The operator welcomes participants to the PulteGroup's Second Quarter 2024 Earnings Conference Call. After the speakers' remarks, there will be a question-and-answer session. The call is turned over to Jim Zeumer, Vice President of Investor Relations, who introduces Ryan Marshall, President and CEO, Bob O'Shaughnessy, Executive Vice President and CFO, and Jim Ossowski, Senior Vice President, Finance. The presentation slides and earnings release have been posted to the company's website and an audio replay will be available later. The presentation includes forward-looking statements and risk factors are detailed in the SEC filings. Ryan Marshall discusses the company's strong financial results and their strategy to balance price, pace, and investment for long-term returns. The company's approach has shown the power of capitalizing on the value of each lot and home sold.

PulteGroup's divisions work hard to secure and develop land assets and generate high profitability. In the second quarter, the company saw an increase in average sales price, closings, and gross margin, resulting in a 19% increase in earnings. The company's return on equity for the trailing 12-month period was 27.1%, driven by outstanding gross margins. The company's strong financial results were partially due to high-margin options and lot premiums. While demand was slightly inconsistent in the second quarter, the housing market has been underbuilt for over a decade.

The housing deficit in the United States is expected to continue for years due to zoning challenges and low inventory of existing homes. The rise in interest rates has caused existing homeowners to hold onto their homes, further limiting the supply. While some markets in Florida and Texas have seen an increase in new home supply, consumer confidence in purchasing a home is low due to high prices and interest rates. The company is focused on addressing affordability concerns in each market.

Pulte has been focusing on meeting buyer needs and building a more efficient land pipeline in a competitive market. They have increased their use of third-party land bankers and have entered into transactions representing 13,000 lots and $1.5 billion of capital. Despite tougher market conditions in the second quarter, Pulte remains on track to close 31,000 homes this year and grow 5-10% in 2025. The company will adjust their starts pace based on demand conditions and absorption paces. Bob will now review the second quarter results.

PulteGroup's second quarter home sale revenues increased by 10% compared to the same period in 2023, driven by an 8% increase in closings and a 2% increase in average sales price. The increase in ASP reflects modest price increases in first-time and active adult communities, while move-up communities remained consistent. The mix of closings consisted of 40% first-time, 37% move-up, and 23% active adult buyers. Net new orders were down 4% from last year due to competitive market conditions and rising interest rates in select Florida and Texas markets. The average community count increased by 3% and the absorption pace was 2.7 orders per community per month, which is above pre-COVID levels but lower than last year's results.

In the second quarter, the company's net new orders decreased by 3% for first-time buyers, increased by 4% for move-up buyers, and decreased by 17% for active adult buyers. This decrease in active adult buyers is due to lower community count and timing of openings and closings. Adjusting for these factors, net new orders only decreased by 3%. The quarter end backlog was down 4% in terms of units, but only down 1% in terms of value. The company started construction on 8,100 homes and ended the quarter with 17,250 homes under construction. 40% of these homes were spec homes, with an average of 1.3 finished specs per community. The company expects to close between 7,400 and 7,800 homes in the third quarter and 31,000 homes for the full year. The average sales price in the second quarter was $549,000, consistent with the company's prior pricing guide of $540,000 to $550,000. The company expects closings in the third and fourth quarters to be in the same range of $540,000 to $550,000.

The company's average price and backlog are higher than expected, but they still have a lot of homes to sell this year, mostly in lower-priced communities. Gross margins increased in the second quarter due to a favorable mix of closings and improved pricing. However, the company expects lower margins in the third and fourth quarters due to higher interest rates and a less favorable delivery mix. They also reported a decrease in SG&A expenses due to a pre-tax insurance benefit. The company's full-year delivery guide of 31,000 units may be impacted by demand conditions in the coming months.

In the second quarter of last year, the company reported SG&A expense of $315 million, which was 7.8% of home sale revenue and included a $65 billion insurance benefit. Excluding the impact of insurance benefits, the company expects SG&A expense to be 9.2% to 9.5% of home sale revenue for the full year. Pre-tax income for the financial services operations increased by 36% due to strong performance and increased capture rates. Overall, the company reported a 10% increase in pre-tax income and an effective tax rate of 22.8%. Net income for the quarter was $809 million, a significant increase from the previous year, and was aided by share repurchases. The company also invested $1.2 billion in land acquisition and development in the second quarter.

The company has invested over $2.3 billion in land acquisition and development this year and plans to invest a total of $5 billion by the end of the year. They have a strong land pipeline and expect community count to grow by 3-5%. They have also repurchased shares and completed a tender offer for senior notes. Their debt-to-capital ratio is low and their cash position is strong. Fitch has upgraded their debt rating and Moody's has given a positive outlook.

The first half of 2024 saw good traffic and absorption pace in PulteGroup's communities, with expectations for a strong back half of the year. The potential for interest rate cuts could provide a financial and psychological boost in 2025. PulteGroup has also made successful new market entries and has seen growth in home sale revenues, earnings per share, land investment, share repurchases, dividend payments, and debt retirement. The company's CFO, Bob O'Shaughnessy, will be transitioning towards retirement at the end of 2025, with his CFO responsibilities being taken over early next year and him remaining as Executive Vice President for 10 months to support a smooth transition.

PulteGroup has announced that Jim Ossowski, currently Senior Vice President of Finance, will be the company's next CFO. He has had a successful 22-year career at PulteGroup and will officially take on the role in February of 2025. In the meantime, there will be a seamless transition of responsibilities. The call was then opened for questions and a question was asked about the company's gross margin outlook, which was addressed by management.

