The conference operator, Abbie, introduces the PulteGroup third quarter 2023 earnings conference call and explains the procedures for asking questions. Jim Zeumer, Vice President of Investor Relations, then introduces the speakers for the call: Ryan Marshall, President and CEO; Bob O’Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior Vice President, Finance. He also mentions that the company's earnings release and presentation slides are available on their website and that the call will be recorded for later playback. Zeumer reminds listeners that the discussion will include forward-looking statements and directs them to the risk factors outlined in the company's SEC filings.

Ryan Marshall, CEO of PulteGroup, discusses the company's strong financial performance in the third quarter, highlighting a 43% increase in orders, industry-leading gross margins, and record earnings. He also mentions the success of their balanced operating model, which includes both spec and build-to-order homebuilding businesses. The active adult segment, in particular, has been a major contributor to their growth, with a high percentage of cash buyers and strong demand for premium lots and upgrades. This is demonstrated by the success of their Del Webb community in Michigan, where they have already sold 114 homes in just over 100 days.

PulteGroup's diversified approach to buyer groups has contributed to their strong third quarter financial performance. They have transitioned to a spec build model for first-time buyer communities, allowing for a more consistent cadence of starts and increased construction efficiencies. The decrease in the percentage of spec sales may be due to affordability challenges for some buyers, while more affluent buyers are still comfortable contracting for a customized home. PulteGroup has also been able to shorten their production cycle, reducing it from 170 days at its worst to 140 days by the end of the quarter.

PulteGroup has been successful in reducing their build cycle and improving cash flow. They have invested in their business, returned money to shareholders, and even retired debt. Despite the Federal Reserve's efforts to slow the economy, PulteGroup has still seen strong demand for new homes due to a strong job market and rising wages. They have made adjustments to address affordability concerns and will continue to manage their business carefully in uncertain economic conditions.

In the third quarter, PulteGroup saw a 3% increase in home sale revenues, driven by a 2% increase in average sales price and a slight increase in closings. The average sales price was driven by increases in move-up and active adult buyers, while first-time buyer closings saw a slight decrease. The mix of homes delivered remained consistent with previous years. Net new orders also increased by 43%, with significant gains in all buyer groups, particularly among first-time buyers.

In the third quarter, the company saw a significant increase in sales among move-up buyers and active adult buyers. The average community count also increased by 12%. The monthly absorption pace also saw an increase, and the cancellation rate remained comparable to the previous year. The unit backlog and value of ending backlog decreased compared to the previous year. The number of homes under construction decreased, with 61% being sold and 39% being spec units. The company has a measured approach to production, with fewer than 1,000 finished spec homes currently under construction.

PulteGroup expects to close approximately 8,000 homes in the fourth quarter, which would bring the total for the year to 29,000. This is slightly lower than their previous guidance due to affordability challenges and a shift towards build-to-order homes. The average sales price for the fourth quarter is expected to be between $540,000 and $550,000. PulteGroup's third quarter home sale gross margin of 29.5% has led the industry, thanks to strong performance across all buyer groups. Their diversified product portfolio allows them to capture higher margins in move-up and active adult communities. PulteGroup remains disciplined in their location, community underwriting, house design and construction, and strategic pricing. There have been questions about their margin performance compared to other public builders, but their margins are not solely due to their land positions in older Del Webb legacy communities.

In the third quarter, PulteGroup's margins for their active adult communities were comparable to the rest of their business, but were not reflected in their overall numbers. They expect to maintain high margins in the fourth quarter, but may be towards the lower end of their projected range. SG&A expenses were slightly lower than the previous year, and pre-tax income from financial services increased due to a higher capture rate. The effective tax rate remained consistent, and net income for the quarter was higher than the previous year. PulteGroup also repurchased shares and paid down some of their debt.

The company retired $65 million of senior notes, lowering their debt-to-capital ratio and investing $1.2 billion in land acquisition and development. They have 223,000 lots under control, with 53% held via option. They are expanding their use of land banking structures and have completed transactions for 5,000 lots. About one-third of their lots are already developed and they continue to develop most of the lots they acquire. The decision to purchase finished lots versus raw dirt depends on return.

