Q4 2024 PulteGroup Inc Earnings Call
Kelvin: Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pulte Group Fourth Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
Speaker Change: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star button followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Bob Shaughnessy. My apologies. Please go ahead.
Good morning, everyone, and welcome to today's call.
Bob Shaughnessy: We look forward to discussing our fourth quarter and full year financial results.
Speaker Change: With me today are Ryan Marshall, our President and CEO, and Jim Osowski, our incoming Executive Vice President and CFO.
Bob Shaughnessy: As always, a copy of our earnings release and this morning's presentation slides have been posted to our corporate website at pulteygroup.com
Bob Shaughnessy: We will also post an audio replay of this call later today. I would highlight that today's presentation includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides.
Bob Shaughnessy: These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.
Ryan Marshall: With that said, let me turn the call over to Ryan.
Ryan Marshall: Thanks, Bob, and good morning. We are pleased to speak with you today about how we are running the business and our outstanding fourth quarter and full year financial results.
Ryan Marshall: Before Bob gives you the detailed data relating to the fourth quarter, I thought it would be appropriate to summarize some of the company's many achievements in 2024.
Ryan Marshall: Pulte Group delivered 31,219 homes in 2024, which represents an increase of 9% over last year. We generated record home sale revenues of $17.3 billion.
Ryan Marshall: We once again reported industry-leading full-year gross margins of 28.9 percent.
Ryan Marshall: And we were able to do this in the face of increasing affordability challenges through the careful management of product offerings, pricing, incentives, and absorption paces as we sought to maintain high profitability while ensuring we continue to turn our assets.
Ryan Marshall: We continue to manage our overheads efficiently, as our reported SG&A amounted to 7.6% of our home sale revenues, including the insurance benefits we recorded in 2024.
Ryan Marshall: And we reported strong operating results from our financial services operations, which generated $210 million of pre-tax income compared to $133 million last year.
Ryan Marshall: As a result, our reported net operating margin was 21.3% for the year.
Ryan Marshall: No matter how you look at it, our performance this year was outstanding, as we have continued to navigate the turbulence in the markets over the last few years.
Ryan Marshall: Our performance is a product of the disciplined and consistent manner in which we are running the business, which has allowed us to quickly adjust key business practices to position Pulte Group for ongoing success.
Ryan Marshall: Our strong operating performance also allowed us to continue to manage our capital in a manner which leaves us with considerable financial strength.
Ryan Marshall: In the year, we generated $1.7 billion of cash flow from operations after investing $5.3 billion in new land.
Ryan Marshall: We continue to efficiently increase our land pipeline, putting approximately 43,000 new lots under control. Inclusive of these lots, we now control 235,000 lots, of which 56% are under option.
Ryan Marshall: In addition, we returned $1.7 billion to investors, including $1.2 billion through share repurchases, the payment of $168 million in dividends,
Ryan Marshall: and $310 million through the early retirement of senior notes. After all of that, we ended the year with $1.7 billion of cash and our gross debt-to-capital ratio was 11.8%.
Ryan Marshall: We are also very proud of the numerous awards recognizing our company's culture, including being named to Fortune's top 100 best companies to work for in 2024 for the fourth consecutive year.
Ryan Marshall: Looking to the future, it remains our view that the long-term outlook for new home construction is positive.
Ryan Marshall: Employment remains strong, and the interest in new homes remains at high levels.
Ryan Marshall: In addition, the structural shortage of housing due to underbuilding, ever-increasing land entitlement challenges, and ongoing labor availability challenges, together with our expectation for continuing lower resale transactions due to a higher-for-longer rate environment,
Ryan Marshall: leads us to believe that new home supply will continue to be absorbed without a significant increase in standing inventory.
Ryan Marshall: Given our constructive views on the outlook for long-term housing demand, we are planning to continue to invest in our operations to support growing our business over time.
Ryan Marshall: Within our operating model, we set our starts pace to align with the sales environment.
Ryan Marshall: rather than being based on a predetermined annual production volume. As a result, home buying demand will impact our closing volumes and resulting growth from year to year.
Ryan Marshall: While there can be resulting peaks and valleys in our deliveries, our focus remains on investing in our business to grow volume while maintaining high returns.
Ryan Marshall: Our expectation of continued financial success is reflected in this morning's announcement that our board approved a $1.5 billion increase to our share repurchase authorization.
Ryan Marshall: with many forecasting interest rates to fall, the economy to stay relatively healthy.
Ryan Marshall: and conditions in the job market to remain favorable, there are certainly reasons to be optimistic about housing demand in the coming years. Having said that, affordability challenges and the generally high cost of living are certainly impacting the American consumer.
Ryan Marshall: Specific to homebuyers, we believe the recent volatility in mortgage rates, including the current increase back above 7%, has contributed to the recent lower activity levels.
Ryan Marshall: Against this backdrop, we continue to carefully monitor our investment and production levels with a view towards generating high returns in our business.
Ryan Marshall: consistent with how we have been managing our business in recent years.
Ryan Marshall: We are managing our starts activity with a view towards driving our spec inventory to be more in line with our desired levels, including targeting our total spec inventory to be between 40 and 45 percent of our total units under production.
Ryan Marshall: Let me now turn the call over to Bob for a review of our fourth quarter results. Bob?
Bob Shaughnessy: Thanks, Ryan. Starting with our income statement, home sale revenues in the fourth quarter were $4.7 billion, compared with $4.2 billion in the prior year.
Bob Shaughnessy: The increase in home sale revenues for the period reflects a 6% increase in closings to 8,103 homes, along with a 6% increase in our average sales price to $581,000.
Bob Shaughnessy: Our mix of closings in the quarter were comprised of 40% first time, 40% move up, and 20% active adult.