The speaker is responding to a question about the impact of land banking on the company's margins. He explains that the West has been performing well and that margins may be slightly lower due to a higher mix of West Coast closings. The company is making progress in increasing land banking from 50% to 70%, which typically results in a trade between margin and return of 200-300 basis points. However, the speaker emphasizes that every deal is unique and the company focuses on underwriting return rather than margins.

The company believes that return is the key driver of shareholder value and they have seen a 20% increase in returns in the industry. They are focused on improving cycle times and have already seen a decrease in the number of days for closings. However, some divisions still have elevated cycle times due to trade availability. The company is working towards meeting their target of 100-day cycle times by the first half of 2025. They are also pleased with the performance of their ICG division, which operates two plants in the Southeast and handles a mix of business for single-family homes and commercial properties.

The ICG business is facing a slowdown due to a decrease in new apartment projects, but the company has secured a location for a third plant. The company is pleased with the benefits of ICG, including cycle time, quality, safety, and cost. The company is seeing an uptick in inventory in certain markets, particularly Southwest Florida, but it is not considered concerning. This market has seen strong price appreciation and is still desirable for retirees and second homeowners.

The speaker believes that the high inventory levels in the market will eventually adjust and return to normal. They mention two specific markets, Austin and Dallas, that have experienced significant growth and price increases. However, the speaker is not concerned about any other markets besides Southwest Florida. Another speaker adds that sellers are also buyers, so their impact on the market is not necessarily negative. The company's cash flow guidance for the year is still valid and they will continue to repurchase shares.

The speaker is unable to give a definitive answer on how a decline in mortgage rates would affect gross margin, as it would depend on the overall economic situation and supply in the housing market. They emphasize that interest rates are just one factor in a consumer's decision to buy a home.

Michael Rehaut asks about the impact of the company's shift towards lot optioning and land banking on gross margin and return on equity. CEO Ryan Marshall confirms that the shift will result in a 200-300 basis point decrease in gross margin, but this will be offset by an increase in return on equity. He also mentions that this shift will account for 20% of the business and result in a 40-60 basis point impact.

The speaker confirms that the current 50% of land options in their business will remain the same, but the incremental optionality will increase from 50 to 70%. They clarify that the return on equity is influenced by other factors and the cost and margin for banks versus non-banks is about 200-300 basis points. The company is currently running below their target levels for debt-to-cap ratio and net debt, but with a potential tailwind in the macro backdrop, there may be room to increase leverage and potentially increase share repurchase in the next few years.

Ryan Marshall and Robert O'Shaughnessy discuss the company's capital allocation strategy. They prioritize the needs of the business, including investments in land, dividends, share repurchases, and debt repayment. The company's strong cash flow has allowed them to have lower leverage and debt, which they believe is advantageous. They plan to continue investing in the business and finding ways to finance it efficiently. As the company's pipeline becomes more efficient, their cash flow will better match their earnings.

The company attributes the slowdown and higher inventory in Florida and Texas to the unprecedented rise in housing prices, which has caused some owners to become sellers, and has created an affordability challenge for prospective buyers. They expect a market clearing price adjustment process to occur over the next few months, similar to what happened in the Austin market after a period of job growth and rising prices.

The company expects a similar market trend to occur in Southwest Florida as it did previously, taking about six months to work through inventory and settle into a more normal growth rate. The gross margin guidance for the second half of the year is driven by a mix of factors, including a larger mix and a choppier market leading to more incentives. The range given is lower but still in line with the end of the first quarter. There is not a significant change in the market, just circumstance-driven.

The speaker disagrees with the idea that the guidance for the company's margins is similar to the previous quarter's and believes that there may be a mix shift and potential incentive war in the back half of the year. They question the company's lack of factoring in potential incentive headwinds in their guidance and suggest that there may be more conservatism in their outlook for Texas and Florida. The company's response is that they are not margin proud and are adjusting their margins accordingly.

In this paragraph, Robert O'Shaughnessy and Alan Ratner discuss the backlog of homes and forward incentive load for the next six months. They also talk about the potential for higher absorption targets in the long-term and the difficulties in obtaining entitled land. Ryan Marshall emphasizes the importance of balancing pace and price to drive returns and create shareholder value, and mentions the company's multiyear growth target of 5% to 10%.

The speaker discusses the impact of insurance rates on the housing market in Florida and states that this is a nationwide issue. They mention that their company has its own insurance agency which provides coverage at a competitive rate for buyers. Their homes are built to the latest code and are resilient to potential natural events due to their land development practices.

In this paragraph, the speaker discusses the impact of insurance rates on home sales in Florida. They mention that while insurance rates may be higher for buyers in Florida, there are also benefits such as lower property tax rates and no state income tax. The speaker also clarifies that there has been no change in their estimates for land costs, which they expect to increase by high single-digits or between 5% and 10%.

Michael Dahl congratulates Bob and Jim and asks about the July traffic, noting that there have been some changes in rates and seasonality. He asks for more clarity on how the beginning of the third quarter has looked and how it compares to the second quarter. Ryan Marshall responds by saying that the second quarter was choppy, but the first three weeks of July have been solid. He emphasizes the importance of focusing on the full year of 2024 and their outlook for 2025. Michael Dahl continues to ask about the situation in Florida and Texas.

During the quarter, the company's Florida and Texas orders were down 9% and 8%, respectively. The CEO attributes this to the impact of Del Webb communities in those markets and a decrease in consumer confidence due to rising interest rates in early April. The company has noticed a change in consumer sentiment regarding the right time to buy a home.

The speaker discusses how the current news and economic conditions may be affecting consumer confidence and buyer psychology. They also mention their recent expansion into Utah and their overall growth strategy. They believe they are in all the necessary markets for now and are satisfied with their current performance.

The speaker assures the audience that they will be available for the rest of the day and encourages them to ask any questions. The operator then ends the call and thanks everyone for participating.

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