Pultegroup Inc ($PHM) Q4 2024 Earnings Call

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 PulteGroup fourth quarter 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'd like to ask a question during this time, simply press the star button 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 call over to Bob Shaughnessy. My apologies. Please go ahead.

All right. Thanks, Colin. Good morning, everyone, and welcome to today's call. We look forward to discussing our fourth quarter and full year financial results. With me today are Ryan Marshall, our president CEO, and Jim Osowski, our incoming executive vice president and CFO. As always, a copy of our earnings release and this morning's presentation slides have been posted to our corporate website at pultegroup.com. We'll also post an audio replay of this call later today, but 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. 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. With that said, let me turn the call over to Ryan.

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. The increase in home sale revenues for the period reflects a 6% increase in closings to 8,513 homes along with a 6% increase in our average sales price to $581,000. Our mix of closings in the quarter were comprised of 40% first-time, 40% move up, and 20% active adult. Consistent with our commentary over the last two quarters, the slight decline in the percentage of closings from active adult buyers 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. 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. 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. Looking at order activity in the quarter, our net new orders decreased 1% to 6,167 homes. 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. 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. 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. We also noted then given the macro issues consumers faced that the spring selling season would offer the best assessment of fundamental housing demand. 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 order activity by buyer group, fourth quarter net new orders decreased 14% for first-time buyers, increased 15% for move up buyers, and decreased 1% for active adult buyers. We believe these activity levels reflect the continued interest of consumers for new homes, but also show the impact of the affordability challenges consumers face, particularly for first-time buyers. 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%. Inclusive of the 7,520 homes we started in the fourth quarter, we ended the year with 16,439 homes in production. 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. With that said, in the event that the spring selling season trends towards lower absorption rates, we will reduce our pace of spec starts in communities with higher spec inventory levels so as to better match local selling conditions and to help produce standing inventory. As Ryan noted, our goal is to reduce our spec inventory back down to 40 to 45% of our total production by the end of the year. 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.

Looking at pricing, we currently expect the average sales price of closings to be in the range of 560 to 570,000 in each of the four quarters of the year. 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. Consistent with recent quarters, our fourth quarter margins reflect higher incentives which increased 20 basis points sequentially from the third quarter to 7.2%. Based on our backlog and current sales conditions, we anticipate that gross margins in the first quarter will be approximately 27%. 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. These estimates assume that incentives throughout 2025 will remain consistent with the incentives we recognized in the fourth quarter. I would also point out that our margins 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. Moving on to expenses, our reported fourth quarter SG&A expense was $196 million or 4.2% of home sale revenues, which compares with prior year reported SG&A expense of $38 million or 7.4% of home sale revenues. 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. 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.

In the fourth quarter, our financial services operations reported pre-tax income of $51 million, which is up from $44 million last year. The improvement in pre-tax income reflects the increase in our home building closings as well as the continuation of favorable market conditions across our financial services platform. Our reported pre-tax income for the fourth quarter was $1.2 billion compared with prior year pre-tax income of $947 million. In the period, we recorded tax expense of $269 million or an effective tax rate of 22.8%. Our fourth quarter effective tax rate includes benefits relating to energy efficiency credits and our purchase of renewable energy tax credits. 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. Looking at the bottom line, our reported fourth quarter results showed net income of $913 million or $443 per share. In the comparable prior year period, we reported net income of $711 million or $328 per share. Reflective of our strong operating results, we generated cash flows from operations of $1.7 billion in 2024. Given our current expectations for operating and financial results in 2025, we expect to generate cash flows from operations of approximately $1.4 billion.

Turning to our investment in capital allocation activities, 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. For the year, our land investment total $5.3 billion, of which 57% was for development. Given 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. 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. Consistent with my comments about our willingness to slow starts, we would also evaluate our spend on new land assets if absorption slows as we seek to maintain a high level of return. Exclusive 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. I would highlight that on a year-over-year basis, we lowered our owned lot count by 2,000 lots while increasing our lots under option by 14,000 lots. As a result, our percentage of lots under option increased to 56% up from 53% last year. 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. Based on the investments we've made and our anticipated community openings and closings in 2025, we expect our average community count in 2025 to be up three to 5% in each quarter as compared to the comparable prior year period.

