PulteGroup Q3 2021 Earnings Call Transcript

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Provided by Quartr
October 25, 2021

Key Takeaways

  • Q3 financial results: Home sale revenues rose 18% YoY to $3.3 billion, gross margin expanded 200 bps to 26.5%, and EPS jumped 36% to $1.82, driving YTD revenue up 22% to $9.2 billion and EPS up 30%.
  • Robust capital allocation: $2.9 billion invested in land YTD (on track for $4 billion), over 54% of lots under option, $261 million of share repurchases, $800 million debt paydown and net debt-to-capital down to 5.7%, with a 26% ROE.
  • Supply chain challenges persist from COVID-19 and the Delta variant, adding ≈$2,000 per home in incremental costs, delaying Q4 home deliveries to ~8,500 units (+24% YoY) and guiding Q4 gross margin to 26.6–26.7%.
  • Demand and backlog: Q3 net orders fell 17% to 6,796 homes due to 14% fewer active communities and pace management, while backlog grew 33% in units and 56% in value to 19,845 homes worth $10.3 billion.
  • Pricing strength: Average selling price in backlog climbed 18% to $519,000, Q4 ASP expected at $485,000–490,000 (+10% YoY), and incentives down to 1.3% (from 3%), supporting further margin expansion into 2022.
AI Generated. May Contain Errors.
Earnings Conference Call
PulteGroup Q3 2021
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good morning. My name is Julie and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2021 Polti Group Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. Thank you. James Zumer, you may begin your conference.

Speaker 1

Great. Thank you, Julie, and good morning. I time, our financial results are Ryan Marshall, President and CEO Bob O'Shaughnessy, Executive Vice President and CFO Jim Osovsky, Senior VP, Finance. A copy of this morning's earnings release and the presentation slides that accompany today's call have been posted to our corporate website at pultegroup.com. I'll also post an audio replay of this call later today.

Speaker 1

As always, I 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.

Speaker 1

Ryan? Thanks, Jim, and

Speaker 2

good morning. I look forward to speaking with you today about PulteGroup's 3rd quarter operating and financial results. In this morning's press release, you read that our home sale revenues in the 3rd quarter increased by 18% over last year to $3,300,000,000 while our gross margin expanded 200 basis points to 26.5%. In combination, top line growth and margin expansion helped drive higher earnings per share of $1.82 This is an increase of 36% over the prior year's 3rd quarter adjusted earnings of $1.34 per share. Inclusive of these strong third quarter numbers through the 1st 9 months of 2021, our home sale revenues were up 22 percent to $9,200,000,000 while our reported earnings per share are up 30 time, we will be conducting a $6 to $4.85 The resulting strong cash flow being generated by our operations continues to put our company in an enviable position in which we can invest in our business, return funds to shareholders And still maintain outstanding balance sheet strength and overall liquidity.

Speaker 2

More specifically, consistent with our constructive view on the housing market, We have invested $2,900,000,000 in land acquisition and development so far this year. Our 2,900,000,000 And we remain fully on track to invest approximately $4,000,000,000 in total for the full year of 2021. I would highlight that while we are investing more into the business, we remain disciplined and focused on building a more efficient and lower risk land pipeline. At the end of the Q3, our lots under option had grown to 54% of our total controlled lot position. Compared to when I set the initial 50% option target, we have over 65,000 more lots under option And now view 50% as the floor rather than the ceiling in terms of how we control our land assets.

Speaker 2

Consistent with our capital allocation priorities, along with investing $948,000,000 more in land acquisition and development Through the 1st 9 months of 2021 compared with last year, we have also returned $726,000,000 to shareholders Through share repurchases and dividends and have paid off nearly $800,000,000 in debt this year, leaving us with a net debt to capital ratio time of only 5.7%. Finally, consistent with our strategic focus, our operating and financial performance has helped drive a return on equity 26% for the trailing 12 months. Just like the broader economy, our operations continue to be impacted by the pandemic. On one hand, We are managing through the disruptions COVID-nineteen and the Delta variant have inflicted on our workforce, our trade partners And with the supply chain that is clearly struggling, reflects the commitment and tireless efforts of the entire FulteGroup team. Since we updated our production guidance in early September, broader industry comments have validated the challenges within the construction supply chain Are significant and don't have any quick fixes.

