Pultegroup Inc ($PHM) Q2 2025 Earnings Call

Good morning and 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 Pulte Group Inc. second quarter 2025 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. We do ask that you limit yourselves to one question and one follow-up. Thank you. I would now like to turn the call over to Jim Zeumer. Please go ahead.

Great. Thank you, Jeannie. Good morning and thank you for joining today's call as we look forward to discussing Pulte Group second quarter operating and financial results. With me today are Ryan Marshall, President and CEO, Jim Ossowski, Executive Vice President CFO, and David Carriere, Senior VP Finance. As always, a copy of our earnings release and this morning's presentation has been posted to our corporate website at pultegroup.com. 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 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. 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 Marshall. Ryan?

Thank you and good morning. As Ryan indicated, while there are challenges within today's housing market, there are certainly positives to be taken from Pulte Group's second quarter results and how we have positioned our business for long-term success. Net new orders in the second quarter totaled 7,083 homes, which is down 7% from last year's second quarter. The year-over-year decline in net new orders for Q2 reflects a 13% decrease in overall absorption pace partially offset by a 6% increase in our average community count for the quarter to 194. As a percentage of starting backlog, our cancellation rate for the second quarter was 11%, which is consistent with Q1 and only a 0.5% increase from Q2 of last year. Stability in the cancellation rate suggests that most home buyers remain comfortable and confident in completing their home purchase once they are under contract. Our second quarter absorption pace of 2.4 homes per month was down from 2.7 homes per month in Q2 of last year. The year-over-year differential of roughly 0.3 homes is fairly constant through the three months of Q2. Stated another way, we experienced a typical seasonal trend, but the core demand is simply running at a lower pace this year. Looking at our net new orders by buyer group, first-time and move-up buyers were down 9% and 14% respectively from last year, while our active adult business was up 9%. Specific to our active adult business, in addition to the underlying demand among these buyers, we are benefiting from new community openings coming online this year. To be clear, while these active adult orders make up 24% of the total this quarter, they will primarily deliver as 2026 closings. It's fair to say that we are pleased to see the new Del Webb communities being well received. Second quarter home sale revenue is at $4.3 billion, down 4% from prior year revenue at $4.4 billion. The decrease in home sale revenue was driven entirely by lower closing volume, as deliveries were down 6% to 7,639 homes. The decrease in closings was partially offset by a 2% increase in the average sales price of $559,000. By buyer group, closings in the second quarter were 38% first time, 42% move up, and 20% active adult. In the second quarter of last year, the closings mix was 40% first time, 37% move up, and 23% active adult. Given second quarter orders and closing activities, we ended the quarter with a backlog of 10,779 homes valued at $6.8 billion. In comparable prior year period, the company's backlog totaled 12,982 homes, the value of $8.1 billion. In the second quarter, we started 7,220 homes, which is down 11% from the 8,146 homes we started in the second quarter of 2024. Given the volatility in demand that we've experienced thus far in 2025, we continue to carefully manage our start pace to better align our available inventory with current rate of sale. As such, we ended Q2 with a total of 16,105 homes in production, of which 47% were spec units. On a sequential basis, our inventory of 7,606 spec homes under production is down 3% from the first quarter and down 13% from the start of the year. Based on expected home sales and starts, we anticipate our spec inventory to be within our target range of 40% to 45% of overall units in production by year end. In managing specs, we are trying to achieve multiple objectives, including having enough units to meet buyer demand, while still allowing our sales consultants to sell from a position of strength. As the market evolves over the third and fourth quarters, we'll be making decisions as to how much production to start as we plan ahead for 2026. Given the recent pace of sales and stage of units under construction, we currently expect to close between 7,200 and 7,600 homes in the third quarter. As it relates to full year, given our level of backlog and the slightly lower absorption paces we have realized over the past several months, we are refining our full year 2025 closings guide to 29,000 homes. We still expect the average sales price of closings to be in the range of $560,000 to $570,000 each in