PulteGroup, Inc. (PHM) Earnings Call Transcript & Summary

Good morning. I'm Matt Bouley, Barclays U.S. Homebuilding Analyst. My pleasure this morning to have the management team from PulteGroup here with us this morning, Ryan Marshall, CEO; Bob O'Shaughnessy, CFO; and Jim Zoomer an IR. I'm going to let Ryan kick it off here with the sort of state of Pulte today. [Operator Instructions] So with that, Ryan, Bob, Jim, thank you for the time this morning. I'm going to let Ryan kick it off with some opening remarks here on Pulte. Please go ahead, sir.

Thanks, Matt. Good morning. It's good to be here, and I appreciate Barclays hosting the conference and giving us the opportunity to present for a few minutes. 2020, as I think most of you are aware, was a very unique and strange year for homebuilding. The year started very strong, came to a screeching halt in March and April. And then ended the year with some of the strongest fundamentals and consumer demand that we've seen in housing in over a decade. I'll highlight just a few things, Matt, that I think were unique to our story and some things that I think we've done to position ourselves for continued growth and success as we go into 2021. I'll highlight maybe just for a minute on the fourth quarter, we saw outstanding consumer demand, excellent order growth that exceeded over 25% in the quarter, with nice growth out of all of our consumer groups, which we were incredibly pleased with. I'll highlight a couple of those in a second. But maybe just for a second, I'll talk a bit about some of the order trends that we saw in the fourth quarter, starting with October, which was a strong month, and it normally is. And then we saw a typical kind of seasonal drop in November. And normally, we see another seasonal drop slightly into December, mostly just because there's so many holidays and other things going on. This year -- 2020 was different. We actually almost saw a V where October was strong, November dropped and then December sales were equal to what we reported in October. And I think that just highlights how much consumer demand is out there for single-family housing right now. And then as we moved into January, and we just had our Q4 earnings release a couple of weeks ago when we gave comments about how January has performed thus far. And the word that we used in our most recent commentary is that January continued from where we were at in December, almost unabated. And we've really had strong traffic to our websites. We've had strong conversions into -- from traffic into leads and then leads into sales unlike anything that I think this industry has seen in a long time. As we look at that and what that's done for our business, it's given us real pricing power. And so we've currently been reporting some of the highest gross margins that we've seen in a long time. It's certainly not without cost increases as we're all facing some forms of labor and material shortages. And with our book of land turning over all of the time, we've quickly got more expensive land coming into the book as well. But the headline story is that we've got pricing power. We're taking advantage of it and what it's yielding is a very profitable business right now. We've given a guide for the full 2021 year of 24.5%. And Matt, I'm sure we'll probably get into that a little bit. I know you've got a few questions on that. Maybe just the last thing I'd highlight that I think we've done really well is we've really strengthened and improved our balance sheet positioning. We ended the year with over $2.6 billion in cash. Our net debt-to-cap was less than 2% at the end of the year. We've recently gone out and retired a 2021 maturity of debt of $425 million, and we did an early tender of another $300 million for our 2026 and our 2027 bonds, which will I think if it hasn't already closed, it'll close you pretty quickly. So once that debt has been fully retired on a pro forma basis, our gross debt-to-cap will be right around 22% on a net basis, a little less than 5%. So really, really strong balance sheet fundamentals. We've got investment-grade rating from 2 of the agencies, and we're on positive watch with the third. So the strength of the balance sheet is quite fantastic. And then we've continued to follow kind of our balanced capital allocation philosophy, where we intend to increase our investment into our business, i.e., land by about 25% in 2021. So we're continuing to position the company for more growth. We're excited about that. We raised our dividend by 17% effective starting 2021. And we will be active in the market with our share buyback program as well. So we're really hitting on all aspects of the capital side. And maybe just lastly, as I think many that follow our story know that our focus is on driving through-cycle return on invested capital. We highlighted in our most recent earnings release that we had yielded 23% return on equity, which is something that we're quite proud of. So I'll stop there, Bob, maybe I just invite you, any other loose ends that you'd tie up with kind of an overview.

That's fair. Well done.

Okay, Matt.

Wonderful. Thank you, Ryan. Very helpful overview there. And you're absolutely right. We'll touch on some of those near-term trends and the guide as well.

But maybe starting off with just something a little bit higher level. You just mentioned kind of the uptick you're planning in land investment in 2021. Thinking about sort of hitting the gas pedal on that and considering the cycle, you've been pretty adamant about your kind of view around a structural increase in housing demand here, perhaps work from home being a greater part of people's lives. This is on top of an underbuilt housing cycle. But at the same time, there's been a big tailwind from lower interest rates, most certainly. So when you think about taking a longer-term view in the cycle and making these land investments, how are you kind of balancing that all together? And what are some of the standards you have in place around these land investments to sort of ensure the returns that are core to your strategy?