Bob Shaughnessy: Consistent with our commentary over the last two quarters, the slight decline in the percentage of closings from active adult buyers.
Bob Shaughnessy: reflects the timing of recent active adult community closeouts, and we continue to expect a normalization of contribution from these consumers when replacement active adult communities begin opening for sales in the back half of 2025.
Bob Shaughnessy: In the fourth quarter of 2023, closings were 40% first-time, 36% move-up, and 24% active adult. I would note that the increase in our average selling price in the quarter, relative to our guide, is due primarily to the increase in the relative proportion of our closings from move-up customers.
Bob Shaughnessy: Our average community count for the fourth quarter was 960, which represents a 4% increase over last year's fourth quarter average of 919 communities and was in line with our prior guidance.
Bob Shaughnessy: Looking at order activity in the quarter, our net new orders decreased 1% to 6,167 homes.
Bob Shaughnessy: This decrease was primarily attributable to a 5% decrease in sales per store and a slight increase in our cancellation rate as a percentage of beginning backlog, partially offset by the 4% increase in our community count.
Bob Shaughnessy: Looking at demand conditions in the quarter, as we noted during our third quarter call, the market in October demonstrated a more typical seasonal demand pattern coming out of the third quarter.
Bob Shaughnessy: This continued through the quarter as consumers faced economic uncertainty related to potential economic changes being considered by the incoming administration and the recent increase in mortgage rates.
Bob Shaughnessy: We also noted then, given the macro issues consumers faced, that the spring selling season would offer the best assessment of fundamental housing demand.
Bob Shaughnessy: Fast forward to today and we continue to believe that market fundamentals, while still presenting affordability challenges to consumers, are supportive of housing and that the spring selling season will be the best barometer for how the consumer will behave in today's economic environment.
looking at our importer activity by buyer
Speaker Change: Fourth quarter net new orders decreased 14% for first-time buyers, increased 15% for move-up buyers, and decreased 1% for active adult buyers.
Bob Shaughnessy: We believe these activity levels reflect the continued interest of community members.
Bob Shaughnessy: consumers for new homes, but also show the impact of the affordability challenges consumers face, particularly for first-time buyers.
Bob Shaughnessy: As a result of our sales and closings activity, our quarter-end backlog was 10,153 homes, which is down 16% from last year. On a dollar basis, our backlog of $6.5 billion is down 11%.
Bob Shaughnessy: Inclusive of the 7,502 homes we started in the fourth quarter, we ended the year with 16,439 homes in production.
Bob Shaughnessy: 53% of our production is spec, including 1,862 finished specs, which, when combined with cycle times that are now largely in line with our historical norm, puts us in position to meet buyer demand through the year.
Bob Shaughnessy: With that said, in the event that the spring selling season trends towards lower absorption rates,
Bob Shaughnessy: We will reduce our pace of spec starts in communities with higher spec inventory levels so as to better match local selling conditions and help reduce standing inventory.
Bob Shaughnessy: As Ryan noted, our goal is to reduce our spec inventory back down to 40-45% of our total production by the end of the year.
Bob Shaughnessy: Based on our current production pipeline, we expect to deliver 31,000 closings in 2025, including between 6,400 and 6,800 closings in the first quarter.
Bob Shaughnessy: Looking at pricing, we currently expect the average sales price of closings to be in the range of $560,000 to $570,000 in each of the four quarters of the year.
Bob Shaughnessy: Our fourth quarter gross margin was 27.5%, which is down 130 basis points sequentially, but within the guide we gave at the end of the third quarter.
Bob Shaughnessy: Consistent with recent quarters, our fourth quarter margins reflect higher incentives, which increased 20 basis points sequentially from the third quarter to 7.2%.
Bob Shaughnessy: Based on our backlog and current sales conditions, we anticipate that gross margins in the first quarter will be approximately 27%.
Bob Shaughnessy: For the balance of the year, we currently expect gross margins to be in the range of 26.5% to 27% in each of the second, third, and fourth quarters.
Bob Shaughnessy: These estimates assume that incentives throughout 2025 will remain consistent with the incentives we recognized in the fourth quarter.
Bob Shaughnessy: I would also point out that our marches beyond the first quarter will ultimately be influenced by the demand conditions during the year, as we have a significant number of homes to sell and close over the balance of the year.
Thank you. Thank you. Thank you.
Bob Shaughnessy: Moving on to expenses, our reported fourth quarter SG&A expense was $196 million dollars or 4.2% of wholesale revenues, which compares with prior year reported SG&A expense of $308 million dollars or 7.4% of wholesale revenues.
Bob Shaughnessy: It should be noted that our reported results for the fourth quarters of 2024 and 2023 included $255 million and $65 million respectively of pre-tax insurance benefits.
Bob Shaughnessy: Based on anticipated closing volumes, we currently expect SG&A expense in 2025 to be approximately 9.5% of home sale revenues, including SG&A expense of approximately 10.5% of home sale revenues in the first quarter.
Bob Shaughnessy: In the fourth quarter, our financial services operations reported pre-tax income of $51 million, which is up from $44 million last year.
Bob Shaughnessy: The improvement in pre-tax income reflects the increase in our home building closings as well as the continuation of stable market conditions across our financial services platform.
Bob Shaughnessy: Our reported pre-tax income for the fourth quarter was $1.2 billion, compared with prior year pre-tax income of $947 million.
Bob Shaughnessy: In the period, the recorded tax expense of $269 million, or an effective tax rate of 22.8%.
Bob Shaughnessy: Our fourth quarter effective tax rate includes benefits related to energy efficiency credits and our purchase of renewable energy tax credits.