Speaker 2

Based on a myriad of calls and questions we have received, I think it's hard for everyone to appreciate the full magnitude of the issues we're facing when you're not dealing with them on a day to day basis. For some products, it's simply the materials aren't available. Sometimes you can switch to an alternative, but when you can't, You wait. For others, it's changing lead times where order fulfillment has gone from 6 weeks to 16 weeks, Back to 11 weeks and then back to 16 weeks. And for others, it's seen allocations being imposed as manufacturers and distributors do their best to keep their major customers, which I would note we are 1, at least partially satisfied.

Speaker 2

Our local divisions may not get much advance notice of the shortage and resulting allocations, so we have to adjust on the fly. In other cases, it's logistics. When you're forced to ship materials to solve near term issues, this might be shipping siding from the southeast to the southwest or our trades driving across the state In one form or another, these issues impacted our Q3 results. And as Bob will detail, we'll put additional pressure on our deliveries and margins in the 4th As difficult and frustrating as this is, I can say that our suppliers have been outstanding partners and routinely bend over backwards to get us the materials We need to solve our issues. I can say that we've been clear with our teams that we have to be that we have to over communicate with customers to keep them informed of any schedule changes.

Speaker 2

We also have to be flexible and creative in sourcing materials, Even if this means spending additional dollars to acquire needed resources. And finally, we must maintain our standards on the quality and completeness of each home that we deliver, given the very problems impacting the supply chain, we would expect the solution that We would expect that solutions will be found over different timelines depending on the supplier's underlying issue. In the interim, we will adjust our production estimates for the Q4 and work to position the business for more consistent cadence in the year ahead. Time, we will also continue to work in close partnership with our suppliers to manage through the supply chain issues as quickly and as intelligently as possible. Now let me turn the call over to Bob for a detailed review of our Q3 results.

Speaker 3

Thanks, Ryan, and good morning. Our teams have done an outstanding job navigating through the challenging production environment, which can be seen point $3,000,000,000 The increase in revenues was driven by a 9% increase in closings to 7,007 homes in combination with an time, we are pleased to announce that we are making progress on our earnings call. We are

Speaker 4

pleased to announce that we are making progress on our earnings call. We are pleased to report

Speaker 3

that we are making progress on our earnings call. The higher average sales price realized in the 3rd quarter reflects meaningful price increases we've realized across all buyer groups, With first time up 8%, move up up 10% and active adult up 8%. The mix of homes we delivered in the Q3 included 32% from first time buyers, 44% from move up buyers And 24% from active adult buyers. In last year's Q3, 30% of homes delivered for first time, 45% were move up Our net new orders for the Q3 were 6,796 Homes, Which represents a 17% decrease from last year that was driven primarily by a 14% decline in year over year community count. In addition to fewer open communities, orders for the period were impacted by ongoing actions to manage sales paces to better align with current production volumes.

Speaker 3

The actions to manage sales pace and outright restrict sales were more frequently targeted toward our first time buyer communities as we strategically work to build up Looking at our 3rd quarter orders in a little more detail, our orders from first time buyers decreased 20% compared with last year. This decrease was driven primarily by our actions to restrict sales as our first time community count was only down 6 In contrast, our orders from move up and active adult buyers decreased 22% and 4% respectively, In the Q3, we operated from an average of 768 communities. Consistent with the guide in our recent market This is down 14% from last year's average of 8.92 communities. Our Q3 community count should be the low watermark for the year We expect our Q4 community count to increase to approximately 775 active communities. Further, our existing land pipeline should allow us to realize a meaningful ramp up in community count as we move through 2022.