The company assesses opportunities for both finished and undeveloped lots in order to drive higher risk-adjusted returns. The third quarter showed strong demand, but there has been some volatility in sales in October due to higher rates and global unrest. The company has increased net income and cash position, and is expecting exceptional results for 2023. They are bullish on long term housing demand, but acknowledge affordability challenges and potential economic impacts from higher mortgage rates.

PulteGroup remains disciplined in their business operations, with a clear and successful operating model that has been in place for over a decade. This strong organizational foundation, combined with their financial strength, positions them for ongoing success. The company thanks their team for their efforts and opens the call for questions. The first question is about the cycle time numbers, and the company aims to reduce them to below 100 next year. The caller asks about specific actions that need to be taken to achieve this goal.

Ryan Marshall, CEO of PulteGroup, discusses the company's progress in reducing cycle times for homebuilding. He explains that while some homes are already being delivered on shorter cycle times, the company is still working on reducing cycle times for older homes in the pipeline. Marshall also mentions that October sales have been a bit choppy, but overall the company is seeing a return to pre-COVID seasonal trends and healthy absorption rates. He also acknowledges the impact of changing interest rates on consumer behavior. Analyst Carl Reichardt asks for more detail on October performance and cancellations, and Marshall responds with further information. The call then moves on to the next question from analyst Matthew Bouley.

In the paragraph, Matthew Bouley asks about the company's efforts to address affordability for first-time buyers, specifically in regards to incentives and rate buy-downs. Ryan Marshall, the company's representative, discusses their use of the permanent 30-year buy-down as their most powerful incentive. He also mentions the redistribution of incentives from cabinets and countertops to interest rate incentives. Marshall acknowledges the impact of inflation on stick and brick costs and mentions a previously discussed inflation rate of 8-9% year-over-year.

The speaker explains that the company's cost to build has remained flat year-over-year due to increases in materials and labor being offset by lumber savings. They also mention that October has been choppy, but in line with pre-COVID seasonality, and that they are expecting a similar gross margin in the fourth quarter. They attribute their strong new order growth to their ability to sell homes. The speaker also mentions that incentives may have come up in the market in recent months.

In the third quarter, the company focused on turning assets and getting the necessary absorptions in each community to deliver the best return on invested capital. They did not give away unnecessary price and incentives, resulting in a 6% incentive load, which is down from the previous quarter. The company expects this to have a minimal impact on margins in the fourth quarter, but there may be some cost due to the current interest rate environment. In regards to the company's higher gross margin compared to peers, they will continue to focus on maintaining profitability while also being mindful of not giving away unnecessary incentives.

The speaker is discussing the company's gross margins and how they have increased from 2% to 6% in the past year. They mention the possibility of higher land costs affecting margins in the future, but state that they cannot provide guidance beyond the current quarter. They also mention that the current incentive load, which includes offering below-market interest rates, has been factored into their results and guidance. The speaker also makes a humorous comment about the inclusion of snow removal in HOA fees for an active adult community in Michigan.

Ryan Marshall and Joe Ahlersmeyer discuss market conditions and the impact on margins, returns on capital, and returns on inventory. Marshall highlights the company's focus on delivering high returns on invested capital and mentions their success in achieving over 30% return on equity in the past 12 months. He also mentions the company's disciplined approach to allocating capital, including paying dividends, buying back shares, and taking advantage of buying debt below par.

Ryan Marshall, CEO of the company, explains their focus on buying assets in good locations and turning them into high return investments. He also mentions their goal of moving their land options to 70%, with plans already in place to reach this target. In response to a question about matching starts to orders, Marshall states that they will be starting more speculative units in the fourth quarter and will be responsive to current market conditions. The next question is from Stephen Kim from Evercore ISI.

Bob explains that the process of negotiating buy-downs for rates is an ongoing and market-based process, with contracts being purchased weekly and typically filled within a week. The rates offered are responsive to market changes, and the cost has increased as rates have gone up. This process has been in place for 10-11 months and has been successful.