Bob Shaughnessy: Projecting ahead, we expect our tax rate in 2025 to be approximately 24.5%, excluding the impact of any discrete tax events, including energy efficiency credits or the purchase of incremental renewable energy tax credits.
Bob Shaughnessy: Looking at the bottom line, our reported fourth quarter results show an income of 913 million dollars or $4.43 per share.
Bob Shaughnessy: In the comparable prior year period, we reported a net income of $711 million, worth $3.28 per share.
Bob Shaughnessy: Reflective of our strong operating results, we generated cash flows from operations of $1.7 billion in 2004.
Bob Shaughnessy: Given our current expectations for operating and financial results in 2025, we expect to generate cash flows from operations of approximately $1.4 billion.
The Earth is a very beautiful and beautiful world.
Turning to our investment and capital allocation activities.
Bob Shaughnessy: We invested $1.5 billion in land acquisition and development in the fourth quarter, of which 53% was for development of our existing land assets.
Bob Shaughnessy: For the year, our land investment totaled $5.3 billion, of which 57% was for development.
Bob Shaughnessy: Even our constructive views on near and longer term housing dynamics, we currently plan to continue investing in land at a rate designed to allow us to grow over time.
Bob Shaughnessy: As a result, we expect to invest approximately $5.5 billion in 2025, and would expect that approximately 55% of that spend will be for development.
Bob Shaughnessy: Consistent with my comments about our willingness to slow starts, we would also evaluate our spend on new land assets if absorption is slow, as we seek to maintain a high level of return.
Bob Shaughnessy: Inclusive of our fourth quarter investments, we ended the year with 235,000 lots under control, which is an increase of 5% over the prior year.
Bob Shaughnessy: I would highlight that on a year-over-year basis, we lowered our own clock count by 2,000 lots while increasing our lots under option by 14,000 lots.
Bob Shaughnessy: As a result, our percentage of lots under option increased to 56%, up from 53% last year.
Bob Shaughnessy: I'm pleased to note that 69% of our new land approvals in the fourth quarter were under some form of option, as we work towards a 70% option mix in our portfolio.
Bob Shaughnessy: Based on the investments we have made and our anticipated community openings and closings in 2025, we expect our average community count in 2025 to be up 3-5% in each quarter as compared to the comparable prior year period.
Bob Shaughnessy: Looking at our capital allocation priorities, we continued returning capital to investors in the fourth quarter, which included the repurchase of 2.5 million common shares at a cost of $320 million, or $129.90 per share.
Ryan Marshall: As Ryan noted, our total return to investors in 2024 amounted to $1.7 billion, including the $1.2 billion of share repurchases.
Ryan Marshall: $168 million of dividends and $310 million through the early retirement of senior notes.
Thank you very much.
Ryan Marshall: Based on the actions taken, our debt-to-capital ratio at the end of the year was 11.8%, down 410 basis points from last year.
Ryan Marshall: Adjusting for the 1.7 billion dollars of cash on our balance sheet, our net debt-to-capital ratio is now below zero.
Ryan Marshall: I'd like to take a moment to provide an update on our expectations for leverage in the future.
Ryan Marshall: As you know, we have historically expressed that our target leverage level has been between 20 and 30 percent of capital on a gross basis.
Ryan Marshall: through the strength of our operations and the resulting utilization of our cash flows.
Ryan Marshall: over the last decade or so, we are well below that target range on a gross basis. And as I noted, we are actually now net debt free.
Ryan Marshall: Looking forward, we expect to continue to generate sufficient cash flows to support our capital needs.
Ryan Marshall: As a result, we are no longer targeting a specific leverage level.
Ryan Marshall: Instead, we will allocate our capital in line with our historical practice.
Ryan Marshall: which will continue to prioritize investment in the business and the payment of our dividend with XX capital being used to repurchase our stock and or retire our debt.
Ryan Marshall: Our resulting leveraged position will therefore be an outcome that is dependent on the decision we make, rather than targeted to a predetermined level.
Ryan Marshall: With that said, we would expect to see our leverage remain flat or decline in the future.
unless there's a transaction where leverage augments our opportunity.
Ryan Marshall: Specific to 2025, I would also highlight that our board recently approved a 10% increase in our dividend per share starting in the first quarter of 2025. And as Ryan noted, we also announced a $1.5 billion increase to our share repurchase authorization this morning.
Ryan Marshall: Now let me turn the call back to Ryan for some final comments.
Ryan Marshall: Thanks, Bob. At the end of last year, I spoke about our successful navigation of the many challenges we've faced in recent years. 2024 was no different, as we have dealt with continuing interest rate variability and affordability challenges, significant weather events, and ongoing geopolitical issues.
Ryan Marshall: I remain extremely proud of how our entire team has responded to these events and the exceptional Operating and Financial Results Multigroup has delivered over time.
Ryan Marshall: I believe that our strategy to focus on disciplined land investment, while maintaining operational and organizational expertise, has proven out as we have capitalized on market conditions and have grown earnings per share at a compound annual growth rate of 30%.
Ryan Marshall: while delivering an average annual return on equity of 27.8% over the last five years. Of course, those achievements reflect what we have done as opposed to what we will do.
Ryan Marshall: and our future share price performance will depend on what we are able to achieve in the future. To that end, I think it's important to share that we will continue to operate the business in a fashion that seeks to realize strong returns through cycle.
Ryan Marshall: For the long term, we have invested in high quality land positions that we believe will allow the company to grow over time.
Ryan Marshall: Importantly, the optionality we have achieved in our controlled lot position gives us the flexibility to pivot if the market faces unexpected headwinds. Similarly, in the near term we have positioned our inventory production to be sufficient to meet projected demand.
Ryan Marshall: It is important to remember that we are seeking to keep all of our communities productive and have made sure that we have the inventory and Plan Start activity in place to meet that end.