the remaining quarters and in turn for the full year. Consistent with our prior guide, we expect our Q3 and Q4 average community count to be 3% to 5% higher than the comparable prior year period. For our second quarter, we are reporting gross margin of 27.0%, which was at the top end of our guide. Relative to our guidance, our Q2 gross margin reflects both the benefit of a favorable mix of homes closed, as well as the headwind of buyer incentives. Incentives for the second quarter were 8.7% of gross sales price, which is up from 6.3% last year and on a sequential basis, up from 8.0%. As we assess the back half of 2025, we are reaffirming our guidance, as we expect gross margins in the third and fourth quarters to be in the range of 26.0% to 26.5%. During our Q1 call, we indicated a potential impact of tariffs of approximately $5,000 per unit that could hit in the latter part of Q4. At this time, we now expect any impact from tariffs in Q4 to be lower, which will help offset the cost of elevated incentives. While we have reasonable visibility into giving this gross margin guide, I will note that we still need to sell and close a meaningful number of spec homes to achieve our closings guide. SG&A expense in the second quarter totaled $390 million, or 9.1% of home sale revenues. In the prior year, we reported SG&A expense of $361 million, or 8.1% home sale revenues, including a $52 million pre-tax insurance benefit recorded in the period. We remain diligent in controlling our overhead costs and we expect SG&A expense for the full year of 2025 to be in the range of 9.5% to 9.7% home sale revenues. In the second quarter, our financial services operations reported pre-tax income of $43 million, down from $63 million in the prior year. The decrease in pre-tax income in the quarter reflects the impact of lower closing volumes and slightly higher expenses. Tax rate in the second quarter was 25% compared to 26% last year. PulteGroup's pre-tax income in the second quarter was $807 million. For the period, we reported a tax expense of $199 million, an effective tax rate of 24.6%. We continue to expect our tax rate to be approximately 24.5% excluding the impact of any discrete period specific tax items. On the bottom line, we reported second quarter net income of $608 million, or $3.03 per share. In comparable prior year period, we reported net income of $809 million, or $3.83 per share. Prior year results are inclusive of $0.25 per share related to an insurance benefit and favorable resolution of certain state tax matters. Second quarter earnings per share was calculated based on 201 million diluted shares, which is a decrease of 5% from the prior year as the company continues to execute its share repurchase program. In the second quarter, we repurchased 3 million shares for $300 million, earning an average price of $100.54 per share. Through the first two quarters of 2025, the company has returned $600 million to shareholders through the share repurchase activity. Along with allocating excess capital back to shareholders, we invested $1.3 billion in land acquisition and development in the second quarter. Through the first six months of 2025, we invested $2.5 billion in land acquisition and development, which keeps us on track with full year guidance of investing $5 billion in land development. Inclusive of these most recent investments, we have further advanced our land pipeline in two critical areas. First, we have increased the total number of lots under control to approximately 250,000. Second, we continue to make progress in becoming more land light as option lots now comprise 60% of total land pipeline. It's gratifying to see the progress we're making towards achieving our target of having our land pipeline be comprised of 70% option and 30% owned lots. In just the past 12 months, we have added almost 30,000 option lots to the pipeline while reducing our owned lot count by approximately 4,000 lots. Relative to peers, our land options are differentiated in that the vast majority of fully blind options are with the underlying land seller or in one-off transactions with a select number of land bankers. An investment in each and every land transaction, we would strike a balance evaluating the cost versus the risk mitigation opportunities that result from optioning the land parcel. As Ryan noted earlier, in an operating environment that has become more challenging, we are adhering to our disciplined business practices and making any needed adjustments consistent with our focus on generating strong cash flow and high returns. Consistent with this focus, we continue to expect cash flow generation for 2025 to be approximately $1.4 billion. Looking at the balance sheet, PulteGroup continues to maintain a strong and highly supportive financial position. We ended the quarter with $1.3 billion in cash and a debt to capital ratio of 11.4%. Adjusting for the cash balance, our net debt to capital ratio at quarter end was 2.8%. Now, let me turn the call back to Ryan for his final comments.