Speaker 3

As is our practice, we will provide more specifics on 2022 community count as part of our Q4 earnings call. Our unit backlog at the end of the 3rd quarter was up 33% over last year to 19,845 Homes. The dollar value of our backlog increased an even greater 56 percent to $10,300,000,000 as we At the end of the Q3, we had 18,802 homes under construction, Of which 83% were sold and 17% were spec. We have almost 900 more spec homes in production than we did in the 2nd quarter As we've been working to increase spec availability, particularly in our CEMTEX communities. In many instances, This has meant tightly controlling current period order rates, but we feel this is the appropriate action as we seek to better align our sales with the current pace of production.

Speaker 3

Given that 90% of our specs are early in the construction cycle and that we have only 109 finished specs, These units are about helping to position the company for 2022 rather than providing closings in 2021. We face similar dynamics within our production of sold units, as 2 thirds of these homes are in the earlier stages of construction, And we can see gaps in the supply of key building products needed to complete these homes. Given these conditions, we believe it appropriate to update our 4th quarter guide for expected 4th quarter deliveries and currently expect to deliver approximately 8,500 homes in the 4th quarter, Which would represent an increase of 24% over the Q4 of last year. It's difficult to say there are positives to be gleaned from the challenging production environment, One of the outcomes is that the limited supply of homes coupled with ongoing strong demand has supported higher prices across the market. Reflective of these conditions, our average price and backlog increased 18% or $78,000 Over last year to $519,000 Although more than half of our quarter end backlog is expected time, we will continue to see the benefit of rising prices in our Q4 as our average closing price This is expected to be $485,000 to $490,000 At the midpoint, this would represent an increase of approximately 10% over last year.

Speaker 3

Our reported homebuilding gross margin in the 3rd quarter increased 200 basis points over last year to 26.5%. Given that our 3rd quarter closings absorbed the elevated lumber prices from earlier this year, expanding our gross margin by 200 basis points test to the strong pricing environment the industry experienced over the past year. It's worth noting that the strong market conditions also contribute Another step down in incentives in the period as discounts fell to 1.3%. This is down from 3% last year And down 60 basis points from the Q2 of this year. As our margin increase demonstrates, strong buyer demand has allowed the company to pass through the higher labor and material That said, and as Ryan discussed, we are knowingly incurring additional expenses to get houses built within today's challenged operating environment.

Speaker 3

In addition to the incremental build costs we are absorbing over the short term to get homes completed, our reported gross margins are being influenced by the mix of homes closed. As we also highlighted in our recent market update, certain of the homes that we expected to close in Q3 slipped into Q4 And others have been pushed out of the Q4 into 2022. These conditions are impacting our reported gross margins in the 3rd and 4th quarters of 20 That said, with the changing mix of homes we currently expect to close in the 4th quarter, coupled with the added material, labor and logistics costs we're paying to get homes closed, We currently expect our 4th quarter gross margin to be 26.6% or 26.7%. This would represent an increase of 160 basis points to 170 basis points over last year's Q4 and an increase of 10 basis points to 20 basis points over the Q3 of this year. We see the opportunity to build on this momentum as the strong pricing conditions we've experienced, coupled with the lower lumber costs we expect in next year's closings Should result in further gross margin expansion in 2022.

Speaker 3

Our SG and A expense for the 3rd quarter was $321,000,000 or 9 point Prior year SG and A expense for the period was $271,000,000 for a comparable 9.6 percent of Given the sequential increase in closings we expect to deliver in the Q4, we should realize improved overhead leverage with SG and A expense in the upcoming quarter call, we expect it to fall to a range of 8.9% to 9.2% of home sale revenues. Looking at our financial services operations, our 3rd quarter pretax income was $49,000,000 compared with $64,000,000 last year. As has been the case for much of this year, higher origination volumes have been offset by lower profitability per loan given more competitive market conditions. The company's reported tax expense in the 3rd quarter was $145,000,000 or an effective tax rate of 23.3%. In the comparable prior year period, our effective rate was 14% as we realized the tax benefit of $53,000,000 associated with energy tax credits For the Q3, our reported net income was $476,000,000 or $1.82 per share.