Ryan Marshall: However, as discussed earlier, we have higher spec inventory than we've traditionally carried.
Ryan Marshall: I know stocks reflect performance, so we are seeking to grow our business and deliver ROE that remains among the industry leaders while generating positive cash flow and maintaining a low-risk profile, which we believe will drive the best returns for our shareholders.
Ryan Marshall: With all that said, I'd like to take a moment to acknowledge the change that we announced back in July. As you know, Bob notified us of his retirement as our CFO, which will be effective after we file our 10k next week.
Ryan Marshall: As part of our succession plan, Bob will transition to a new role for the balance of the year, in part to ensure a smooth transition of the CFO role, but during which time he will also oversee our growth and strategic partnerships platform, including our land banking efforts, our asset management committee, and our financial services operations.
Ryan Marshall: I'd like to thank Bob for his 14 years of service and look forward to working with him over the coming year.
Ryan Marshall: I would also like to more formally introduce Jim Ossowski, who will be taking over as our CFO.
Speaker Change: Jim is a 22-year veteran of Pulte, having come to us after working for a national accounting firm at the start of his career.
Ryan Marshall: Jim has served in many capacities for us, including a number of field and corporate leadership positions. In fact, in his current role, he has been involved in all of our significant strategy and operating initiatives over the last 13 years.
Ryan Marshall: Throughout his career, he has demonstrated a strong understanding of the home building business and has developed deep relationships with our board, our senior leadership team, and our field operating teams. He has also exhibited a great ability to work with our service providers.
Ryan Marshall: Based on the depth and breadth of his experiences and relationships, I am eminently confident in Jim's ability to seamlessly step into the CFO role.
Ryan Marshall: And finally, before I close, I would like to take a moment to express my continuing gratitude and thanks to each of our employees for their tireless efforts.
Ryan Marshall: in supporting the delivering of superior homes and experiences to our homebuyers while providing outstanding financial returns to our investors.
Ryan Marshall: We are now prepared to open the call for questions. In order that we can get to as many questions as possible during the remaining time of this call, we would ask that you limit yourself to one question and one follow-up. Thank you, and I now ask the operator to again explain the process and to open the call for questions.
Ryan Marshall: Ladies and gentlemen, we will now begin the question and answer session. As we move into the question and answer session, please limit your input to one question and one follow-up to ensure we have time for everyone. At this time, I would like to remind everyone, to ask a question, press star then the number 1 on your telephone keypad.
Ryan Marshall: We will pause just for a moment to compile the Q&A roster. One moment for your first question, please.
Ryan Marshall: The first question comes from the line of John LaValle of UBS. Please go ahead.
Speaker Change: Good morning, guys. Thanks for taking my questions. And Bob, best of luck to you. The first question is, maybe just help us.
Speaker Change: with the sequential walk from the fourth quarter into the first quarter and then through the remainder of the year for gross margin. I think you're talking about 27 percent in the first quarter and then 26.5 to 27 in 2Q to 4Q. I mean, how would you sort of bucket the headwinds in terms of, you know, maybe working down some of that spec inventory, you know, higher incentives, product mix, and then stick and bricks and land cost inflation?
Speaker Change: The, you know, the walk from October through December matched what we would consider to be a more seasonal pattern as you progress through the fourth quarter, October being the best, November a little less, and December the lowest total month.
As we turn the corner into 2025.
Speaker Change: We saw the continuation of what we would expect to be a normal seasonal selling pattern, including as we move toward the really important spring selling season.
We're starting to see some green shoots.
Speaker Change: There's been some positive order activity. We know that it's still early in that kind of spring selling season. And we typically look to first part of February Super Bowl timing to be the official start, but we're encouraged and optimistic by what we're seeing.
Speaker Change: In terms of the margin guide, we think we've done a really nice job in a tough environment balancing the pace, price, mix, and continue and deliver.
what are industry-leading gross margins?
We noted that 27% will be our Q1.
Speaker Change: Margin Guide with, you know, the range of 26.5 to 27 for the balance of the year.
Speaker Change: We believe, based on what we know now, today, we've factored in...
Speaker Change: not only what's in our backlog, but also what we would expect to sell the standing inventory for inclusive of anticipated discounts, which, you know, the big assumption that we've made, John, is that those incentives are going to remain consistent with what we've experienced in the fourth quarter.
Speaker Change: If things turn out differently than that, then we'd certainly have to have a different conversation, but we feel pretty confident about where we sit now that we've positioned ourselves well to continue to have success in Q1 and beyond.
Speaker Change: okay that's helpful and then you know you're talking about one thing sure you know in terms of the structural kind of 20
six-and-a-half to twenty seven percent
Speaker Change: It does include a flat incentive from the exit from Q4.
Speaker Change: Just for your perspective, it's assuming relatively flat pricing. You can hear that in the guide we gave on ASPs. But I would note that land costs are up about 10% year-over-year. So that's the primary driver of our cost increase.
Jesus.
Speaker Change: Understood, that's helpful, thank you. And then you guys mentioned sort of normal seasonality, and then you talked about some green shoots. I mean, when we think about the first quarter absorption, I think historically it's been, you know, like 40% positive sequentially into the first quarter. I mean, is that a reasonable guide as we look into the spring selling season here?
Speaker Change: Yeah, John, we haven't given a guide, so I think we'll, you know, we'll leave the comments kind of as we've made them to this point, but we're encouraged by what we're saying.
All right. Thank you, guys. Good luck.
Speaker Change: Your next question comes from the line of Carl Reichardt of BTIG. Please go ahead.
Carl Reichardt: Thanks. Hey guys, congratulations Bob and welcome Jim. Bob sounds like you're going to be busier in retirement than you were even as a CFO based on all the stuff you're going to be doing.