The executives of the company are discussing their financing strategies, including a forward purchase commitment and individual rate buy-downs for consumers. They also mention that most buyers are taking advantage of some form of incentive towards interest rates, but not all are going for the lowest rate of 5.75%. They clarify that only 25% of their business in the quarter was through a national campaign, and that the majority of their incentives are now financing-oriented. They also mention that seasonality is coming back into the business.

The speaker discusses the impact of the housing market slowing in the fourth quarter and their approach to buyers during this time. They mention evaluating land actions for risk-adjusted returns and the company's low leverage rate, which they attribute to the strength of their business and successful capital allocation.

The speaker addresses a question about pricing, discounts, and the impact of options on margins. They state that they will continue to set prices and incentives based on market conditions and will not engage in excessive discounting. They also mention that options and lot premiums make up about 20% of their average sales price and are a consistent part of their sales strategy. This is expected to remain the same as long as market conditions do not change.

Ken Zener asks about the impact of options on gross margins, specifically the cost of mortgage rate buy-downs and the distribution of usage among buyers. He also asks about the percentage of closings that come from finished lots and the impact on margins. Robert O’Shaughnessy responds by stating that the incentive load is about 6%, with the majority being rate buy-downs for financing support. He also mentions that the company is focused on returns rather than just margins, and that they have closed on finished lots.

Ryan Marshall, speaking on behalf of the company, stated that they are a return-focused company and do not focus on margin. They are able to maintain high returns even with lower gross margins if they sell a large number of units in a community and turn assets quickly. Last quarter, when rates were at 7%, they were buying down to 5% or 5.25%. As rates have increased to 8%, their promotional rate has also increased by 50 basis points. This is generally their strategy, but there is a limit to how much they can lower rates in relation to the headline number.

During a conference call, John Lovallo asks about community count and Robert O’Shaughnessy responds by saying they expect it to be up 5% to 10% over last year's fourth quarter. Ryan Marshall adds that their land spending this year is a good indicator of future community count. Mike Dahl asks about the practical limit on rate buy-down and Ryan explains that it depends on the type of buy-down and government agency rules being used.

The speaker explains that upfront fees paid on a forward commitment do not count towards seller contribution, but additional incentives applied once a home is under contract do count towards the seller contribution. They have not analyzed how many buyers would not qualify at current rates compared to rates earlier in the year. They highlight that they qualify buyers on the 30-year fixed rate and do not want to see the industry repeat the situation in 2008. The speaker is then asked about potential opportunities arising from the recent market conditions.

Ryan Marshall, the CEO of a public industry company, discusses the current state of the market and potential opportunities for growth. He mentions that there is some tightness in the availability and cost of capital for land development, which could create opportunities for his company to take market share. He also mentions that their build-to-rent business is a small but important part of their operations. Overall, Marshall is confident in the health of their business and their ability to continue succeeding in the market.

The speaker discusses a minimum sales target of two per community and how they manage their business to meet this target. They also mention that if the pace dips below this target, they will reassess their incentives, discounts, and base prices. The speaker also mentions spending time in the field and looking at various factors such as pricing, product, and target consumers to meet their sales goals. A question is then asked by an operator from Wolfe Research.

The speaker is discussing the performance of their entry level orders in the third quarter, which saw a 53% increase year-over-year. They are pleased with the growth in this segment and have invested in it, with the goal of making it 40% of their business. However, they acknowledge that there are challenges for this buyer cohort, such as high interest rates and affordability. They also note that first-time buyers have the advantage of not having a home to sell and rising wages, but there is not much more to add beyond that.

The speaker discusses the current high rate environment and how it affects consumers, housing, and the economy. However, he believes that with their strong management team and operational flexibility, the company will continue to be successful. He also mentions their ability to adjust their product offerings to address affordability challenges. In terms of their spec strategy, they expect it to remain stable at around 49% of their overall business.

The speaker discusses the company's performance during the COVID-19 pandemic, stating that it has been better than before due to an increase in first-time business and a decrease in the spec business. They apologize for not being able to answer all questions but are available for follow-up and look forward to the next quarter's call. The operator then concludes the call.

This summary was generated with AI and may contain some inaccuracies.