The conference call for PulteGroup's Q1 2024 earnings begins with the operator welcoming everyone and providing instructions for the Q&A session. The call is led by Jim Zeumer, who introduces the other participants and directs listeners to the company's website for more information. Zeumer also mentions that the call will include forward-looking statements and highlights the risk factors that could affect future results. The call then shifts to Ryan Marshall, who discusses the company's record-breaking first quarter results.

PulteGroup had a successful first quarter with strong revenues, margins, and earnings. This was a result of long-term strategic planning and disciplined capital allocation. The company's decision to not lower prices in the fourth quarter of the previous year and hold inventory for the 2024 spring selling season allowed them to sell more homes with higher margins in the first quarter of 2024. This demonstrates their balanced approach to running the business and delivering high returns. Stronger demand gives the company the choice to sell more homes, raise prices, or do both.

In the first quarter of 2024, the housing market continued to perform well in areas of strong demand, while areas that struggled in 2023 showed improvement. Most markets saw stable or increasing prices, resulting in higher net pricing for the company. The supply of available housing remains tight due to a decade of under-building and low inventory of existing homes for sale. This creates a good operating environment for homebuilders, but can also cause hardships for consumers due to high housing prices. Some buyers have been motivated to purchase now due to the fear of rates increasing.

The company's targeted incentives, such as mortgage rate buy-downs, have helped bridge the affordability gap in a market with high home prices and limited inventory. In the first quarter, 25% of buyers used their national rate program. Despite the challenges of higher interest rates, the company is optimistic about their financial performance in 2024. In the first quarter, the company reported a 10% increase in home sale revenues, driven by an 11% increase in closings. The average sales price decreased due to a shift in geographic mix of homes closed. Closings exceeded expectations due to available spec inventory and strong buyer demand.

In the first quarter, the company saw an increase in net new orders and a reduction in cancellation rates, resulting in a higher absorption pace. The average community count also increased, and orders were higher across all buyer groups. The largest increase was seen in the move-up buyer category, influenced by improving market conditions in the west. The quarter-end backlog also increased significantly.

In the first quarter, the company started 7,500 homes and ended with a total of 17,250 under construction. They have a production pipeline of 7,000 spec homes, with 1,337 already completed. They expect to close between 7,800 and 8,200 homes in the second quarter and have raised their full-year closing guide to approximately 31,000 homes. The average sales price for the first quarter was $538,000, slightly below their guide, but they expect it to be consistent for the rest of the year. The gross margin for the first quarter was 29.6%, which is higher than the previous year and their guide. The company attributes this to actively managing pace and price, as well as an increase in demand as the quarter progressed.

In the first quarter, there were more home closings in higher margin markets in the southeast and Florida, resulting in an increase in reported gross margins. However, the company expects a more balanced geographic mix of closings for the rest of the year. The gross margin guide for the remainder of 2024 has been raised, with expected gross margins of 29.2% in the second quarter and approximately 29% in the third and fourth quarters. This is also influenced by changes in the geographic mix of homes to be closed, with more homes expected to be closed in the west region. SG&A expenses for the first quarter included a pre-tax insurance benefit, and the company expects SG&A expenses for the full year to be in the range of 9.2% to 9.5% of home sale revenues, with increased overhead leverage expected as the year progresses.

In the first quarter, the financial services operations reported a pre-tax income of $41 million, a 200% increase from the previous year. This was due to improved market conditions and higher capture rates in all business lines. The sale of a joint venture resulted in a gain of $38 million. The reported pre-tax income for the quarter was a record of $869 million. The tax rate for the quarter was 23.7%, impacted by energy tax credits and stock compensation deductions. The reported net income for the quarter was $663 million, a 6% reduction in share count compared to the previous year. $1.1 billion was invested in land acquisition and development in the first quarter, with 60% for the development of existing land assets. The company plans to invest $5 billion for the full year, with 60% for development and the remainder for new land positions.