Carl Reichardt: I'm not sure how that happened to me, Carl. Yeah, fair enough. You talked about incentives, I think, 720 BIPs this quarter, up a bit. Can you talk about the difference between move-up active adult versus the first-time buyer? Is the spread between the incentives you're using on both really wide, or is it relatively narrow?
Yeah, Carl, it's interesting. The
Carl Reichardt: We haven't provided that level of granularity, but I'll offer, you know, clearly the first-time buyer who is focused on monthly payment more than, say, move up an active adult.
Carl Reichardt: gets a richer look, and so especially if it's a government-type loan, you know, we've got programs that are for conventional and gubbies.
Carl Reichardt: So those are typically going to be a little bit more expensive. When you get to that move up buyer, you know, there might be other incentives that get mixed in with it.
Carl Reichardt: You know, we're trying to again meet their desires as well as their financial needs And then when you get to the active adult buyer, you know, a lot of them are taking small or no mortgage at all
Carl Reichardt: so the incentive package looks a little different there and and that's not inconsistent with history right I mean that's that's always been the case so I don't know if that helps but just a little more color
Speaker Change: Okay. Thank you, Bob. I appreciate that. And then, Bob, in your remarks about leverage, you used a word I hadn't heard in a while, which was transaction.
Carl Reichardt: And I haven't asked this in a while, but Ryan, we've talked in the past about your potential interest in M&A or lack thereof. There's been a lot of movement there on the public-to-private side. I'm curious as to whether or not that becomes potentially a more interesting opportunity for you, given the value of the stock on a relative basis, but really also the desire to want to grow the business long-term, especially via the new vehicles you'll be using.
Speaker Change: off balance sheet as you go forward. So love your comments on that and thank you.
Ryan Marshall: Yeah, Carl, it's a great question. I would summarize it by saying our view is really unchanged. We've always been open to kind of M&A activity with
Ryan Marshall: You know the strong kind of caveat we prefer to grow the business organically, but we look at a lot of things
Ryan Marshall: I was looking at a tally sheet that we used. I think we evaluated something north of 20 plus potential
Ryan Marshall: acquisition opportunities last last year, most of them pretty small, and you'll note that we didn't do any of them. So we look at a lot of things, but we're really, really selective, really judicious. We've got a great operating platform, we've got really good relative market share in most of our markets.
Ryan Marshall: So, you know, we remain open and we'll evaluate a lot of things, but we're going to be, you know, super thoughtful because
Ryan Marshall: of how disciplined we've been in underwriting our own land, which has been the primary driver of our outperformance on ROE. And we want to, you know, we want to stay, we want to, you know, stay disciplined with that.
I appreciate it, Ryan. Thanks a bunch, fellas.
The
Speaker Change: Your next question comes from the line of Stephen Kim of Evercore ISI. Please go ahead.
Speaker Change: If we look at your guidance that you've given, I'm curious whether that trajectory over the year assumes any benefit at all from having more active adult communities by the end of the year, or is that margin benefit likely to be only seen in fiscal 26?
Speaker Change: and can you give us a sense for what you think the sort of the long-term sustainable growth or operating margin you feel comfortable with this?
Speaker Change: Stephen, thanks for the question. As it relates to gross margin on active adults specifically, the replacement communities will start to come online
Speaker Change: Toward the middle part of this year, middle to end part of this year from a grand opening and starting sales, which means the majority of the margin benefit won't be felt until we get into 2026.
And then we haven't given...
Senate Debt Long-Term
kind of outlook, long-term view, in terms of where margins...
Speaker Change: can go. There's, you know, just I think too many factors to influence that.
Speaker Change: We have given, you know, a full year guide and for this year, which, you know, we feel good about given kind of the assumptions that I think we've articulated, but we haven't, we haven't really gone much beyond that in terms of guide.
Okay, great.
Speaker Change: Appreciate that. It does feel that, you know, you've sort of maybe some contrary to some competitors have sort of said that you're going to not be beholden to a particular volume level, you're going to, you're going to modulate that with demand. And so I would think that that you would have a little bit more margin stability than your than your competitors may
which is why I asked the question.
Speaker Change: Second question actually I'm going to shift gears and talk a little bit about the the labor side of the equation. You know obviously one of I think the additional big wild cards this spring is going to be whether or not we see any accelerate
Speaker Change: particularly active ICE, you know, enforcements in the construction industry. And I'm curious if how or if you are preparing your divisions for any potential
Speaker Change: or maybe more likely, just potential slowdowns. We've seen supply shocks before. We saw them during the pandemic. And I think what a lot of investors think is that in a supply shock and inflation environment,
Spec building offers a lot of advantages.
Speaker Change: Because you're not locking in the home price early, you know, and then bearing that cost and margin risk that could come later So I'm curious you've said that you're going to reduce your spec activity But would you agree in general that in a period of supply shocks?
Speaker Change: that actually spec building can afford some some advantages and you be would you be willing to pivot in some way if you were to see slowdowns brought on by increased ice activity.
Speaker Change: Yes, Stephen, it's a good question. Maybe let me first start with it's been a long-standing policy of our company that all of our
Speaker Change: trade partners and the labor that are on our job sites. We require verified residency status and our work permits that allow them to work legally in the U.S.
Speaker Change: That's been our position for a long time. It'll continue to be our position.
Speaker Change: You know, in terms of kind of impacts to the broader labor force, even beyond
just construction labor, the extent that there are deportation activities.
Speaker Change: There's no question there'll be less labor available, and that will have an impact on all wage rates, and we'll certainly have to...
Speaker Change: deal with that as that becomes more clear. Your final question on spec and you know, is spec inventory more beneficial in a
Speaker Change: in a supply shock environment? Yeah, I think it can be.
