Q or a four Q impact? Just trying to get the sense there of the lag. Yeah, Mike. I'll take the first part of that, and then I'll have Bob do the last piece.

Speaker Change: Okay.

Speaker Change: [music].

Michael Jason Rehaut: So we're up 50 basis points from Q3. We were 6% in Q3, and 6.5% in Q4. You know, in terms of what that means for 2024, you know, I think I addressed it on a prior call; we're going to actively be managing our incentive load, but we've shared with you what our assumption is in kind of its current form. If there's an opportunity to peel those back, we'll do it. And we'll certainly share that with you.

Okay.

Ryan R. Marshall: In terms of the kind of the quarter that it would impact, right now, about 50%, somewhere around 50% of our sales are speculative, so those are closing in the kind of following quarter. You know, spec sales now would either be late Q1 closings or early Q2 closings. If it's a dirt sale, Q1 closings typically end up being Q3 or early Q4 closings. So, you know, we factored all of those assumptions into the margin guide that we gave for the year, which is, you know, 28 to 28 and a half. To repeat that. And then, Bob, I don't know if you have the incentive load for Q1, Q2. I think that was the only piece I didn't answer. It was about 6% in each of the first, second, and third quarters.

Mike Dahl: And it was 4.3% in the fourth quarter of last year. Great. No, that's helpful.

Michael Jason Rehaut: Thank you for that. You know, I guess secondly, I'd love to kind of shift a little bit to the SG&A side. I think you gave guidance for the first quarter, but you know, you've been running the last couple of years, plus or minus around 9%, low 9%. Obviously, we've heard a little bit about higher commission rates coming back maybe in a more choppy market at points in the past year or so, overall solid market, but still, we've heard a little bit about commissions maybe coming up a little bit. How should we think about, you know, SG&A and the potential for further leverage over the next couple of years against the, you know, the growth algorithm that you talked about, and if commissions, let's say, are stable from here, could we see an 8% at some point or getting closer to an 8% number? I would love your thoughts on that.

Ryan R. Marshall: Yeah, Mike, we've, you know, I think we've always been thoughtful in how we spend SG&A dollars. We have historically made some extra investments in the quality of the homes that we build and the customer experience that we provide for our homeowners. And we invest incremental dollars in the culture of our, you know, our workforce. So we've tried to maintain balance within the SG&A structure as well. We're not trying to run kind of the leanest and, you know, the lean end. We're also, you know, not trying to overspend. I think we're trying to be very balanced.

Ryan R. Marshall: In terms of the leverage for 2024, specifically, we've kind of given the guide, which was kind of in the low, you know, low nines. And that's really reflective of kind of what Bob guided to on the average sales price, which we're expecting to be flat. And against that, you've still got wage inflation for kind of our internal employees running close to, you know, three and a half, 4%. So, you know, there's some pressure on the SG&A front that we're not necessarily getting the benefit of on the ASP increase side.

Michael Jason Rehaut: So in terms of kind of where it goes into the future, time will tell. But, you know, we've given the best visibility that we can for 2024. Bob, I don't know if you have anything to add to this. You know, Bob keeps it honest. I'll tell you that we're not overspending anywhere, at least not under Bob's watch. Great, thank you. Our next question comes from the line of Sam Reed with Wells Fargo. Please go ahead.

Sam Reed: Hey, thanks so much, guys, for taking my question here. I wanted to drill down a little bit on the first-time buyer. You guys have given a lot of good color on pricing. It does sound like prices did move lower for this buyer group a bit again during the quarter. Maybe help us unpack the relative split, perhaps between higher incentives for this buyer group as you try to make these homes more affordable versus perhaps some of the other affordability levers that you might be pulling, like smaller floor plans, et cetera. Any color here would be appreciated.

Sam Reed: Yeah, I would tell you, you know, if you look, year over year, pricing at 422 to that buyer is down 6%. Year over year, it was down about 1% versus the trailing quarter, so the third quarter of this year. And I would tell you it is... big, etc.

Mike Dahl: And, you know, so we're not, we haven't, in the last three months or the last 12 months had a radical redesign of the product that we're offering to people. You know, communities, when they get entitlements, you have product approvals, you know, so to a degree, you can see people saying, "I want the smaller floor plan." I would tell you that's not the driver of the price change. It is the incentive load that we've introduced. So it's that, you know, 220 basis points, which for that buyer is about, call it $8,000; that's the price. No, that's helpful.

Sam Reed: And maybe one more on pricing here, just from a slightly different vantage point. You guys have given good color in the past on option and lot premiums and the impact on ASP. I want to say it's been around 100k or north of 100k across your entire mix throughout 2023. Curious as to where that trended in Q4 and maybe give us a sense as to your outlook for that piece of the price component into 2024. Yeah, in the fourth quarter, it was $105,000 per unit, so it's down about $4,000 versus the prior year.

Mike Dahl: And so I think that speaks to the sales team, and I give them a lot of credit. You know, where we've needed incentives were less around options and lot previews and more oriented towards finance. So we didn't see a big change there, which I think is a real positive. It also, you know, is interestingly for that move up in active adult buyers, and we've highlighted the relative strength of them in this quarter and the relative pricing. The first time was down about 6%.

