PulteGroup, Inc.

Q1 2023 Earnings Conference Call

4/25/2023

spk01: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pulte Group Inc. Q1 2023 Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. At this time, I would like to turn the conference over to Jim Zumer, Vice President of Investor Relations. Please go ahead.
spk12: Great. Thank you, Audra. Good morning. I want to thank everyone for joining today's call. As you read in this morning's press release, Volta Group had an exceptional first quarter, and we are excited to discuss our operating and financial results. Participating on today's call are Brian Marshall, President and CEO, Bob O'Shaughnessy, Executive Vice President, CFO, and Jim Osowski, Senior Vice President, Finance. A copy of our earnings release and this morning's presentation slides have been posted to our corporate website at PulteGroup.com. We'll post an audio replay of this call later today. As noted in this morning's earnings release, to be more consistent with industry reporting practices, effective with our first quarter 2023 reporting, the company has reclassified closing cost incentives from cost of sales to net revenues for all periods presented. This reclassification impacted the company's reported home sale revenues and associated average sales price, as well as home sale gross margin and SG&A percentages, but had no impact on reported earnings. An analysis of the impacts on the current quarter and comparable prior year period is included in this morning's press release and can be found in our web class slides associated with today's call. Our comments today reflect these changes for all periods referenced. Also, I want to inform everyone that today's discussion includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now, let me turn the call over to Ryan. Ryan?
spk14: Thanks, Jim, and good morning. Based on the improving demand dynamics we experienced in the fourth quarter of last year, we were cautiously optimistic heading into 2023. I am extremely pleased to report that the market momentum that began building in Q4 continue to expand into the first quarter of 2023. Today's stronger market conditions, combined with actions implemented by our outstanding field teams to enhance our competitive position, helped drive our strong first quarter results that included a 15% growth in home sale revenues, a 100 basis point increase in operating margin, and a 28% increase in earnings per share. Among the actions we've taken has been to increase our production of spec homes, a strategy we began implementing in the back half of 2022. As discussed in previous earnings calls, we made the decision to increase spec starts as we saw the opportunity to realize a number of strategic benefits within our home building operations. With more units in production, we can better meet buyer demand as more consumers are seeking quick move-in homes as a hedge against rising mortgage rates. By maintaining a level of spec starts, we can commit to a more consistent start cadence. This is particularly valuable in today's environment when negotiating with our trades and suppliers. Keeping units in production allows us to turn assets more efficiently, which is critical to delivering high returns over the housing cycle. The importance of having an appropriate inventory of spec homes available can be seen in our first quarter sign-ups, which on a gross basis increased 1% over last year to 8,900 homes. Of these signups, almost 60% were spec sales, so the decision to increase spec starts was the right one. That said, I want to be clear that our strategy is to keep starts directionally in alignment with market demands. We believe this balanced approach is consistent with Holti's historic business practices and allows us to turn our assets while maintaining a better margin profile. Our first quarter results show that we are successfully executing against this strategy as we realize strong sales while still delivering exceptional gross margins of 29.1%. You've heard me say that we won't be margin proud, but we also won't sacrifice profits if we don't have to. By being more measured in our starts cadence, we can meet buyer demand while not oversupplying the market. Case in point, we ended the first quarter with 1,500 fewer specs in production than we started the quarter. This gives us flexibility to maintain or increase production volumes, which in today's market is an important lever when working with trades and suppliers. As it relates to overall housing demand, home sales are benefiting from recent declines in mortgage rates, but I also think just having a general sense of stability in rates is important to consumer confidence. Given improvements in demand conditions and the broader interest rate environment, as well as a generally limited inventory of existing homes, we are starting to see the pressure on selling prices ease in many of our markets. In fact, in well over half our markets, we have found opportunities to pull back on incentives and or move prices higher in many of our communities. While the price changes are modest, it demonstrates the point that people desire homeownership and are willing to buy when they see a value. Earlier this month, there was an article in the Wall Street Journal that looked at the housing shortage in this country. The article raised the point that depending upon which expert you ask, the housing shortage ranges from 2 million to 7 million houses. While there are certainly debates about the number, I think there is broad agreement that we have a housing shortage. I believe this is one of the reasons homebuyers are quick to respond when affordability pressures can be eased. Before turning the call over to Bob, let me take a minute to address impacts on credit availability given recent disruptions in the banking industry, particularly among the regional banks. The short answer is that we have not experienced any disruptions. On the mortgage side, we are advantaged by having a captive financial services operation that routinely originates mortgages for between 75% to 80% of Pulte homebuyers that require financing. On the project side, big builders such as Pulte Group self-fund or have access to capital that smaller builders typically cannot match. In the end, it may be that recent disturbances in the banking sector may create opportunities for Pulte Group to put its more than $2 billion in total liquidity to work. I am very proud of our team, as Pulte Group delivered exceptional operating and financial results in the quarter. I'm also highly encouraged by the improving demand conditions we've been experiencing over the past two quarters. And I would add that buyer demand has remained strong through the first few weeks of April. While we have and will continue to take steps to best position Pulte Group for success within today's changing market dynamics, we remain measured and disciplined in our actions. From production rates and land spend to overheads and share repurchases, We remain focused on delivering performance over the long term. Now let me turn the call over to Bob for a detailed review of the quarter.