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 in this call. We ask that you limit yourself to one question, one follow-up. Jeannie, if you would again explain the process, we will open the call for questions.

At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. And your first question comes from the line of John Lovallo with UBS. Please go ahead.

Good morning, guys. Thanks for taking my questions. The first one I had is that you guys have talked about some encouraging signs as rates kind of pulled back in late June. Curious, rates have been a little bit bouncy, but fairly stable I guess through July. I'm curious if the improvement that you saw in June kind of carried through into July, and we've also seen some recent improvement in consumer confidence. Is that helping support this demand in your view?

Okay. Now, that's great. And then maybe just on stick and brick costs, maybe how they trended in the quarter, and then on the land side, we've heard some signs of perhaps a little bit relief on the development side of the cost equation. Maybe if you can comment on both of those, it'd be great.

Sure. Thanks, John. The sticks and bricks, they were $79 per square foot, so consistent with last year and sequentially the same as Q1. So, they're holding firm for us. On the development side, yeah, we're hearing some of the same things, a little bit of opportunity on the development side. You've got trades up there, a lot of heavy machinery. People want to put it to work, so it's encouraging with what we're seeing. Don't really see that coming through in kind of our quarterly results, but as we look forward, we're hoping that we see some benefit from that going forward.

Appreciate it, guys. Thank you.

Your next question comes from the line of Ivy Zelman with Zelman and Associates. Please go ahead.

Good morning. Great quarter, guys. Congrats on really strong performance. Maybe we can start with the comments you made Jim as it relates to the land options that you're predominantly utilizing land developers as the ones selling you those options as opposed to land bankers. Can you elaborate as to why you think that's better? Or maybe there's a lower cost I presume as can you just go through your rationale there?

No, that's really helpful. And thinking about, and you spent $1.3 billion invested in land acquisition development, are you able to take some of the options that you have right now and retrade them and get better pricing because the market's been soft. We've been hearing from our land contacts that there is a lot of retrading going on.

Well, that's great. One quick last one. We've seen news about Canadian tariffs potentially doubling. Can you comment on, I don't even know if you guys are using US-sourced lumber or what percent is Canadian, but maybe you can give us some perspective on what that doubling impact might be to your direct cost.

Got it. And therefore, if the ones that you're acquiring from the Canadian, how much will that impact just double assuming the 25% will go up by double, or you think you'll get better pricing despite that?

Great. Well, good luck, guys. Thanks again. Appreciate taking my question.

Your next question comes from the line of Michael Rehaut with J.P. Morgan. Please go ahead.

Thanks. Good morning, everyone. Wanted to, first just kind of talk about the pluses and minuses on gross margins in the second quarter. Came in at the high end of guidance. And just kind of curious about how you saw incentives trend during the quarter, maybe compare it to the first quarter. And if there was any outliers and any kind of drivers to, I know it's only 25 basis points from the midpoint of guidance to the high end, but if there was any kind of additional tailwinds or headwinds even that you saw in the quarter relative to what you were expecting 3 months ago.

Yeah, great question, Mike. As we looked at the quarter, we really just had a different mix. Product and geography in the quarter, to give you a frame of reference, there were 1,200 homes that we both sold and closed within the quarter. So, we make assumptions about where we're going to sell and when we're going to sell and what the costs are associated with that. And it fared a little bit better than we thought. So, as we looked at it, incentives were 8.7% on what we closed for the quarter and again, the mix gave us a little lift and got us to the top end of our guide.

Great. And then, maybe just kind of looking forward, reiterating the 3Q and 4Q gross margin guidance. I know you talked, I believe I heard that you said maybe tariffs headwinds as they are today, maybe outside of the recent headlines around Canadian lumber. It sounded like you had talked about maybe tariff headwinds being a little less than expected, offsetting maybe a little bit higher incentives, and maybe you were at the beginning of the year. Is that the right way to think about it, in terms of

You know, being able to reiterate that back half gross margin guide. In other words, maybe if you know, and specifically, I guess I'm just wondering around the incentive loads, if that has maybe been a little bit higher. It almost sounded like you said, you know, incentives are a little higher, but tariffs are a little lower and hence we're able to reiterate the back half guide. Wasn't sure if that was the right way to think about it or if there are other pluses and minuses to consider.

Great. Really appreciate the call, Ryan. Thanks for that. That's all for me. Good luck for the upcoming quarter.

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

Yeah, thanks very much, guys. Ryan, I think you mentioned in your press release that you're positioning to grow market share as demand strengthens in the future. And I wanted to see if you could elaborate what you mean and maybe also what you don't mean with respect to that statement about growth. For instance, I guess my question would be like, are you planning for spec homes to be up on a year-over-year basis as you head into next spring? Are you willing to carry more owned land in the near term in order to accelerate community count next year? I just wanted to try to frame out what you mean by looking to grow market share as demand strengthens in the future. Thanks.

Okay. That's helpful. And then one other question, you talked again today a lot about your land positions and how proud you are of them and this has brought to mind something that we field a lot of questions from investors regarding your land positions. A lot of people seem to have this view that you have a lot of land that's maybe legacy land from sort of pre-COVID type vintages and that that's supporting your margin, your gross margin specifically. I was wondering if you could elaborate a little bit more on what you see in your land positions. How much of your active communities would you say are actually from kind of pre-COVID vintage land?