Sam Reed: Our move-up pricing was actually flat quarter over quarter, and our active adult was actually up 3%. And I think it's reflective of the way we go to market, the way we sell the lots that we've got, the options that people put in houses, so our teams are still doing a really good job of providing value for that which people desire. Helpful color all around.

Ken Zener: I'll pass it on, guys. Thanks. Our next question comes from the line of Ken Zener with Seaport Research Partners. Please go ahead. Good morning, everybody.

Ken Zener: Again, I've got two very simple questions. First, on land banking. What percent of closings do you expect to be from finished lots once you reach your 70% option owned scenario? General access.

Ryan R. Marshall: That's an interesting question. You know, certainly, the land banking would be finished lots, but for the optionality that we have with individual sellers, many of those were self-developing, and so I don't, I don't, I don't know. Mike, do you have anything to add? Yeah, Mike, and this is a little bit of a guess, but roughly 20 to 25% of our total closings, once we get to 70-30, will be finished lots. You know, the rest will there'll be a lot of optionality in there. But to Bob's point, a lot of our options we take down as follows.

Ken Zener: You know, raw land chunks, and then we self-develop those, you know, still highly efficient; it's just a different form of, you know, an option structure. Right. I assume that's kind of reflecting your entry level exposure as well.

Ken Zener: Second question is, talk to us about options. Again, could you please update us on what percent of your ASP is coming from options? And then comment on the margin benefit you get from that, if you could, so we can discern, you know, your operating construction costs versus your strategy of bringing in these options. Sorry, I want to make sure I understand the 4,000 and the 105,000. How much of it is optional? No, I think... Oh, right. Right. You're a, you know, you're a total ASP.

Ken Zener: You have a certain option exposure, more at move up and adult, but could you talk to the margin impact of that as well? Thank you. Yeah, so of the $105,000 of option and lot premium, $80,000 is the option. $25,000, that's a lot of premium.

Mike Dahl: You know, I could say, for instance, lot premiums are pure margin. I'm not sure that that's fair, right, you know, pricing doesn't really work that way. But in terms of the option spend, typically, it's going to have a relatively rich margin mix, call it 50%. And so it'll, you know, it is accretive to the overall margin, and you know the way we try and go to market Ken and I don't know if this answers it better, we put a base price house that we think is kind of a market standard and what people can and should expect to pay for that What are you willing to pay for that lot?

Ken Zener: That's what generates the $25,000. And then, okay, now in the house. If we're offering optionality, and we don't do it for everyone, right? So for the Centex buyer, we may have curated packages or no choices at all, but for the folks that can do structural options, or Fit and Finish, that's what's driving that $80,000. Thank you very much. Our next question comes from a line by Alan Ratner with Zelman & Associates. Please go ahead. Hey guys, good morning. Thanks for all the details so far. Question on cycle times.

Alan Ratner: So congrats on the improvement there. Sounds like you expect to see further improvement in 24. Curious, you know, to get to the 100 day target from 130, where you're at right now, you guys are targeting 5% growth. We've heard some other builders maybe a little bit higher than that.

Ryan R. Marshall: Is there a level from a labor perspective where if builders try to push starts more significantly, you think cycle time... might stall a bit? So are there any constraints that you could foresee, or is the unleashing of kind of the normalization of the supply chain just kind of, dependent on whatever the start pace? Yeah, it's a fair question. You know, based on the total amount of production that's happening, I don't see the industry stressing the labor availability. I'm not suggesting there's a whole bunch of excess labor running around out there.

Ryan R. Marshall: But at least for the big builders, I think we've got great, you know, trade relationships, and, um, I think we'll continue to get. Not only schedule performance but the labor on our job sites. I think the pressure likely comes in dollars or more so than time.

Ryan R. Marshall: If we're running into labor pinches because of a volume increase, I think it's probably dollars more than time. A lot of the decreases that we'll take will be because we're getting things on a predictable schedule like we used to pre-COVID. That's working better, which allows us to take some dead days out of our schedule that we had built in for things to go wrong or for time when we were just literally waiting for materials to show up. It's a little bit of that, a little bit of we're just getting back to the cycle times that we had pre-COVID. We've trimmed down about 30 or so days in 2024, or in 2023 rather. We think we can get another 30 or so days by the end of 2024, and we'll be back largely in line with pre-COVID cycle time.

Ryan R. Marshall: Great, appreciate those added thoughts, Ryan. And then, in a similar vein, was curious if you could just give an update on the ICG, growth plans there, and kind of how that's been trending and what your current thinking is as far as National Market Expansion, if there is one. Yeah, Alan, it continues to go well. We have two plants today. You know, both are focused in the southeast part of the US.

Alan Ratner: Growth plans are, you know, still largely on target to have approximately eight factories. So we haven't announced anything new. You know, similar to our share buybacks, we'll probably report the news on that as opposed to giving, you know, forward-looking forecasts. And I guess if I could sneak one in on that, I mean, you know, it's hard for us to conceptualize what impact that has on your business. And obviously, it's concentrated in a handful of markets right now.

