The PulteGroup Inc. is holding their Q4 2023 earnings conference call and Jim Zeumer, Vice President of Investor Relations, is welcoming participants. He is joined by Ryan Marshall, President and CEO, Bob O’Shaughnessy, Executive Vice President and CFO, and Jim Ossowski, Senior Vice President, Finance. The company's earnings release and presentation slides have been posted on their website and an audio replay will be available later. They will be discussing their debt ratio and providing a reconciliation of their adjusted results to their reported financials. The presentation includes forward-looking statements and the most significant risk factors that could affect future results are summarized in the earnings release and presentation slides. Ryan Marshall is excited to speak about the company's outstanding fourth quarter and full-year financial results, despite facing challenges such as COVID and supply chain disruptions.

Despite challenges, PulteGroup has remained disciplined and adaptable, leading to strong financial results. They strategically increased spec production to meet demand and reported record home sale revenues. They carefully managed costs to maintain profitability and efficiently increased their land pipeline through land banking. They invested in the business and returned money to investors.

PulteGroup has been consistently repurchasing shares and reporting strong financial results. Despite a decrease in homebuying demand in the fourth quarter, the company saw improved sentiment and increased activity as mortgage rates dropped. The company believes the long-term outlook for new home construction is positive due to a shortage of housing and challenges in land entitlement and labor availability. As a result, they are investing in their operations to grow unit volumes by 5% to 10% annually.

PulteGroup's decision to walk away from option locks due to increasing interest rates in 2022 will result in slower growth in 2024, with an expected 30,000 home closings. The company's focus is on investing in high quality projects and maintaining high returns on equity. They plan to continue generating strong cash flows, pay dividends, and return excess capital to shareholders while maintaining a strong balance sheet. The board has approved a $1.5 billion increase in share repurchase authorization. Market conditions have changed, with falling interest rates and a healthy economy, leading to optimism about housing demand. The fourth quarter saw a decrease in wholesale revenues due to these evolving market dynamics.

The decrease in home sale revenues for the period is primarily due to a decrease in closings and average sales price. Sales were impacted by higher mortgage rates and a general softening in buyer demand. However, demand improved in the back half of the quarter and the company maintained its desired buyer mix. The average community count increased by 8% and net new orders increased by 57% compared to the previous year. The difficult operating environment in the fourth quarter of 2022 also contributed to the significant increase in orders.

The company's absorption pace improved in December due to lower interest rates and a decrease in cancellation rates. Net new orders increased for all buyer groups, leading to a strong potential for housing demand in 2024. The quarter end backlog was flat compared to the previous year, but the mix of first-time buyers resulted in a slight decline in backlog value. The company has a strong production pipeline and expects closings and deliveries to grow in the first quarter and full year of 2024. The company is also targeting a shorter construction cycle time.

The company expects the average sales price of closings to remain stable in the first quarter and full year of 2024. The fourth quarter gross margin was 28.9%, with higher incentives and input costs affecting margins. SG&A expense decreased due to lower closings and revenues, and the company anticipates it to be in the range of 9.2% to 9.5% of home sale revenues for the full year of 2024. Overhead leverage is expected to improve throughout the year.

In the fourth quarter, the company's financial services operations saw an increase in pre-tax income due to favorable market conditions and higher capture rates. The company also reported a decrease in net income and an increase in cash flows from operations for the full year of 2023. In 2024, the company expects to see a tax rate of 24% to 24.5% and plans to increase land investment to $5 billion. In the fourth quarter, the company invested $1.3 billion in land acquisition and development, with a 60/40 split between development and land acquisition.

In 2023, Ryan's investments increased by 5% and they ended the year with 223,000 lots under control. They lowered their owned lot count by 4,000 while increasing their lots under option by 16,000. Their goal is to have 70% option lots and they expect their average community count to increase by 3% to 5% in each quarter of 2024. They also returned capital to shareholders through dividends and share repurchases, and used cash to pay down debt.

The company successfully retired a significant amount of debt and lowered their debt to capital ratio in 2023. The CEO, Ryan Marshall, is proud of how the company has navigated challenges in the past few years and delivered strong financial results. The company has grown volumes and invested in land, leading to high earnings per share and return on equity. The company's consistent performance over an extended period of time may change how they are valued by the market.

In the past five years, the company has invested $19 billion into its operation while generating almost $7 billion in net cash flow from operations. They have shifted their focus from just topline growth to driving high returns over the housing cycle, resulting in only one year of negative cash flow. They have also paid off $1.1 billion of debt and returned $4 billion to shareholders through stock repurchases and dividends. The CEO believes that if they continue to grow their business, deliver high returns, and maintain a low risk profile, their stock price and shareholders will be rewarded. During the call, they also discussed the business performance in January and the potential for pulling down incentives or raising base across the company's footprint.

The company had a successful December with the highest sales and absorptions per community in the quarter, which continued into January. They will monitor discounts and price increases to find a balance between pace and price. The entry level business has been strong, but the move-up business saw significant growth and strong margins in the quarter. The company is optimistic about the start of the year.

The company's community mix and strategic targets are in line with their long-term goals, with the community mix making up about 35% of their overall business. Sales and consumer performance have been strong, with high margins and absorptions. The company expects 5-10% annual growth, but may be at the lower end for 2024 due to walking away from some deals. They feel confident in their land pipeline and ownership structure, with 225,000 lots under control.