Yeah, that's what I was hoping you'd say. All right, great. Appreciate it, guys. Thanks a lot.

Your next question comes from the line of Matthew Boulay with Barclays. Please go ahead.

Morning, everyone. Thank you for taking the questions. Wanted to ask a question around product mix and how that's going to impact your margins. I know you mentioned some of the improvements in the active adult business and the new community openings and it sounded like you're speaking to the benefit of that mix. As that delivers in early 2026, if I heard you correctly. I think at the same time, you're seeing some of that pressure on the move-up business as you spoke to. So, I guess my question is, number one, how does move-up margins compare versus active adult margins? And I guess any additional color on how that mix of your product types may affect the gross margins here over these next several quarters. Thank you.

Understood. Yeah, and then even though that was very helpful, caller. So then secondly, I wanted to ask back on construction costs, we've certainly seen from a couple of your peers that they've been able to push back a little bit on construction costs. Does it sound like you guys are seeing flat stick and brick and appreciating obviously regional differences and product type differences and all that. My question is if there is room for you guys to drive construction costs lower at some point and if so, when might we begin to see that? Thank you.

You know, as Ryan said earlier, our procurement teams are all over this stuff. Best in the business as it relates to it. Similar to my comments a little earlier on land development, you'd hope to see some opportunity. Our teams are certainly working to see what they can do. Again, the $79 a square foot that we have now, these are homes that we contracted 6 months ago and started. So, as we go forward, our teams are certainly pushing for opportunity and we'd like to see that opportunity come through in the future.

All right. Thank you, both. Good luck, guys.

Your next question comes from the line of Anthony Pettinari with Citigroup. Please go ahead.

Good morning. Just staying on the cost side, I'm wondering if you could talk a little bit about labor availability and maybe where labor costs might shake out for the full year and if that's changed relative to expectations on January 1st.

Got it. Thank you. And I'm just curious on ICG and offsite manufacturing, how is that business performing and are there any kind of learnings about offsite as we've moved from kind of this white-hot market in the pandemic to kind of more of a choppy volume environment today? How that fits in the portfolio.

Okay, that's helpful. I'll turn it over.

Your next question comes from the line of Mike Dahl with RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking my questions. I'm just going to go back on labor quickly. Anecdotally, it sounds like maybe a little more noise in the market in terms of some ICE-related dynamics. It doesn't sound like you're necessarily seeing that on your job sites, but can you just give us your view on your take on some market in terms of like any impacts there?

All right. Okay. Thanks. And shifting gears, your order ASP was down a decent amount, 5% sequentially, 4% year on year. Obviously, there's always a lot of mix dynamics in there. Can you help us understand kind of what's like for like versus what's mix-related in that and maybe how to think about just the back half of the year from obviously your closings ASP is supported by the backlog to a certain degree, but just help us think through on the ground how your order ASP is shaking out.

Sure. As we look at the order ASP in the quarter, what we saw there was both mix in product and geography. You know, if you look our West business, and Ryan alluded to it, was the softest and particularly in some of the move-up segments. If you look at places like California, our two regions out there. So, you've got a mix influencing that with some of the move-up taking a little bit of a step down in some of our higher-priced markets. And then as well, you've got the incentives that are underneath that as well. So, primarily the mix and then as well as the incentives played into the 549 for the quarter for the quarter and order ASP.

Okay. All right. Thanks, Jim. Thanks, Ryan.

Your next question comes from the line of Kenneth Zener with Seaport Global. Please go ahead.

Morning, everybody. What do you expect your inventory units? I know you talked about the spec mix, but what do you expect your inventory units to be roughly at the end of the year? And then in Florida, how many of those buyers, which are largely active adult, are actually coming from Florida as opposed to from other states?

And what else I can if you don't mind I would add that because you made reference to it being heavy active adult. I mean there's parts of it so if you look at our Southwest business yeah you may be more active adult but you get into Orlando you get up in the Jacksonville you get into Tampa it's pretty well diversified across first time move up and active adult. Again you obviously get a draw because of the weather down there but it is we've built a business with the divisions of the very diversified business down there. So it is not just Del Webb Del Webb Explore or anything.

Thank you very much.

Your next question comes from the line of Paul Zimbelsky with Wolfe Research. Please go ahead.

Great thank you good morning. I guess to start off are you seeing any difference in the elasticity of incentives between your different consumer segments and then if you could provide some color on the incentive levels across the consumer segments relative to the 8.7% average in the quarter?