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. As Ryan noted, our total return to investors in 2024 amounted to $1.7 billion, including the $1.2 billion of share repurchases, $168 million of dividends, and $310 million through the early retirement of senior notes. 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. Adjusting for the $1.7 billion of cash on our balance sheet, our net debt to capital ratio is now below zero. I'd like to take a moment to provide an update on our expectations for leverage in the future. As you know, we have historically expressed that our target leverage level has been between 20 and 30% of capital on a gross basis. Due to the strength of our operations and the resulting utilization of our cash flows 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. Looking forward, we expect to continue to generate sufficient cash flows to support our capital needs. As a result, we are no longer targeting a specific leverage level. Instead, we will allocate our capital in line with our historical practice, continue to prioritize investment in the business and the payment of our dividend with excess capital being used to repurchase our stock and/or retire our debt. Our resulting leverage position will therefore be an outcome that is dependent on the decisions we make rather than targeted to a predetermined level. 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. 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 the $1.5 billion increase to our share repurchase authorization this morning. Now, let me turn the call back to Ryan for some final comments.

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 one on your telephone keypad. We will pause just for a moment to compile the Q&A roster. One moment for your first question, please. The first question comes from the line of John Lavalo of UBS. Please go ahead.

Good morning, guys. Thanks for taking my questions and Bob, best of luck to you. The first question is maybe just help us 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% in the first quarter and then 26.5 to 27 in 2Q through 4Q. I mean how would you sort of bucket the headwinds in terms of you know maybe working down some of that spec inventory, higher incentives, product mix, stick and bricks, and land cost inflation.

Okay, that's helpful. And then you know you're talking if I

Sure.

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 like 40% positive sequentially into the first quarter. I mean is that a reasonable guide as we look into the spring selling season here?

All right. Thank you guys. Good luck.

Your next question comes from the line of Carl Reichard of PTI. Please go ahead.

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. To be Carl.

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. 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've been a lot of movement 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 off balance sheet as you go forward. So, love your comments on that and thank you.

I appreciate it, Ryan. Thanks a bunch, fellas.

Your next question comes from the line of Stephen Kim of Evercore ISI. Please go ahead.

Yeah, thanks a lot guys. Appreciate it. Just a first question I guess relates to the gross margin. Actually before I say that, welcome Jim and best of luck to you also Bob and also our best wishes for Jim Zimmer as well. My first question on margins: taking the gross margin first, 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 and can you give us a sense for what you think the long-term sustainable growth or operating margin you feel comfortable with?

Okay, great. Appreciate that. It does feel that you've sort of, contrary to some competitors, have said that you're going to not be beholden to a particular volume level. You're going to modulate that with demand. And so I would think that you would have a little bit more margin stability than your competitors may. Which is why I asked the question. Second question: I'm going to shift gears and talk a little bit about the labor side of the equation. Obviously one of the additional big wild cards this spring is going to be whether or not we see any particularly active ICE enforcements in the construction industry. And I'm curious if or how you are preparing your divisions for any potential raids or maybe more likely, potential slowdowns. You'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 because you're not locking in the home price early 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, actually spec building can afford some advantages and would you be willing to pivot in some way if you were to see slowdowns brought on by increased ICE activity?

Gotcha. Great. Thanks a lot, guys.

Your next question comes from the line of Alan Ratner of Zelman. Please go ahead.

Hey guys, good morning. Thanks for all the great info so far and congrats to Bob and Jim as well. 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 I understand the interplay there and the perhaps more competitive discounting environment today than maybe we thought we would be in three or six months ago. But I think you gave a longer term guide of 5 to 10% 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% growth that seems like a lot of the industry is targeting entering 2025?