Speaker Change: and we certainly saw that in the kind of post-COVID era.
Speaker Change: What you've seen from our company is that we are capable
Running a mostly built-to-order business. We're also capable of running
Speaker Change: a kind of medium, kind of low-medium to medium-spec business as well, which is where I think we're operating today.
Speaker Change: We've set that number of 40 to 45 percent as what we think is optimal for our consumer and our brand mix That allows us to get the benefits of both the built-to-order
Speaker Change: margins from the move up in the active adult buyers that are personalizing their homes, but still gives us enough spec inventory in the first time.
Speaker Change: to use the powerful forward commitment incentives and also to protect some of the margin if there are supply shock.
Speaker Change: supply chain shock type situation. So if we're at 53 today, we're gonna work it down into the historical range. If we needed to turn it up a little bit more, I think we've clearly got the ability to do that.
Gotcha. Great. Thanks a lot, guys.
Thank you.
Speaker Change: Your next question comes from the line of Alan Ratner of Zellman. Please go ahead.
Go to Beadaholique.com for all of your beading supply needs!
Speaker Change: Hey guys, good morning. Thanks for all the great posts so far, and congrats to Bob and Jim as well.
Speaker Change: Ryan, I guess first question on the closing guide for Roughly Flat Closings. And you guys have done such a great job of balancing pace and price over the years. So, you know, I understand the interplay there and kind of the
Speaker Change: perhaps more competitive discounting environment today than maybe we thought we would be in three or six months ago, but
Carl Reichardt: I think, you know, you gave kind of a longer-term guide of 5 to 10 percent growth. And I'm just curious, as you look at where your margins are today, how much margin do you feel like you would need to give up in order to achieve that 5 to 10 percent growth that it seems like a lot of the industry is targeting kind of entering 2025?
Speaker Change: Yeah, Alan, thanks for the question and we still think the long-term growth guide of five to ten percent is appropriate and we really look at it first and foremost from the way that we're investing in land and new communities. You'll note that we grew community count in twenty four by four percent and we grew our volume deliveries by nine percent.
Speaker Change: As we move into 25, we're projecting for community count to still be in that 3 to 4 percent.
range, but we've seen
Speaker Change: a bit of a pullback on community absorptions given the discounting environment. So we're projecting for, you know, we're projecting for flat volume growth.
Certainly in 24, we got the benefit of moving
Speaker Change: Some homes, you know, more homes out of the backlog as we reduce cycle time.
Speaker Change: But, you know, I think we were definitely positioning the company from a land investment standpoint to deliver that long term kind of multi year growth target.
Speaker Change: We do believe, you know, as I highlighted in some of my prepared remarks that
From a overall return on on invested capital basis
yields the best outcome on return.
you know, in this current environment.
Speaker Change: the amount of incremental discount that we'd have to apply in order to drive more valve volume, we don't believe that's a favorable return outcome. And so we'll continue to, you know, pressure test those assumptions. What we've laid out for 2025 is, you know, what we think yields the, you know, the best outcome for how we position the business.
Speaker Change: And we're going to have a hard time sustaining those types of margins in Florida. So kind of a big picture question on the state, but what are your current thoughts on Florida and where do you see that business going for you guys going forward?
Thank you.
Speaker Change: Yeah, Alan, you know, thanks for the question. Florida has been a just
tremendous market for the for the company were
you know, really the driver of the outperformance in Florida.
Speaker Change: You know, margin and the margin that we generate out of Florida is certainly important, but once again, like you've heard from us a lot, return is the focus. So, whether it's an investment in Florida or an investment in Cleveland, Ohio,
we're looking at revert return on invested capital ultimately.
Speaker Change: We've got an insurance agency that has been very effective at continuing to be able to provide coverage.
Speaker Change: to our homeowners in Florida. I'd also note, and your point about storms, concerns around storms, it's certainly valid.
Speaker Change: But I note that where our communities are located, the way they're built and designed, they're higher, they're further inland, they're less susceptible to some of the kind of tragic, catastrophic things that you see of homes and communities that are right on the water.
Speaker Change: So, Florida's, you know, there's a lot of sun there, there's a lot of jobs there.
Speaker Change: There's zero state income tax, so there's no snow for the northern folks, so there's still a lot of attractive things about Florida, despite maybe having a few recent challenges.
Speaker Change: We'll keep our head up and pay attention to what's happening in Florida. For the time being, though, we're still very encouraged by what the business can do there.
Thanks very much.
Speaker Change: Your next question comes from the line of Mike Dahl of RBC. Please go ahead.
Speaker Change: Hi, this is Chris Hunt for Mike. Just going back to the 26.5%, 27% gross margin range for this year. Is that where you guys are currently underwriting land to on a gross margin basis? Or should we still expect some downward pressure as newer land bids just come through?
Speaker Change: Yeah, Chris, we don't underwrite the margin, we underwrite the return, so the margin guide that we've given is for the closing business in 2025.
Speaker Change: Fair enough. I guess, so what are you guys seeing this year in terms of, or what are you expecting this year for low-cost inflation and stick and brick inflation?
Speaker Change: On the sticks and bricks, you know, as we exited at 24, we heard about $82 a square foot, so really minimal.
Speaker Change: very low single-digit increases. You know, that's absent any potential impacts from tariffs that are being discussed, but again, expect very low single-digit increases on the house side. And then land, Jim? And on the land side, as Bob stated earlier, we're expecting a 10% increase in land costs this year.
Speaker Change: And that's inclusive of raw land and developed cost, you know, developed lot cost overall inclusive of land ed development would be close to 10%.
Understood. Appreciate the call.
Speaker Change: Your next question comes from the line of Michael Reholt of J.P. Morgan. Please go ahead.