Matt, so the first thing is we've not changed our underwriting at all. The same underwriting standards that we've used for the last decade are in place today, and we haven't modified those. So -- and we underwrite at current -- using current market pricing, current market fundamentals. So we're not speculating and underwriting future land acquisitions with the anticipation we're going to get increased volume or increased price. So that would be the first thing on the underwriting side. I do believe that the demand that we're seeing right now, while certainly robust, is structural. I've been asked the question several times in some other forms are we building the next housing bubble? And my view is no, we're not. I tend to come back to simple supply demand fundamentals. We barely reached 1.5 million new starts in 2020 after a decade of underbuilding to the point you just made, Matt. I think most economists, no matter the firm they're with will agree that this country needs 1.5 new -- 1.5 million new starts a year just to keep up with the population growth in obsolescence. So we're basically at an equilibrium standpoint right now and that doesn't take into consideration the underbuilt for the last decade. I think COVID impacts have further benefited single-family new construction as we have seen, in my view, a shift from multifamily into single family. That's been further buoyed by low interest rates. And at least with some of the things that I've been watching following, it would not appear that interest rates are going to rapidly increase anytime soon. So I think the pricing power that consumer has right now, that will likely continue for a while.

Got it. Okay. That's helpful. So maybe jumping to some of those more near-term trends. Really interesting sort of cadence of orders you laid out there for Q4 and January continuing unabated to use your words. I think in the past, or at least the prior quarter, you had spoken to intentionally slowing some of the sales pace with price. And when we think about the spring selling season and just what would normally be typically a larger uptick in selling pace. To the extent we just haven't had seasonality this year, should we expect a similar type of uptick as we've seen in the past? Do you have the capacity to do that? And I don't know if you can put any numbers around what you've seen in the first 6 weeks of the quarter here. But just any kind of color around how that uptick should progress through the spring?

Yes, Matt, I think you highlighted the industry does typically see a stronger spring selling season. And our expectation is that this year will be no different. We've not given any commentary beyond what we gave in our earnings release a few weeks ago. And so I wouldn't want to do that here. But our expectation is we will see a seasonal uptick. In terms of kind of our ability to meet that demand, we believe that we are prepared to do it. We've been working really for the last 6 months to put more locks on the ground, which is one of the gating factors that we have in our business. We've also been working to increase our overall production capacity in terms of the field management or the construction management teams that we have in each of our communities, such that we can produce more. One of the other points that we talked a little bit about on our call a few weeks ago is our desire and our intent to increase the overall number of speculative homes that we have in production. We like to run somewhere between 25% and 30% of our total inventory as speculative. Right now, we're at about 15%. We said it's going to take some time, Matt, to get back to that 25% to 30% because we've got such a large backlog. We're putting our resources and our focus on the customers that have actually purchased. And over time, we'll feather in more of that speculative inventory. So we're going to continue to manage paces, sales paces to match the capacity that we have but the difference and the thing I'd highlight is we have been increasing capacity, and we're still working to increase it even more such that we can respond to what is our expectation of a strong selling season.

Got it. Okay. So maybe moving on from that point on the pricing points you were making. Interesting about the Pulte business, obviously, is the sort of balanced portfolio you guys have across first time and move up and active adult. So when you think about pricing power, I mean, I guess you guys would have a relatively strong view into how pricing is across buyer segments. So I guess, the higher-level question is just how do you think about pricing power here and balancing that with affordability? And then secondly, what's it look like at those different buyer segments particularly move up just given that's a segment that Pulte has continued to lean into or at least remains heavily in while other builders have sort of leaned out of in recent years. So yes, it's kind of overall question on pricing versus affordability and then by buyer segment.

Yes. So Matt, there's a lot there to unpack. I'll try and pick through it. Generally, there has been really strong pricing power. One of the things that we've highlighted about our story is that one of the things that is different or we believe, is different about Pulte is our strategic pricing tools. We have built those and refined them over the last decade, where our local operators have what we believe is best-in-class information, knowledge and tools to set pricing such that we can maximize margin. We think it's one of the elements that has allowed us to be an outperformer on the margin side. In terms of consumer groups and affordability, we believe broadly, affordability is still in check. While asset prices have been rising fat as the low interest rates have kept the pricing, the overall pricing affordability schematic in check. And so we feel pretty good about that. There are a few new pockets where things have gotten a little overheated, and we'll keep an eye on that. But broadly speaking, I think we're in a good position. In terms of consumer groups, Matt, we've seen pricing power across all 3 consumer groups, first time move-up and active adult. We believe that while there has been tremendous growth in the entry-level segment, both with price and pace, that consumer group probably hits an absolute ceiling faster. There will -- there comes a time when the entry-level buyer just simply has been tapped out on their budget, and there's not a lot more room to go. So well -- we think while that's a strong segment, you probably got the least amount of continued pricing headroom there. We think there's more room in the move-up in the active adult space. I'd highlight that with the active adult consumers about 40-some odd percent of those buyers pay cash, the rest of them typically get very small mortgages. So the affordability equation, I think, is much better on the active adult side. And then the final point that I'd probably make just around the active adults is we actually saw the largest year-over-year growth in the fourth quarter was out of our active adult segment at over 30% year-over-year growth. So that was a buyer group that had gone to the sidelines early in the pandemic that came back in pretty big numbers in Q4.

Got it. Okay. No. That's helpful. So I guess sticking along those lines, just given the build-to-order business model, and sort of what consumers are demanding in this environment. Presumably, you would see something tangible in terms of option revenues ticking higher. I know you guys used to give a little bit more detail than I think I've seen at least in the past year or so. It used to be about a high teens portion of the average selling price. Just wondering if you could update us on that. And then just to the extent there is consumer demand for a few more bells and whistles, so to speak, in this environment, what would that do to pricing and even to margins as well?

Yes. Bob, would you like to take that one?