Speaker 3

This compares with prior year adjusted net income excluding the impact of the energy tax credits of $363,000,000 for $1.34 per share. Moving over to the balance sheet, our business continues to generate strong cash flow, Which allowed us to end the quarter with $1,600,000,000 of cash after significant investment in the business and continued shareholder distributions in the quarter. In the quarter, we repurchased 5,100,000 shares or about 2% of our outstanding common shares for $261,000,000 at an average price of $51.07 per share. The $261,000,000 in stock repurchase is a sequential increase of $61,000,000 from the second quarter of this year. As stated previously, we are fully prepared to allocate more capital to shareholders as conditions warrant.

Speaker 3

We also invested $1,100,000,000 in land acquisition and development in the Q3. This brings our total land related spend in 2021 $2,900,000,000 and keeps us on track to invest approximately $4,000,000,000 of land acquisition and development for the year, Which would be an increase of almost 40% over last year. We ended the 3rd quarter with a debt to capital ratio 22.4%, which is down from 29.5% at the end of last year. Adjusting for our cash position, our net debt to capital ratio at the end of quarter was 5.7%. We ended the 3rd quarter with approximately 223,000 lots under control, Of which 54% were controlled through options.

Speaker 3

Our divisions and particularly our land teams have done an outstanding job building a more efficient land bank We're extremely proud of their efforts and the success that they've realized. Now let me turn the call back to Ryan.

Speaker 2

Book ending the front of this call where I talk about supply, let me finish the call by providing a few comments about 3rd quarter demand, which is a very positive picture. We continue to experience strong demand in the quarter With very consistent traffic and sign up numbers across the period, I would also add that strong demand has continued through the 1st few weeks of October. While sign ups in the quarter were lower compared with last year, the primary driver of the decline was the decrease in community count. Beyond the impact Community Count had on order rates in the quarter, our divisions continue to manage or outright restrict sales pace to better match sales with our As Bob indicated, this most recent quarter should be the low point of our community count this year As we expect our community count to move higher on a sequential basis as we move through 2022, Reflecting the strong demand conditions and relatively limited supply of new and existing homes, we were able to raise prices in the quarter across most of our communities. The most typical increase in the quarter was in the range of 1% to 3%, although some of our divisions were able to push pricing in select communities a little more aggressively.

Speaker 2

That being said, we continue to keep a close eye on affordability metrics within our local markets, Especially given the recent rise in mortgage rates. Between an improving economy, a strong jobs market, wage inflation and time,

Speaker 5

I will now turn the call over to Mr. President. Thank you, Mr. Chairman.

Speaker 2

Thank you, Mr. Chairman. Thank you, Mr. Chairman. Thank you, Mr.

Speaker 2

Today's higher prices for everything from food to autos to homes. We continue to see a very strong financial profile among our homebuyers with the Average FICO score remaining above 750 and loan to value of 83% based on users of our mortgage company. Looking at demand across the country, I would tell you that generally where we have product available, we can sell it and at a higher price than earlier in the year. Although frustrated at times because of limited supply, higher prices and longer build cycles, consumers remain engaged in the home buying Just to wrap up, while there are certainly challenges in the business, time, we continue to make more efficient through the use of lot options. We have an opportunity to further expand margins based on limited supply, Strong buyer demand, resulting favorable pricing dynamics and lower lumber costs in 2022.

Speaker 2

And liquidity that can support our operations and gives us tremendous flexibility to capitalize on market opportunities. Let me close by again thanking our employees for their tireless efforts to serve our homebuyers and deliver outstanding business performance. Now let me turn the call back to Jim.

Speaker 1

Great. Thanks, Ryan. We're now prepared to open the call for questions so that we can get to as many questions as possible during the remaining time of the call. We Julie, I'll now open the queue for questions and answers.

Operator

Thank you. Your first question comes from Truman Patterson with Wolfe Research. Please go ahead.