The company ended the quarter with 220,000 lots under control, with 51% held through options. They continue to work towards their goal of controlling 70% of their land through options. The community count is expected to increase by 3-5% each quarter compared to the previous year. The company also repurchased shares and bonds, ending the quarter with $1.8 billion in cash and a low debt to capital ratio. The CEO, Ryan Marshall, notes that buyer interest and order paces were strong in the first quarter, but have since moderated due to increases in interest rates.

PulteGroup has seen a modest change in consumer activity due to higher interest rates, but they are monitoring the situation and are prepared to adjust pricing or incentives. The company has been investing in land and people to support their goal of 5-10% annual growth. They have maintained their underwriting discipline and have consistently grown their earnings and delivered high returns. Additionally, PulteGroup has been named a Fortune 100 Best Company to Work For, based on feedback from their employees.

PulteGroup has been named to the list of top companies for four consecutive years, showing their commitment to caring for customers and employees. The call is then opened for questions, with a limit of one question and one follow-up. The first question is about the company's long-term target for land ownership, with the analyst estimating it to be a little over two years owned and 70% optioned, and asking when the company expects to reach this target.

The speaker explains that reaching their long-term target will take a few years due to their desire to do it in an organic and natural way. They mention that in the previous quarter, 74% of approved deals were under option and they believe this activity will lead them to their goal. They also discuss cash flow and mention that they have not updated their guide for the year, but they expect to generate around $1.8 billion in cash flow from operations. They also mention that they will continue to invest in the business and that their leverage has stabilized in low single digits.

The company has seen a $300 million increase in investment in their balance sheet, with half going towards land and half towards houses. They expect to generate more cash from operations and will use some of it to meet their growth goals. The company has a consistent strategy for capital allocation, including investing in the business, paying dividends, buying back stock, and managing liabilities. They are not sure if cash flow from operations will equal repurchase activity, but they will report on it. In the fourth quarter, they did not increase incentives to chase volume.

Ryan Marshall, speaking on behalf of PulteGroup, addresses the issue of higher rates for longer and how it will affect their incentives and margins going forward. He mentions that they are not "margin proud" and are willing to trade some margin for better growth and returns. They have a strong operating platform and community investments that allow them to command good pricing and pace. They also have the advantage of using forward mortgage rate commitments to offer attractive incentives. Marshall notes that their Centex brand, which caters to first-time buyers, may be more sensitive to rates, but overall they have assumed that their incentive load will remain flat for the rest of the year. The second topic he addresses is land costs and inflation.

Bob O'Shaughnessy, CEO of a company, addressed the potential for mid to upper single-digit inflation in land and its impact on gross margin. He clarified that this increase in land costs has already been accounted for in the first quarter and will continue throughout the year. The current market conditions are still competitive, and land prices have not decreased despite slight variations. The company has seen a slight improvement in construction cycle times but is still targeting a goal of 100 days by the end of the year.

The speaker discusses the company's Q1 numbers, explaining that long-cycled closings for multi-family and condo buildings may have inflated the overall cycle time of 128 days. However, they have made progress in many markets and believe their target of 100 days is achievable. The speaker also addresses existing home inventory creep and suggests it is mostly neutral on the overall supply side, with the majority of buyers likely to purchase another home elsewhere. A question is then asked about the difference between vacant investor-driven inventory and existing resale inventory.

Ryan Marshall, CEO of Pulte, discusses the potential impact of the NAR settlement on the real estate industry and Pulte's business. He mentions that the settlement may lead to changes in fee structures and how consumers pay for services. Marshall also notes that Pulte has seen stronger trends in western markets, such as Nevada, Arizona, and California, due to a combination of price appreciation and improved buyer sentiment. He expects these markets to continue to contribute to Pulte's overall results.

Bob, the speaker, explains that the margin contribution from certain markets will be lower, but they are still pleased with their performance. They have seen strong demand in the first quarter and the beginning of April, although there has been a slight downturn in traffic due to changes in the rate environment. Material costs have remained stable at $80 per square foot for base houses.