spk15: Thanks, Ryan, and good morning. As Jim noted at the beginning of the call, we have reclassified closing cost incentives from cost of sales to net revenues for all periods presented. The total incentive reclassified amounts to $81 million in the first quarter of this year and $38 million in the first quarter of last year. This reclassification impacted our reported home sales revenue and associated average sales prices, as well as our reported home sales gross margin and SG&A percentages. An analysis of the impact of this reclassification on the current quarter and prior year periods is included in today's webcast slides. Where appropriate, any numbers referenced in my comments, current, past, or future, are inclusive of this reclass. Let me now get started with a review of our first quarter results. Home sale revenues in the first quarter increased 15% over the prior year to a first quarter record of $3.5 billion. Higher revenues for the period reflect a 6% increase in closings to 6,394 homes and a 9% increase in average sales price to $545,000. On a year-over-year basis, we realized higher average sales prices across all buyer groups led by double-digit gains in both move-up and active adults. In the quarter, we reported 6,394 closings, which represents a 6% increase over the comparable prior year period. Our closings for the quarter came in above our guide as we capitalized on stronger demand for spec homes and improvement in select areas of our supply chain that allowed us to close additional homes in the period. I'd like to take a moment to thank our procurement and construction teams working in partnership with our trades and suppliers for their contributions over the last several quarters. Their efforts during a time of extraordinary market volatility were instrumental to the operating success we have achieved. Looking at the mix of our closings in the quarter, our results included 39% from first-time buyers, 35% from move-up buyers, and 26% from active adults. In the first quarter of last year, the closing mix was 34% first-time, 40% move-up, and 26% active adults. The higher percentage of closings from first-time buyers reflects our increased investment resulting from our decision to increase spread production to the back half of 2022. Looking at our orders in the quarter, our net new orders totaled 7,354 homes, which is down 8% from the prior year. Our cancellation rate as a percentage of beginning backlog was 13% in the first quarter, which is up from 4% last year. On a sequential basis, the 13% cancellation rate is up less than 200 basis points from the fourth quarter, So cancellations are beginning to stabilize. In fact, on a unit basis, cancellations in this quarter amounted to 1,544 homes, which is down sequentially from 1,871 homes in the fourth quarter. By buyer group, net new orders to first-time buyers increased 18% over the prior year to 3,177 homes, while move-up orders decreased by 20% to 2,645 homes and active adult orders were lowered by 22% to 1,532 homes. Our average community count in the first quarter increased 13% over last year to 879. Based on the communities open in the period, our absorption pace of 2.8 homes per month was down from the prior year, but in line with our pre-pandemic sales rate, which averaged 2.7 for the five-year period from 2016 to 2020. Based on land investments we made in prior years, we expect to operate out of approximately 900 communities in the second quarter, which would represent an increase of 14% over the second quarter of last year. Looking over the balance of the year, we continue to expect community account growth of 5% to 10% over the comparable prior year quarter. Given our expanding community account, Holti Group is well positioned to increase its market share within the improving demand environment. We ended the first quarter with a backlog of 13,129 homes with a value of $8 billion. This compares with last year's Q1 record backlog of 19,935 homes valued at $11.5 billion. At the end of the first quarter, we had a total of 16,872 homes under construction, of which 15% were finished. Spec units represented 38% of our production, which is up from last year consistent with our strategy to have specs available to meet buyer demand for homes that can close sooner. Over the course of the first quarter, we started production on approximately 5,200 homes. This start rate was down about 40% from the first quarter of last year, but up on a sequential basis from the fourth quarter of 2022, as we continue to drive an appropriate start cadence as we focus on turning our assets. Based on the roughly 17,000 homes we have under construction and their stage of production, we expect to deliver between 7,000 and 7,400 homes in the second quarter. Given the ongoing improvement in the overall operating environment, we're pleased by the level of production we've been able to realize thanks to the efforts of our outstanding operating teams. In addition to these higher unit volumes, we are also seeing the beginning stages of a shortening in our production cycle. At this point, depending upon