Speaker 6

Hey, good morning, everyone, and thanks for taking my questions. First, I wanted to touch on gross margin. Is there any way you could just quantify the elevated costs you've incurred that will impact Q4. And then in the prepared remarks, you mentioned 22% gross margin time, we are likely moving higher, which I think is there's been a lot of investor uncertainty on that. So with prices moving up, lumber coming down, other costs accelerated, accelerating, can you just help us think through the gross margin and backlog or kind of the incoming orders?

Speaker 3

Yes. I'll start with the Q4, Truman. We obviously have taken down our Margin expectation for Q4, depending on which where you peg the margin, it's call it 60 or 70 basis points from what we had originally guided. And I would suggest the way to think about that is we've got mix changes very consistent with what we had in the What we had in the Q3 as stuff has moved out of the Q4 into 'twenty two, that's probably 30 basis points of it. And then Incremental costs and you heard us talk about them in the prepared remarks, to get Done today is about $2,000 a house for us, which is about 40 basis points.

Speaker 3

And so That's sort of the magnitude of what we're seeing in the Q4. We didn't provide a guide for 'twenty two gross margins, time But we obviously did highlight the significant pricing that we're seeing in our backlog. It's up 78 $1,000 a unit or 18%, We'll have lower lumber costs. Now lumber is variable. It's moved down.

Speaker 3

It moved up a little bit. We'll see where that lands. But we'll see on a sequential basis as we get into 'twenty two some decreases. So Certainly the structure is there for lower margins. We'll give an estimate of what that is as we release our 4th quarter.

Speaker 3

Higher margins. Did I say lower? My apologies, higher margins in 2022.

Speaker 6

Okay. Thank you.

Speaker 5

I

Speaker 3

saw Jim had a horrified look on his face. I apologize for that. Time. And we'll give you some visibility to that as we release our Q4 earnings, and we'll have obviously better visibility into the year at that point.

Speaker 6

Okay. I'm just hoping you could run through where the most common pressure points are in the supply chain and On the material side, any highlights on the vendors? Are they giving you a timeline As to when they expect their internal capacity begins improving and actually increasing time, I'll turn it back to you.

Speaker 2

Yes, Truman, it's Ryan. Good morning. It really depends on the region, Truman, so in like the Florida regions, there are challenges of block. Most of our homes that are built out of concrete block as opposed to lumber. So we've been on allocation there for a number of months.

Speaker 2

Windows, I would tell you generally across the entire United States Our pressure point paint is a pressure point, and appliances would be some things that I think are common Across the entire enterprise. And then when you

Speaker 4

time, I'll turn the call back over to Jim.

Speaker 2

As I tried to highlight in my prepared remarks, we think that the time line of fixing things will be varied, and it really depends on what the underlying issue is for that particular distributor or manufacturer. There are some things that are obviously reliant on microchips like appliances. And I think that Those challenges are well detailed. In some cases, it's chemicals and things like resin. I think the paint suppliers, paint manufacturers have kind of highlighted some of the things that they've done.

Speaker 2

In particular, Sherwin Williams recently purchased time, we will be conducting a question and answer session. Yes. Our next question comes from the line of John time, we'll

Speaker 4

be able to get a sense of urgency.

Speaker 2

And then in some cases, It's logistics, and so there's just simply not enough transportation capacity to move things From the ports to the distribution centers or from the factories to our job sites. And so I think what we're going to end up with is a mixed bag of results and recovery timelines as we move through 2022. The relationships that we have with our suppliers are outstanding. We're communicating actively with them and collaboratively There's no doubt there are some headwinds out there that we're fighting through each and every day. As As Bob highlighted, we'll talk more about 2022 as we get to the end of the 4th quarter, Which is when we customarily provide our guidance.

Speaker 2

But there are some favorable things with community count growth, Opportunity for margin expansion, etcetera that I think leave reason to continue to be optimistic.

Operator

And your next question comes from Alan Ratner with Zelman. Please go ahead.

