Yahoo Finance PulteGroup, Inc. (NYSE:PHM) Q1 2024 Earnings Call Transcript
PulteGroup, Inc. (NYSE:PHM) Q1 2024 Earnings Call Transcript April 23, 2024
PulteGroup, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Jeannie and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup Inc. Q1 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star, one again. Thank you. I would now like to turn the conference over to Jim Zeumer. You may begin.
James Zeumer: Great, thanks Jeannie. Good morning. Let me welcome everyone to today’s call. We look forward to discussing PulteGroup’s outstanding Q1 operating and financial results for the period ended March 31, 2024. I’m joined on the call today by Ryan Marshall, President and CEO; Bob O’Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior VP, Finance. A copy of our earnings release and this morning’s presentation slides has been posted to our corporate website at pultegroup.com. We’ll post an audio replay of this call later today. We want to alert everyone 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 made 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. 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. Ryan?
Ryan Marshall: Thanks Jim, and good morning. As you read in this morning’s press release, PulteGroup reported record first quarter results across many of our key financial metrics. From top line revenues of $3.8 billion and gross margins of 29.6% to bottom line earnings of $3.10 per share, it was an exceptional quarter. These strong first quarter results helped to drive a return on equity of 27.3% for the trailing 12-month period. Our strong first quarter results reflect long-term strategic planning and a disciplined capital allocation process that have underpinned PulteGroup’s success for more than a decade. I would suggest that another driver of our record Q1 results are decisions we made in the fourth quarter of last year, decisions that I think are emblematic of the balanced approach we take to running our business and to delivering high returns.
On our last earnings call, we talked about decisions we made in the fourth quarter of last year to not lower our prices in a chase for volume. As you will recall, demand in the fourth quarter of 2023 had started slowly but improved as interest rates began to moderate. As we made the decision to push incentives aggressively as the quarter progressed, we likely could have delivered higher closing volumes in ’23. With demand improving in the fourth quarter, we elected to hold our pricing and have had more inventory available for the 2024 spring selling season. The result of this decision is that we were in a position to sell and close more homes in the first quarter of 2024, and at higher margins. That’s what you see in our Q1 results - closings and gross margins above our guide as demand dynamics allowed us to sell more homes with better net pricing.
When buyer demand is rising, we’re often asked how many more homes we can sell given the value we place on entitled loss and our focus on driving high returns. More volume is not the only answer as we work to balance pace and price to drive high returns. Within our operating model, stronger demand provides choices: we can sell more houses or we can raise prices, or as was the case in the first quarter, we can do both. What we experienced in the first quarter is that areas of strong demand last year, such as the southeast, Florida and Texas, continued to perform well into 2024. Even more positive is that areas that had some struggles in 2023, notably Arizona, California and Nevada, were much improved in 2024. Consistent with the favorable conditions in the first quarter, almost all our markets displayed pricing dynamics that were stable or improving, which allowed us to raise net pricing in more than half of our communities.
As you’ve heard us say many times, our pricing decisions are made with a goal of delivering high returns and the best overall business outcomes. Depending upon the community and the buyer’s wants and needs, we may have raised base prices or lowered incentives, the result being that net pricing in the quarter across many of our markets was up between 1% and 5%. The impact of these actions on our business performance is powerful. As Bob will discuss, we are increasing guidance for both full-year closings and gross margins. Against generally favorable demand conditions, the supply of available housing remains tight. We have a long-term structural issue resulting from a decade of under-building that has the country short approximately 4 million housing units.
At the same time, the available inventory of existing homes for sale continues to be low as homeowners remain locked into their low mortgage rates. Life happens, so we are seeing some additional existing homes come to market, but the numbers remain well below historic rates. As a homebuilder, this is a great operating environment as we are supplying a product that a lot of people need and want. I appreciate, however, that our country’s housing shortage can create hardships for today’s consumers as the lack of supply keeps housing prices high. In fact, some of our recent buyers said that they made the decision to buy now because they couldn’t wait any longer for rates to roll back. In a market where home prices are high and because of limited inventory, they will likely continue moving higher.
Our company’s ability to offer targeted incentives, particularly mortgage rate buy-downs, is a powerful tool that can help bridge the affordability gap. For example, in the first quarter, approximately 25% of our home buyers used our national rate program. In a world where the consensus is that interest rates will be higher for longer, our interest rate incentives likely become an even greater competitive advantage, especially relative to the existing home seller. Higher interest rates create additional challenges for today’s home buyers, but we appreciate that rates are moving higher because of a resilient economy and a strong job market. Given these conditions, we are optimistic about 2024 and PulteGroup’s ability to continue delivering strong financial results.
Now let me turn the call over to Bob for a review of our first quarter results. Bob?