Okay. Excuse me. And did you see any impact on orders this quarter from the change in FHA eligibility for non-resident buyers? Any pull forward maybe before the May 25th deadline and then slowness afterwards?

Okay thank you appreciate it.

Your next question comes from the line of Susan Maklari with Goldman Sachs. Please go ahead.

And good morning everyone. My first question is on the SG&A which came in a little lower than we had modeled in terms of both dollars and as a percent of the revenue. Could you just talk about maybe some of the puts and takes there and how we should be thinking about the next two quarters?

You know great question Susan we stay very diligent all the time as we look at our SG&A and we talk with our teams constantly about the discretionary spend that they have we look at our people costs so I think we're running a very effective and efficient business that we have. You know we reiterated our guide of 9.5 to 9.7%. We still think that's a good guide but again it's something we talk about all the time and I think our experience operating is doing a nice job in this space.

Okay that's helpful. And then I guess maybe just thinking about capital allocation with the operating environment being what it is the guide for the land spend that you reiterated any thoughts on just buyback activity in the next couple quarters and how you're thinking about that given the valuation relative to the outlook for the business?

Yeah so on share buyback our the way we operate there is we report what we do in the quarter. I would reiterate that we've been a consistent buyer of our equity and we're using it as an opportunity to return excess capital back to the shareholders. So we did another $300 in the most recent quarter following $300 in Q1 and I think our practice will be to share Q2 Q3 results as they happen.

Okay thank you. Good luck with everything.

You too.

Your next question comes from the line of Jay McCanless with Wedbush. Please go ahead.

Hey good morning everyone. So the first question what percentage of communities were you able to raise prices quarter?

Yeah probably about 10% of the quarter.

And then I know you talked about Del Webb a lot but when we think about the communities coming online is the bulk of these new Del Webb communities coming online by year end or is it going to go into maybe first half of 2026?

Well you saw Jay in this quarter that the percentage of sign-ups in the quarter were 23%. 23 or 24% of this quarter sign-ups so typically from the time we sell until delivery it's about 6 months so this quarter sign-ups will end up being first quarter 26 closings. So what you should expect is that we'll get back into the Del Webb closing mix being about a quarter of our business once we hit 2026.

Great that's what I was looking for. Appreciate you taking my question.

Your next question comes from the line of Rafe Jadrosich with Bank of America. Please go ahead.

Great thanks for taking my question. I just wanted to you spoke a little bit about land to some relief on the land cost and development side and some more retreating there. Can you talk about when that would potentially start to flow through your P&L and on the actual cost side?

Yeah you know Rafe it typically land development occurs roughly 6 to 12 months before you see the closings hit. A typical land development cycle is 6 to 9 months. Then you have the home construction period of call it 4 months and then you start to see those closings. So it depends on how big the phase is it depends on there's a lot of variables but I think if you got savings today at this moment in time you're likely back half of 2026 is when you'll start to see the benefit of those lots closing that had lower land development costs.

That's helpful and then you spoke a little bit about Del Webb Explore that launched earlier this year. Can you tell us how that differs from the legacy Del Webb business and what the size of that is and how you're planning on growing that?

Thank you. That's really helpful. Okay.

And your final question comes from the line of Buck Horn with Raymond James. Please go ahead.

Hey, thanks. Good morning. Just wanted to go back to Florida real quick and the positive shift you're seeing in those regions or in those markets there. Specifically, just wanted for a little extra color if you can provide it in terms of like buyer segments, are we seeing any particular buyers responding more positively right now? It seems to be coinciding with a decline in resale inventory in Florida, which seems to be happening sooner than seasonal patterns would project. So, just wondering if you've noticed any particular dynamics within Florida within the buyer groups or any other characteristics you can explain why that shift is occurring now.

That's great news. Appreciate the initial feedback there. And just lastly, in terms of single-family rental partnerships, just wondering if you're getting any further opportunities, inquiries of interest, how you're thinking about blending single-family rentals into the operating platform. What's your kind of current line of thinking on rentals right now?

Appreciate the call there. Congratulations. Thanks.

That concludes our Q&A. I will now turn the call back over to Jim Zeumer for closing remarks.

Appreciate everybody's time this morning. I know it was a busy morning for everyone. We're available for the rest of the day. Got to have a question. Otherwise, we will look forward to speaking with you on our next earnings call. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.