Speaker 7

Hey, guys. Good morning. Thanks for taking my questions. So first question, I'd love to dig in a little bit to the pricing environment. Your average order price was up way more than that, up 9%.

Speaker 7

So I'm guessing the delta there is mix, but I'm curious if you could just talk a little bit about what you're seeing time, power is moderating a bit. It doesn't sound like you're seeing that in your communities, but any color you can give there would be great.

Speaker 2

Yes, Alan, I would just good morning, by the way. I'd highlight that the demand environment continues to be very strong. And in most communities, we continue to have pricing We're exercising that through price increases obviously and in some cases we're outright restricting sales, which I think is in the same kind of family of actions that we take to manage the demand that we have. What I would tell you, we highlighted on average, most communities were 1% to 3%. There were certainly some communities that were well in excess of that.

Speaker 2

Those kind of outlier communities combined with the fact that you do have some mix in there as well as I think contributes to The incremental increase that you highlighted in your question. In terms of kind of where things are at today pricing power wise relative to A quarter ago, 2 quarters ago, I'd suggest it's pretty comparable to where we were at in Q2,

Speaker 5

a little weaker than where we were at in Q1 in terms of

Speaker 2

kind of time, we are at in Q1 in terms of kind of month over month or week over week pricing changes. We are keeping an eye on affordability. We highlighted that in our prepared remarks. I think it's something that while The consumer continues to be strong financially. They don't have unlimited financial means and resources.

Speaker 2

Time, we need to be mindful that not only as a company,

Speaker 3

Well, to be clear, we haven't given a margin expectation for next year. And part of the reason for that, Alan, Is because we want to give ourselves the opportunity to really evaluate That question more fully. Certainly the supply chain is not going to cure itself in the next 3 months, probably not the next 6. Anybody's guess as to how long beyond that. And so there will be continued constraint.

Speaker 3

You also have kind of working in the other direction that most builders are kind of pushing towards their year end in Q3 and Q4. So there's more kind of demand for service and materials and that will mitigate to a degree in the first half of next year. So I think a lot of it will depend on how the supply chain kind of moves forward from here, and again, it's one of the reasons that we are waiting until the Q4, not just convention, but also we We'll get better information as we get into December, January and can answer.

Operator

And your next question comes from the line of Michael Rehaut with JPMorgan, please go ahead.

Speaker 8

Thanks. Good morning, everyone. Thanks for taking my Maybe just to shift the question a little bit on lot optioning and lot owning. A lot of progress on lot optioning, but Actually, if you look at the years owned, It's staying around 3.8, 3.9 in terms of 3.8, 3.7 in terms of year zone supply. Any thoughts around trying to get that metric down over the next 2 or 3 years?

Speaker 8

And as a result, I'd presume that it would We have even more cash to perhaps return to shareholders or invest in the company in other ways.

Speaker 2

Hey, Mike. Good morning. It's Ryan. Yes, in terms of capital allocation, I'm really proud of what we were able to do in the quarter. The health and the quality of the homebuilding operations continues to Generate outstanding cash flows.

Speaker 2

And so we were able to do a lot in the quarter. We're very pleased with time, the total

Speaker 4

amount of land that we've been

Speaker 2

able to Investing in the year, we sit at right at $3,000,000,000 year to date and are on track for 4, which will be a big year for the company. We had an outstanding quarter of returning funds to time, we will be working with our shareholders and that's something that is very consistent with And right in line with our capital allocation philosophy of investing in the business and returning funds to shareholders. That we really are pleased with what our teams have been able to do to continue to maintain Optionality with the overall land supply. Turning to your question on 3 7 of year supply, Mike, That number would be calculated Visibility to what that forward number is, but I think we've very clearly highlighted our desire to grow and you've seen The early end of that with the amount of capital that we've been investing into the business. The other thing that I'd also just mention and we've been consistent in stating that we haven't changed our land underwriting Guidelines, and we continue to do improve land deals that are right in line with our target of 3 years owned land.

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