In the first quarter of last year, the cost per square foot was $84, but it has since decreased to $23 in Q4 of '23. The company expects costs to increase slightly in 2024 due to labor and material inflation, but they have factored this into their guidance. The next question asks about the company's flat gross margin outlook for the year, which they attribute to a mix of pricing and market strength. The mix differential was only an issue in Q1 and is expected to even out in the second half of the year.

The gross margin outlook for the second quarter has slightly decreased from the first quarter due to a mix impact and the number of homes to be sold in the back half of the year. The demand environment will play a role in the margin, and the Centex buyer is more sensitive to rates and payments. Traffic to the website remains strong despite a decrease in store traffic.

The speaker discusses how fluctuations in interest rates can affect buyer behavior, but believes that the demand for housing is still strong in a supply-constrained environment. They also mention that they have the tools to navigate affordability challenges and provide an update on their relationship with Invitation Homes in the single family rental market, stating that they aim for 5% of their total volume to go into this channel and are currently on track to meet that goal. They also note that the current interest rate environment may make it harder for single family rental operators to underwrite deals.

The speaker is discussing costs and margins in response to a question from Rafe Jadrosich of Bank of America. They mention consistent materials costs and a high single digit increase in lot costs. They also explain that lot costs will continue to rise in the future. Rafe Jadrosich then asks about the first quarter gross margin, which saw a 70 basis point increase. The speaker clarifies if the question is about sequential or year-over-year changes.

Bob O'Shaughnessy discusses the company's margin performance in the fourth quarter, attributing it to the strength of the market and a mix shift towards move-up homes. He also mentions that the company is facing challenges with affordability. When asked about the company's assumptions for flat incentives in light of recent rate changes, O'Shaughnessy explains that it is a tricky time to make predictions, but the company is basing its assumptions on current backlog margins and the ongoing challenge of affordability.

The company expects to continue to incentivize homebuyers through national commitments and rate finance support. In the first quarter, they saw a 6.5% increase in incentives, and they believe they will need to continue to offer support to meet affordability needs. This may lead to a strong market performance for new homes compared to resale homes. The company is aware of the impact of rising interest rates on demand, particularly for their Centex brand, and has programs in place to offer lower cost incentives to entry-level buyers.

The speaker discusses the details of the national program offered by the company and how it varies for different types of buyers. They mention actively managing the program and making changes based on market changes and consumer needs. The question is raised about the company's approach to spec homes versus build-to-order homes, and the speaker mentions that they have increased spec production due to longer cycle times and smaller margin differentials between the two options.

The speaker is asking if the company is considering changing their approach to spec starts and incentives due to the current market conditions, with interest rates remaining high and cycle times normalizing. The company is currently operating at a 50/50 mix of build-to-order and spec sales, with 40% of their business being spec. They closely monitor the spec sales and are responsive to market changes. In a higher interest rate environment, having available spec inventory allows for more effective use of incentives. The company plans to stay close to their current approach. The speaker also commends the company for not chasing the market lower in the previous quarter.

The speaker explains that they monitor sales rates every day and consider both qualitative and quantitative feedback from their field operations when making decisions about increasing incentives. They have noticed that any change in the sales rate can cause buyers to pause, but this effect seems to diminish over time. However, affordability continues to be a concern, and they will pay attention to market rates and adjust their incentives accordingly.

The speaker discusses their company's focus on keeping their production machine moving and optimizing returns in order to maintain market share. They also mention the impact of price and discount changes on affordability. The caller asks for more information about the effect of rising existing market supply on the company's profitability in Florida, particularly in regards to their move-up brand. The speaker provides some commentary on Florida's housing market, noting that it is a significant part of their business and is primarily focused on move-up and age targeted buyers. They also mention a small amount of entry-level business in certain markets.

The speaker discusses the strong business and job relocation in Florida, with many people attracted to the state due to flexible work arrangements. However, there are challenges with affordability, property taxes, and insurance. Despite these challenges, Florida remains a bright spot for the speaker's business. The call concludes with the speaker thanking everyone for their time and mentioning the availability for follow-up questions.

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