the market, The gains range from just a few days to a few weeks, but the trends are generally positive. Based on our strong Q1 results and the potential for cycle times to gradually improve, the production potential of homes we'll have available for close in 2023 has increased to 27,000 to 28,000 homes. This is up from our initial guide of 25,000 homes. Obviously, the strength of sign-ups in the second quarter will go a long way in determining how much of this production universe actually converts into 2023 closings. While the average sales price in our backlog is $608,000, we currently expect the average sales price for our second quarter closings to be in the range of $525,000 to $535,000. That estimate reflects both the mix of homes scheduled to close as well as the impact of anticipated spec closings, which are primarily first-time homes that have a lower average sales price. We reported first quarter gross margins of 29.1%, which was 20 basis points below last year. Please note that our reported gross margins in the first quarter benefited by approximately 70 basis points from the reclass of closing incentives from cost of sales to net revenues. The benefit to our first quarter 2022 gross margin was 40 basis points. I would highlight that in the current quarter, Our margins benefited from our move-up in active adult business, where pressures on our selling prices have been relatively less impactful compared with entry-level homes. After several years of gross margin parity across buyer groups, we are seeing a reversion to the historic trend of higher margins in our move-up in active adult business. Based on the mix of homes we plan to close in the second quarter, we expect gross margins to be in the range of 27.5% to 28%. As with our closings and reported margins in the first quarter, deliveries in the second quarter will reflect the benefit of lower lumber costs that are flowing through our operations. In the first quarter, we reported SG&A expense of $337 million for 9.6% of home sale revenues. In the comparable prior year period, our SG&A expense was $329 million for 10.9% of home sale revenues. drove the improved overhead leverage relative to last year and our guide. With expected 2023 production volumes moving higher, we are carefully adding sales and construction staff, but still expect to maintain overhead leverage. As such, we expect second quarter SG&A to be in the range of 9.0% to 9.5%. In the first quarter, our financial services operations reported pre-tax income of $14 million, which is down from $41 million in the prior year. Pre-tax income in the period was impacted by lower loan volumes, competitive pricing dynamics, and higher mortgage incentives being used throughout the industry. In Q1, our capture rate was 78% compared with 81% last year. Market conditions have clearly improved, but as we do under all market conditions, we continue to routinely reassess our own land positions and pending land transactions. Based on this review process, In the first quarter, we walked away from 5,300 lots that were previously held under option and wrote off approximately $6 million in associated deposits and pre-acquisition costs. In the first quarter, our reported tax expense was $170 million for an effective tax rate of 24.2%. We expect our tax rate in the second quarter to be 24.5%. Our net income for the first quarter was $532 million, or $2.35 per share, which is up from prior year net income of $455 million, or $1.83 per share. In addition to significantly higher net income, our earnings per share benefited from the company's share repurchase program. In the first quarter, we repurchased 2.8 million common shares at a cost of $150 million, or an average price of $54.30 per share. Consistent with our plans to continue returning excess funds to our shareholders, our board has approved an additional $1 billion of share repurchase authorization, bringing the total available under the program to $1.2 billion. Along with returning funds to our shareholders, we continue to strategically invest in our business. In the first quarter, we invested $906 million in land acquisition and development, down from $1.1 billion in Q1 of last year. Given the stronger demand environment and the increase in our overall construction activities, we now expect to invest between $3.5 billion and $4 billion in land acquisition and development in 2023. We ended the period with 210,000 lots under control. This is consistent with year-end and down 10% from last year. Based on our activity over the past several quarters, 51% of those lots are owned and 49% are option. We will continue to seek increased optionality of our land bank with a target of up to 70% of our lots being controlled via option. Reflecting the strength of our first quarter financial results and associated cash flows, we ended the quarter with $1.3 billion of cash, which lowered our net debt-to-capital ratio to 7.2%. On a gross basis, our debt-to-capital ratio was 18.1%, down from 21.5% at the end of the first quarter last year. Now let me turn the call back to Ryan for some final comments.