Understood. I appreciate the thought process there. Second question: if we could spend a second talking about Florida. I feel like that's probably a lot of the concern surrounding your company that we hear from investors, just the exposure there, about a quarter of your business in Florida. But not only that, your margins historically in the state have been incredibly strong and it feels like with the building resale inventory environment there, concerns over storms and homeowners insurance and just general softening, that if there was a bear point we hear, it's that you'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?

Thanks very much.

Your next question comes from the line of Mike D of RBC. Please go ahead.

Hi, this is Chris on for Mike. Just going back to the 26 and a half 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 lands come through?

Fair enough. I guess so what are you guys seeing this year in terms or what are you expecting this year for lot cost inflation and stick and brick inflation?

And that's inclusive of raw land and develop cost? Develop lot cost overall inclusive of land and development be close to 10%? Understood. Receive the call.

Your next question comes from the line of Michael Rehood of JP Morgan. Please go ahead.

Thanks. Good morning everyone. And, yeah, Bob, best of luck. Great working with you. And, Jim, congrats on the promotion. First I'd love to just review, if possible, just a little bit more around the regions. How you feel trends have been obviously there's a lot of concern as talked about earlier with inventory levels in Florida as well as Texas, but just love to get around your footprint, which markets maybe you would characterize as better than average versus worse than average and how things have trended so far in this year.

Great, great. Thanks for that. And second question, I just wanted to circle back to some of Bob's comments earlier on leverage and kind of moving off of that prior gross leverage target of 20 to 30% and it sounds like implying a more persistent even lower level of leverage compared to that. But just to push a little bit on how we should think about share repurchase. I mean, certainly even with the current trends, looks like your leverage is only going to go further south and just trying to understand why shouldn't we as investors or sell-side buy-side expect some level of a solid step up in share purchase in 2025 that even with a solid step up you'd still probably have by our estimates 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 if lot optioning is only going up, it looks like your balance sheet even with leverage getting more conservative could still support a solid step up in share purchase in 25. So just trying to understand if we're missing anything or if that's directionally the way we should be thinking about it.

Great. Thanks a lot. I appreciate it.

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. 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% target or one target, but then you've also moved your model to be more towards spec. 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? Are you waiting to see how demand shakes out in the spring selling season? And then maybe just some commentary on how you feel you view completed inventory levels in the markets you play in for the industry as a whole.

Yeah, it makes a lot of sense. Definitely encouraging regarding the spring. And then second question is just on cycle times. How did those trend 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.

Thank you for all the color and good luck moving forward.

Your next question comes from the line of Matthew Wheelie of Barkclays. Please go ahead.

Uh morning everyone. Thank you for taking the questions. I guess just a couple around the margin. You mentioned 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 incentives would stay unchanged from Q4? To the extent that finished inventory has been rising, would that signal that we have not found an equilibrium so the incentives would need to move higher to move those homes, or is your view perhaps based on history that normal rising seasonality of housing demand into the spring would be enough that you wouldn't have to alter incentives? So just any color on how you're approaching that. Thank you.

Okay. Thanks for that, Ryan. And then the second margin question is just, to have flat or nearly flat gross margins going forward, I guess everything else needs to be kind of flat or offsetting each other sequentially. You mentioned land up 10% on a year-over-year basis and construction costs 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 have higher lot and construction costs, what is it that would allow you to hold the margins flat sequentially beyond that first quarter?

All right, got it. Thanks, guys. Good luck.

Your next question comes from the line of Ray Jedich of Bank of America. Please go ahead.

Hi. Good morning. Thanks for taking my question. I just starting first on the incentives, just can you talk about from a regional perspective, were there meaningful differences with the incentive level?

Okay. And then just on the land cost inflation comments running up 10% right now. Can you just talk about how you would expect that to trend through 2025 or maybe even to 2026? Like the land that you're contracting today, are you seeing any relief on land prices or even 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?

Great. Thank you.

Ladies and gentlemen, that concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.