Thank you for joining us.
Michael Reholt: Thanks, good morning everyone and Bob, best of luck, great working with you and Jim, congrats on the promotion.
Michael Reholt: First, I'd love to just review, if possible, just a little bit more of around the regions, how you feel trends have.
Michael Reholt: And obviously, there's a lot of concern, as talked about earlier, with inventory levels in Florida, as well as Texas. But just look to get, you know, around your footprint, you know, which markets maybe you would...
Michael Reholt: characterized as better than average versus worse than average and how things have trended so far in this year.
Michael Reholt: , , , , , , , , , , , , , ,
Michael Reholt: Yeah, Mike, thanks for the question. I'd start by giving some well-deserved acknowledgment to our Midwest and Northeast business.
about as expected and kind of flat year over year.
Michael Reholt: We did have a slight decline in our taxes orders on a year-over-year comparison basis.
Michael Reholt: And that's really reflective of what we highlighted with our first-time buyer business.
being down in the quarter, mostly driven by affordability concerns.
Michael Reholt: And we've got a lot of our business in Texas is oriented against that first-time buyer business.
Michael Reholt: And then Florida, you know, I think is the other one that folks are focused on. There's a lot of questions.
Our sign-ups on a year-over-year basis in Florida were flat.
Michael Reholt: So, you know, we're, and we're, you know, as I talked about when we asked, when I think John asked about Q4 to Q1,
Michael Reholt: you know Texas and Florida included in this you know we're seeing some green shoots and some positive energy from from the sales floor so you know we'll continue to look toward the you know the spring selling season
Speaker Change: Great, great. Thanks for that. And, you know, second question, you know, I just wanted to circle back to some of
Speaker Change: Bob's comments earlier on leverage and you know kind of I guess moving off of that prior
Speaker Change: gross leverage target of 20 to 30 percent and it sounds like kind of implying a more persistent even lower level level of leverage compared to that.
Speaker Change: But just to push a little bit on, you know, how we should think about share repurchase, I mean certainly
you know, even with, you know, the current trends.
Speaker Change: you know, looks like your leverage is only going to go further south. And just trying to understand, you know, why shouldn't we as investors or, you know, sell side buy side expect
Speaker Change: some level of a solid step up in share repurchase in 2025 that
Speaker Change: You know even with a solid step up you'd still probably have by our estimates
Speaker Change: even more conservative leverage in 25 versus 24. Is there anything that we're missing? Obviously, I know you like to have some optionality for transactions or other things, but a lot of optioning is only going up.
Speaker Change: You know, it looks like your balance sheet, even with leverage getting more conservative, could still support a solid step up in share repurchase in 2025. So just trying to understand if we're missing anything or if that's kind of directionally the way we should be thinking about it.
Mike, it's a fair question, and I think we've demonstrated
Speaker Change: You know over the last gosh almost 15 years That we're going to be pretty disciplined about this and see consistency So we haven't just haven't seen this take a lot of big swings
Speaker Change: on equity. Really, the only time we did was back in 2016 and 17, where we bought a lot of stock in a relatively short period of time. But, you know, you go back over the last five years and
Yeah, what we've been doing is
using the cash that we're generating in the business
Speaker Change: to buy back stock or pay down debt, and so, you know, we don't have any maturities in the next 12 months, so I think, you know, unless we went out and did a tender, which we've done in the past, but unless we did that, I wouldn't expect leverage to move from here. You know, the rate environment tells us how to think about that and the way our bonds trade, obviously.
Speaker Change: So when we do, you know, if we're buying back debt, it's because it's NPV accretive, right? We want to invest wisely.
Speaker Change: You know, could the company withstand more leverage? Absolutely. You know, we were never uncomfortable with 20 to 30 percent. It's just that the decisions we were making were leading us to a lower number, and we wanted to reflect that. We got asked a bunch of times.
Speaker Change: Hey, when are you going to borrow to get inside that 20% to 30%? And our answer was always like, if we have a reason to, we will, and we'll tell you about it. So.
Speaker Change: We've historically not wanted to guide on share repurchase activities. We've told you, we'll think about that. And we haven't yet come to the point of doing that. Maybe Jim will, you know? But at the end of the day, again, I think our track record.
is pretty consistent and is
Speaker Change: demonstrating a desire to do more. We just announced a $1.5 billion authorization increase. So, we'll report the news, but.
Speaker Change: Again, a fair question, I don't know that we've got a
Complete answer for you, but...
There you have it.
Great. Thanks a lot. I appreciate it.
Speaker Change: Your next question comes from the line of Trevor Allenton of Wolf Research. Please go ahead.
Hi, good morning. Thank you for taking my questions.
Speaker Change: First question just back on the finished inventory level. I think if I heard you correctly, your finished spec number implies about 1.9 finished specs per community, clearly above your historical 1% or 1 target, but then you've also
moved your model to be more towards spec.
Speaker Change: You're talking about moving spec production lower going forward, but I think I also heard you suggest maybe it also depends on how demand plays out in the spring selling season. So I guess the question is, have you already started to pull back on your specs?
Speaker Change: Are you waiting to see how demand shakes out in the spring selling season? And then maybe just some commentary on how you view completed inventory levels in the markets you plan for industry as a whole.
Speaker Change: Yeah Trevor so yes we've already pulled back on start rate we started doing that in the fourth quarter and you know we'll continue to monitor that as we move through
Speaker Change: the first quarter of this year, you know, the rate of the rate at which we start homes will, you know, appropriately match to the sales environment. In addition to that, and you know, part of the reason we're so comfortable with the inventory level that we have, despite being a little higher than we normally run at,
Speaker Change: We're optimistic about what the spring selling season can provide. We wanted to have some incremental inventory, which we put into the ground.