The company is confident in their future growth and has already secured land for the next few years. They expect to see a decline in gross margins in 2024 due to flat pricing and increases in land, labor, and material costs. They anticipate incentive loads to remain around 6.5%.

The speaker discusses the strong margin performance of the company, with a slight decline but still at 28-28.5%. They also mention that January has been performing well and they expect a strong first quarter. The western markets have also been picking up. The speaker also talks about the company's share buyback, which has been around $1 billion per year, but with the new authorization of $1.8 billion, they may see more than a billion in 2024.

Ryan Marshall states that the company's capital allocation priorities remain the same, with an increase in land investment and a 25% increase in dividends. The company will continue to report on news regarding their $1 billion yearly revenue and $0.8 billion cash reserves. They have also increased their land control via options from 48% to 53%. The company will also continue to consider liability management as part of their capital allocation strategy.

The company is focused on becoming more land-light and efficient, while maintaining a lower risk model. They plan to keep their owned lot count flat or slightly decrease, while increasing their option lot exposure. They anticipate a tradeoff in their land banking strategy, with a potential decrease in margin but an increase in inventory turns. The exact impact will depend on the mix of their business.

The speaker discusses the efficiency of inventory turns and how it varies depending on the type of asset. They also mention the incentive load in their gross margin guidance and how it is influenced by interest rates and affordability. The company plans to continue using incentive dollars to help with affordability, but may reallocate some of those funds if interest rates fall. They are not afraid to raise prices if necessary.

The company is not afraid to cut discounts and is always looking to optimize pace and price. They prioritize maximizing returns for shareholders and actively manage all aspects of the business. The company believes that their strong cash flow and consistent growth could potentially change the way people view their equity and manage their leverage on the balance sheet. The rating agencies have also recognized the value in the business model.

The speaker is discussing the use of debt for the right things and how it can be helpful. A question about incentives and their potential decline is raised and the speaker explains that they are currently at 6.5% and may be reduced in the future. They also mention that about 50% of sales are spec and the impact on margins for the year.

Bob O’Shaughnessy and Michael Rehaut discuss the company’s performance in the first, second, third, and fourth quarters of last year. They also touch on the potential for higher commission rates in the future and how that could impact SG&A and overall leverage for the company. Ryan Marshall explains that they have always been thoughtful in their SG&A spending and that they aim for a balanced approach, investing in the quality of their homes and customer experience. For 2024, they expect to see low nines in terms of SG&A leverage, with wage inflation being a factor.

The company is facing pressure on the SG&A front and is not seeing the benefit of the ASP increase. They have given the best visibility for 2024, but it remains to be seen where things will go in the future. The first-time buyer segment saw a 6% decrease in pricing year-over-year, largely due to increased incentives. There has not been a radical redesign of the product offerings, and the decline in pricing is primarily driven by the incentive load.

In the fourth quarter, the option and lot premiums were $105,000 per unit, down $4,000 from the previous year. The sales team has been successful in reducing the need for incentives and maintaining strong pricing for move-up and active adult buyers. In terms of land banking, the majority of closings will likely be from finished lots, but some may be self-developed through individual seller options.

The speaker is discussing the breakdown of their total closings, with an estimated 20-25% being finished lots and the rest being options. They clarify that they take down options as raw land chunks and self-develop them, which is still efficient. The questioner asks about the percentage of their average selling price (ASP) that comes from options and the margin impact. The speaker explains that $80,000 of the $105,000 option and lot premium is from options, with a relatively rich margin mix of 50%. They also mention that they have a base price for their houses and then add on the cost of the lot.

The speaker discusses the increase in revenue due to offering options in home packages, and mentions that for the Centex buyer, there may be curated packages or no choices at all. They also discuss the improvement in cycle times and how they expect further improvement in 2024, but do not foresee any constraints in labor availability. The pressure may come on dollars rather than time, and the decrease in cycle time is due to getting things on a predictable schedule like pre-COVID.

Ryan Marshall, CEO of a company, discusses how their operations have improved since the COVID-19 pandemic. They have been able to take out "dead days" from their schedule and are getting back to their pre-COVID cycle times. They have also trimmed out 30 days in 2023 and expect to trim out another 30 days by the end of 2024. Marshall also mentions their plans for growth in the ICG sector, with a goal of having eight factories. However, they have not shared specific metrics yet, as it is currently concentrated in a few markets. Marshall says they are seeing improvements in cycle times.

The speaker, Ryan Marshall, discusses the company's production and spec levels. He mentions that they have about 44% of their production in spec and do not anticipate a major change in this percentage. He also mentions that they intentionally put more spec starts in the ground for the spring selling season. When asked about the potential impact of rate cuts on the existing home market, Marshall believes it will be helpful but not have a major impact on their business projections for 2024.

Rafe Jadrosich from Bank of America asks about the expected build cycle improvement for 2024 and if it's factored into the cash flow guide. Ryan Marshall and Bob O'Shaughnessy confirm that it is and that the improvement will not be seen until Q4. Rafe also asks about land inflation and the difference between development cost and raw land inflation. Ryan Marshall explains that land prices are typically sticky and do not often decrease.

The speaker discusses the recent increases in lot costs and the competitive landscape of the land market. They mention that they underwrite to return and expect no change in the land market. They also mention the influence of labor constraints and general cost inflation on land development. They anticipate a more expensive lot increase in 2024 due to these factors, but note that the vertical market is showing signs of a slowdown in inflation. They end by thanking everyone for their time and offering to answer any further questions.

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