Robert O’Shaughnessy: Thanks Ryan, and good morning. As Ryan noted, the company delivered exceptional operating and financial results in the quarter, which have us well positioned to realize outstanding financial performance throughout 2024. In the first quarter, we reported home sale revenues of $3.8 billion, which represents an increase of 10% over the prior year’s first quarter. Higher revenues in the period were driven by an 11% increase in closings to 7,095 homes, partially offset by a 1% decrease in average sales price of $538,000. The lower closing price compared to the first quarter of last year reflects a shift in the geographic mix of homes closed as we realized relatively higher closings from our southeast and Florida markets with more modest increases in our higher priced western markets.
Closings in the quarter came in above our guide as we had available spec inventory to meet the strong buyer demand we experienced this period. As Ryan highlighted, by choosing not to chase volume in last year’s fourth quarter, we had additional inventory in Q1 that we were able to sell and close with better margins due to the improving buyer demand activity in the quarter. Our spec production is predominantly within our first-time buyer communities, so on a year-over-year basis we realized increased closings from first-time buyers. In the quarter, our closing mix included 41% first-time, 36% move-up, and 23% active adult. In the first quarter of last year, the mix of closings consisted of 38% first-time, 36% move-up, and 26% active adult.
Reflecting the favorable demand conditions we experienced in the first quarter, net new orders increased 14% over last year to 8,379 homes. In the quarter, we realized a year-over-year increase in gross orders and a reduction in cancellation rates. Cancellations as a percentage of starting backlog fell to 10.1%, down from 12.7% in the first quarter last year. Average community count for our first quarter was 931, which is an increase of 6% over the prior year and in line with our guidance for year-over-year community count growth of 3% to 5%. The resulting absorption pace of approximately three homes per month for the quarter was above our historic average for the period, excluding the pandemic-impacted years of ’21 and ’22. I would also like to highlight that orders in the quarter were higher across all buyer groups, which is another sign of the overall strength of the market.
More specifically, net new orders among first-time buyers increased 8%, move-up increased 22%, and active adult increased 12%. Consistent with earlier comments, the large increase in orders among move-up buyers was influenced by improving market conditions in the west, where our business mix is much more heavily weighted towards move-up. Given this strong start to our spring selling season, our quarter-end backlog increased to 13,430 homes with a value of $8.2 billion. We started approximately 7,500 homes in the quarter and ended the period with a total of 17,250 homes under construction. Our production pipeline includes approximately 7,000 or 41% spec homes, of which 1,337 are completed. We are operating just above our target of one finished spec per community but believe carrying a few more finished specs was the right strategy, given buyers’ preferences and the fact that we are still in the more active spring selling season.
Given the units we have under construction and their stage of production, we expect to close between 7,800 and 8,200 homes in the second quarter. With the strong start to the year in both orders and closings, we are raising our guide for full-year closings to approximately 31,000 homes. This would represent an 8% increase over 2023, which is the higher end of our long-term goal of growing our closing volume between 5% and 10% annually. Closings in the first quarter had an average sales price of $538,000, which was slightly below our guide for pricing of $540,000 to $550,000. Relative to our guide, pricing in the quarter was influenced by the geographic mix of closings along with a higher volume of spec homes closed in the period. As we move through the remainder of the year, we expect the mix of homes closed in each quarter will result in ASPs consistent with our prior guide of $540,000 to $550,000.
For the first quarter, we reported a gross margin of 29.6%, which is an increase of 50 basis points over the first quarter of ’23 and a sequential gain of 70 basis points from the fourth quarter of ’23. At 29.6%, our first quarter gross margin was also notably higher than our guide. Beyond Ryan’s comments that we are achieving higher returns by actively managing both pace and price, mix had an impacted on our reported Q1 margins. Higher demand increased as the quarter advanced, which allowed us to sell and close more homes in the period than forecast. On a relative basis, more of these closings occurred in our higher margin markets in the southeast and Florida, resulting in a meaningful increase in reported gross margins for the quarter.
Based on Q1 sign-ups and the composition of our backlog, we expect the geographic mix of closings to be more balanced as we move through the remainder of the year. That being said, we’re raising our gross margin guide for the remainder of ’24. We had previously guided to quarterly gross margins of 28% to 28.5%, but we now expect gross margins in the second quarter to be approximately 29.2%. Based on current backlog, we would expect gross margins for our third and fourth quarters to be approximately 29%, but we still have homes to sell and close, so demand conditions over the coming months will impact the results we ultimately report. Beyond buyer demand and near-term pricing dynamics, the gross margin guide for the remainder of ’24 also reflects expected changes in the geographic mix of homes we expect to close.
Given recent sign-up trends, we anticipate closing more homes in our west region, which currently have a lower relative margin profile due to the fact that we adjusted pricing in these markets over the course of ’23 to achieve appropriate sales pace. Looking at our costs, reported SG&A in the first quarter was $358 million or 9.4% of home sale revenues. As noted in our press release, our reported SG&A for the period includes a $27 million pre-tax insurance benefit. SG&A in the first quarter of ’23 was $337 million of 9.6% of home sale revenues. Consistent with our previous guide, we continue to expect SG&A expense for the full year to be in the range of 9.2% to 9.5% of home sale revenues. Based on normal seasonality, we expect to realize increased overhead leverage as we move through the remaining quarters of the year.