Ryan R. Marshall: But are there certain kinds of metrics that you can share with us, whether it's cycle times or costs, margin, etc., that, you know, you can kind of demonstrate on a case study basis, how that's contributing to your business right now? Yeah, Alan, so we haven't given a lot of guidance on that, just because it is concentrated in a couple of markets? And we don't, we don't feel it's appropriate to extrapolate the entire enterprise yet. As we get further down the path, we'll share more. Conceptually, it's exactly what you highlighted.

Ryan R. Marshall: We're getting cycle time improvements, we're getting better quality, and there are some raw material cost savings that we believe we're getting as well. Thanks a lot. Our next question comes from Susan Maklari of Goldman Sachs. Please go ahead. Thank you. Good morning, everyone, and thanks for fitting me in. My first question is just about the specs.

Susan Maklari: You know, you mentioned that you had about 44%, I think, of your production that's in spec. As you think about the year and the way that demand may come together, any thoughts on where that may move or how you're thinking about it longer term? Yeah, Susan, I wouldn't anticipate a massive change from the percentage. We're probably on the higher end of the range that we'll have in spec right now. Specific to the fourth quarter, we put more spec starts in the ground than we sold, and that was intentional.

Ryan R. Marshall: We wanted to have some additional inventory going into the spring selling season, which we have. So, as we move throughout the year, probably right in line with where we're at, we're a tad lower. Okay, that's helpful.

Susan Maklari: And then when we think generally about the potential for rates to come down this year and that possibly driving some increase on the existing home side of the market, any thoughts on what the implications of that could be, especially perhaps on the move up and the active adult parts of the businesses and any initiatives you have relative to that? Yeah, Susan, you know, with the rate cuts that are forecasted, I don't see them being at a level that's going to unleash a tidal wave of resale inventory. So, you know, is it better than where we're at today? Certainly. Will that start to free up some resale inventory? I think so. And I think that's probably helpful against the backdrop of us continuing to be undersupplied in the country. So, on balance, I don't think it will have much impact at all on what we're projecting for our business in 2024. Okay, thanks for the color and good luck.

Ryan R. Marshall: Our final question comes from the line of Rafe Jadrosich with Bank of America, where we've reached the time allotment for this morning's call. Please go ahead. Great, great. Thank you. Thanks for taking my questions.

Rafe Jason Jadrosich: Can you give an example of the additional 30 days of build cycle improvement you're expecting for 2024? Can you talk about what the build cycles are in homes that you're starting today? Like, are you already at that 100 day level? And is that improvement embedded in your cash flow guide? Yeah, Rafe, it's a fair question.

Ryan R. Marshall: Homes that we're starting today will deliver kind of late. You know, homes we're starting today will deliver in Q2, basically. So no, we're not at 100 days yet. Now that being said, there are some markets in some communities where we are. And in fact, we were at the 100 days last, um, when you blend it all together, you know we think it'll be uh q4 before we're at the 100 days that we've highlighted as our goal. And Rafe, our guide does factor in what we see in terms of cycle times during the year, the cash flow guide. Thank you, that's helpful.

Rafe Jason Jadrosich: And then you gave a really helpful color in terms of the land inflation you're expecting in your gross margin for 2024. And you have the land that you need through 2025. On the land that you're contracting today, what are you seeing in terms of inflation? Is it at a similar level?

Mike Dahl: Or are you actually seeing that come down? And then can you kind of help us understand the difference between development cost inflation relative to what you're seeing for raw land? Um, yeah, so...

Mike Dahl: Sorry, I forgot. You spoke about land inflation in the... Oh, I got it. I'm sorry.

Mike Dahl: Listen, it's interesting land prices don't come down very often, you know; they're sticky. And we've seen, and we've highlighted, you know, sort of sequential increases in lot costs. I would tell you that the land we're seeing today is consistent with that. Prices are pretty robust, and it's a pretty competitive landscape out there. We underwrite to return, and so we look to see, can we get a return on that?

Mike Dahl: So I think, you know, there's really no change, honestly, in the landmarks. In terms of the, you know, what we are seeing is that that labor constraint influences the development of land just like it influences the building of houses, um, and with general cost inflation that we were seeing last year, in particular, it was influencing the suspense of pipe. Everything that we do to do the development of communities was running pretty hot too. So again, we've highlighted that we think it's going to be a little bit more expensive in terms of our lot increase this year for 24. And again, I think that just reflects all the activity that was going on and some of the cost inflation that we saw in 23 feeding into our lots this year. The good news is, you know, the vertical we're seeing, you know, pretty benign in the market, whereas that had been running pretty hot last year, obviously. So the slowdown in inflation.

Mike Dahl: We feel it now in the house; hopefully, we'll feel that a little bit later on in the land. It would be an opportunity. Great. Thank you. Appreciate all the calls. Thanks for listening. I would now like to turn the call over to Jim Zeumer for closing remarks. I appreciate everybody's time this morning. We'll certainly be available over the rest of the day if you have any additional questions. Otherwise, we'll look forward to speaking to you on our next earnings call. This concludes today's call. You may now disconnect.