Speaker Change: Given the softness of Q4, we probably have a little bit more than we thought we would, but other than making some modest changes, I don't think that we have an emergency-type issue. In terms of...
kind of inventory in the markets where we compete.
Speaker Change: Certainly, inventory has increased in most regions, both on the new home and the resale level. But even though there's been an increase, we still think that their bulk numbers are below, except for a couple of specific markets.
Speaker Change: Most of the inventory is still way below what would be considered normal. You know, we talked a lot about in the prepared script. We still think demand for housing is at you know high levels and we've got a healthy economy with
Speaker Change: you know, a good job market and you know, affordability is probably the one headwinds that's out there, but I continue to think that the economy will figure out ways to solve for that.
Speaker Change: Yeah, it makes a lot of sense. Definitely encouraging regarding the spring. And then second question is just on cycle times. How did those trends sequentially, you previously talked about getting under 100 days here early in 2025, is that the expectation still? And then do you expect to see further improvement beyond that point in 2025? Thanks.
Speaker Change: So in the fourth quarter we were at 111 working days. I tell you that most of our divisions are down to their pre-COVID cycle time levels so as we exit the year we think we've gotten down to our goal and still would expect to be it down to a hundred in the first half of 25.
Speaker Change: you know, take well in excess of a year to complete, so...
Speaker Change: but as you know Jim highlighted our markets that are kind of pure play single-family
Speaker Change: And, you know, townhome-type builds were below 100 days, and we think our construction and procurement teams have done an unbelievable job getting back to that pre-COVID cycle time level.
Thank you. Thank you. Thank you.
Speaker Change: Thank you for all the color and good luck moving forward.
Speaker Change: Your next question comes from the line of Matthew Whealy of Barclays. Please go ahead.
Matthew Whealy: Morning, everyone. Thank you for taking the questions. I guess just a couple around the margin, you mentioned, you know, kind of finding the finding the right price to move that spec inventory if needed. So I guess just how does that balance with the assumption that you're assuming?
Matthew Whealy: incentives would stay unchanged from Q4? Like to the extent that, you know, finished inventory has been rising, would that signal that, you know, we have not found an equilibrium, so the incentives would need to move higher to move those homes?
Matthew Whealy: or is your view, you know, perhaps based on history that, you know, normal rising seasonality of housing demand into the spring, that that would be enough that you wouldn't have to alter incentives. So just kind of any color on how you're approaching that.
Matthew Whealy: Yeah, you know, Matt, it was a fairly, you know, it's a tough sales environment in Q3, back after Q3 and into Q4. And you can see the heavier incentive load. So I think the short answer is
Matthew Whealy: We believe that the incentive load that we had in Q4 as an exit rate is sufficient to deliver the volume and the margin guide that we have in Q1.
Matthew Whealy: combined with healthy economy, combined with spring selling season, you know, when we factor all of those things in, you know, we we feel good about the guide that we've given. So I'm not sure that I can...
Speaker Change: probably add any more color. Bob or Jim, I don't know if you guys have anything else you'd add to that question.
don't go.
Speaker Change: Okay, thanks for that Ryan and then The the second margin question is just I guess to have you know flat or nearly flat gross margins going forward
Speaker Change: on a year-over-year basis and construction costs, I think I heard you say, up low single digits. And I guess you're guiding to delivered ASP up around 3% in 2025. I'm not sure how much mix plays into that. But again, just given those moving pieces and you do have higher lot and construction costs, I mean, what is it that would allow you to hold the margins flat sequentially beyond that first quarter?
Speaker Change: So Matt, it's basically all of those pieces. You just mentioned we've got about a three percent increase in ASP. That's enough to offset what we're anticipating in lot and house cost increases.
Most of
All right. Got it. Thanks, guys. Good luck.
Speaker Change: Your next question comes from the line of Rafe Jedrosich of Bank of America. Please go ahead.
Rafe Jedrosich: Hi, good morning. Thanks for taking my question. Just starting first on the incentives, can you talk about from a regional perspective, were there meaningful differences with the incentive level?
Speaker Change: Yeah, Rafe, we don't give that level of granularity. You know, I think, you know, Bob talked a little bit about it on a question that Carl asked earlier by Consumer Group. You know, the incentives and the types of incentives vary between entry-level, move-up, and first-time, but we typically don't give a breakdown of incentives by region.
Speaker Change: Okay and then just on the land cost inflation comments of burning up 10% right now, can you just talk about how you would expect that to trend?
sort of through 25 or maybe even to 26, like
Speaker Change: The land that you're contracting today, are you seeing any relief on land prices or even like the horizontal development side? And then just within that, can you remind us how much of your own development you're doing right now and how you expect that to change going forward?
Speaker Change: Yeah, so I'll take the last part first. We do the majority of our own development, probably something north of 85%. We directly manage, so the rest of it we buy as finished lots.
Speaker Change: That's an expertise that we have and certainly something that we think adds value to the overall.
equation of our offering.
In terms of land,
Speaker Change: Ray, we're literally buying land every day. We're not buying it in big chunks. So, you know, I think over the last, you know, 12 months, you've probably seen a little more stability in raw land prices, but it varies market to market.
Speaker Change: the Heavy Machinery Operators and some of those things and then
you know you've got all the things like asphalt pipe
Speaker Change: kind of dirt import, there's a lot of moving parts and pieces in there. But I think the easiest way to look at it is just with the guide we've given that on a year over year basis, we expect to have about 10% inflation. Most of that, you know, I think is coming from
Speaker Change: the prices, the raw land prices that were contracted in years prior when we were in a higher inflationary environment.
Thank you.
Speaker Change: Ladies and gentlemen, that concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
The
Music Music Music Music Music Music