Our financial services operations reported pre-tax income of $41 million for the first quarter, which is an increase of almost 200% from last year’s pre-tax income of $14 million. The increase in Q1 pre-tax income was driven by better market conditions across our financial services platform. Financial services also benefited from higher capture rates across all business lines, including an increase to 84%, up from 78% last year in our mortgage operations. As noted in this morning’s press release, in the first quarter we completed the sale of a joint venture that resulted in a gain of $38 million. On our income statement, this gain was recorded in equity income from unconsolidated entities. Our reported first quarter pre-tax income was period record of $869 million, an increase of 24% over last year.
Against that, we reported tax expense of $206 million, which represents an effective tax rate of 23.7%. Our reported Q1 tax rate was impacted by energy tax credits and stock compensation deductions recorded in the period. For the balance of the year, we continue to expect our tax rate to be in the range of 24% to 24.5%. In total, our reported Q1 net income was $663 million or $3.10 per share, compared with prior year reported net income of $533 million or $2.35 per share. Earnings per share in our most recent quarter benefited from a 6% reduction in share count compared with the prior year as we continue to systematically repurchase our stock. Moving past the income statement, we invested approximately $1.1 billion in land acquisition and development in the first quarter.
Consistent with our recent land activity, 60% of our land spend in the quarter was for the development of our existing land assets. Our Q1 land spend keeps us on track with our plans to invest approximately $5 billion in land acquisition and development for the full year, of which we continue to expect about 60% will be for development with the remainder for the acquisition of new land positions. We ended the quarter with approximately 220,000 lots under control, of which 51% were held via option. The purchase of several large land positions in combination with the decision not to move forward with a few option transactions during the quarter lowered our lot option percentage from the end of 2023. I would highlight, however, that 74% of the lots we had pre-approved in this most recent quarter were under option.
As our first quarter numbers indicate, we continue to work toward our multi-year goal of controlling 70% of our land by buying via option. Looking at our community count, we continue to expect average community count for 2024 to increase 3% to 5% in each quarter over the comparable prior year period. Along with investing in our business, we continue to return capital to shareholders. In the quarter, we repurchased 2.3 million common shares at a cost of $246 million for an average price of $106.73 per share. In the quarter, we also opportunistically purchased approximately $10 million of our outstanding bonds. After allocating approximately $1.4 billion to investments and the return of funds to shareholders, we ended the first quarter with $1.8 billion of cash.
Taking all of this into account, our quarter-end gross debt to capital ratio was 15.4%, while our net debt to capital ratio was only 1.7%. Now let me turn the call back to Ryan for some final comments.
Ryan Marshall: Thanks Bob. As you would expect, given the strength of our first quarter results, buyer interest was high in the period as order paces increased beyond typical seasonality. That sales momentum continued into April, although we are now seeing some moderation of traffic into our communities due to the recent increases in interest rates, particularly within the Centex brand. While the change is relatively modest and based on a limited number of days, consumer feedback suggests that higher rates are causing some buyers to evaluate the timing of their activity due to the volatile interest rate environment. We’ll continue to monitor how buyers respond to changes in the rate environment and are prepared to adjust pricing or incentives to ensure we are appropriately turning assets.
During our last earnings call, we talked about the opportunity for PulteGroup to grow its business 5% to 10% annually. Given the lengthy land investment process, organic change in this industry takes time to accomplish, but we have been systematically planning and positioning to deliver against this goal for the past few years. I think that the company’s efforts are reflected in the allocation of capital into growing our business. Including our Q1 spend, since 2021 our operating teams have invested approximately $14 billion in land acquisition and development, with plans to invest another $5 billion in 2024. Along with the land, we have been investing in our people and working to ensure the needed trade capacity is available to support our expanding operations.
I’m proud to say that we have accomplished this while adhering to the same underwriting hurdles and investment disciplines which have been the cornerstone of PulteGroup for the past decade. Such discipline has allowed PulteGroup to more consistently grow its earnings, drive substantial cash flow from operations and deliver high returns, we have accomplished this while maintaining the superior build quality and customer experience which PulteGroup home buyers have come to expect. Before opening the call to questions, I want to take a minute to recognize and celebrate our team for once again being named a Fortune 100 Best Company to Work For. What makes this recognition so important and gratifying is that it’s based on feedback from all of our employees.
This marks PulteGroup’s fourth consecutive year on the list and is a testament to the culture of personal caring and professional development that we work to maintain. I am proud to lead such an organization that is committed to taking care of our customers and each other. Let me now turn the call back to Jim Zeumer.
James Zeumer: Great, thanks Ryan. We’re now prepared to open the call for questions. So we can get to as many questions as possible during the remaining time of this call, we ask that you limit yourself to one question and one follow-up. Jeannie, if you would explain the process, we’ll get ready to--we can start with our Q&A.
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