spk14: Thanks, Bob. I think there are a lot of positives to be taken out of our first quarter results, including we delivered record first quarter earnings driven by higher closings, continued strong gross margins, and improved overhead leverage. Overall market conditions continue to improve as we experience strong demand and are finding opportunities to reduce incentives and or increase prices in many communities. Supply chain conditions are stabilizing, and we've seen at least an initial turn towards shorter cycle times. At this point, the gains have been market specific, but we are optimistic that we've seen the high watermark in terms of construction cycle times. Our national and local teams are making strides and clawing back construction days, which is critical because shortening our cycle time is an important driver to expanding our 2023 production universe. Pulte Group's board approved another $1 billion increase to the company's share repurchase authorization. We have bought back over 40% of our shares and clearly remain committed to the systemic return of funds to our shareholders. One other positive I would highlight is that Pulte Group was once again ranked among the Fortune 100 best companies to work for. This is our third year on this prestigious list, and we again moved higher, climbing from number 43 last year to number 36 in the most recent ranking. We take pride in being included on this list because it is based on what our employees say about their experience as part of the Pulte Group team. Our success in delivering quality homes and delighting our customers starts and ends with our 6,100 employees dedicated to doing the right thing, taking care of our customers, focusing on quality, and lifting the teammates around them. The amazing culture resonant in Fulte Group doesn't happen by chance, but rather it comes from a committed effort by every employee to create a world-class culture. I am extremely proud of our team, and I want to thank all of our employees, along with our trade partners and suppliers, for their tremendous work in helping to deliver another outstanding quarter of operating and financial results. Let me now turn the call back to Jim Zomer.
spk12: Thanks, Ryan. We're now prepared to open the call for questions so that we can get to as many questions as possible during the remaining time of call. We ask that you limit yourself to one question and one follow-up. Audra, do you want to get the process started? We're prepared for Q&A.
spk01: Thank you. And as a reminder, please press star 1 if you would like to ask a question. We'll take our first question from John Lovallo at UBS.
spk02: Good morning, guys. Thank you for taking my questions. The first one is you guys talked about some of the pressure on selling prices easing and the ability to pull back on incentives or even maybe raise prices in some markets. I think 50% of the markets you said. Can you just help us maybe frame which markets you're seeing the greatest opportunity to kind of pull back on the incentives and maybe the markets where it's a little bit more challenging at this point?
spk14: Yeah, sure, John. Good morning. We're seeing continued strength in the Florida markets. The southeast markets in Texas would be the three kind of regions that I would highlight with strength. Our Midwest business continues to be a steady performer. And then in terms of markets that are more challenging, it would really be the western markets, particularly the ones in the high-priced coastal areas. Northern California and Seattle will probably be in the two that I would highlight.
spk02: Got it. That's helpful. And then, you know, recognizing that you guys are not a spec builder. I mean, the quick move in effort has been, you know, it's been helpful and it's been meaningful. I mean, can you just help us outline sort of your thoughts on that today? Where do you see this going? And, you know, will this be, you know, perhaps a slightly bigger piece of the Pulte business than it has historically?
spk14: Yeah, John, I think we've demonstrated exactly that. And I think it shows that, you know, when we started really talking about this middle of last year, that specifically with the first-time entry-level business, there was an opportunity to have more homes that were, you know, sooner deliveries, which helped to alleviate, you know, it really helped to alleviate pressure around interest rate, rising interest rates. It helped to alleviate pressure around certainty of when things were going to deliver. And we made the strategic decision to put more spec in the ground. To your point, we've historically not been a spec builder, but it's never been 0% of our business. We've always had specs as part of our business, but we made the decision to make it a bigger piece. It got as high as about 45% of our total work and process inventory was spec. And I highlight that number, John, because that matches up pretty well with our Centex business, which is about 40% of our overall business, which is catered toward the entry-level first-time buyer. So in terms of where it goes in the future, we're going to continue to, as we highlighted in our prepared remarks, match our spec production with what we think the market demand is. And right now, that's certainly higher spec production than maybe what we've historically done. It's working for us, and I think this most recent quarter's results are a great example of how that strategy is working.
spk16: Great. Thanks, Ryan.
spk01: We'll go next to Alan Ratner at Zellman.
spk11: Hey, guys. Good morning. Nice quarter, and thanks for the time. Following on that last question, I guess, obviously, it seems like you saw a strong demand for the spec inventory you have on the ground. Would you say the momentum you saw in the market overall was similar in your BTO business as well, and the skew towards more spec was just a function of where you had the inventory, or do you still see kind of currently more of a desire for those quick-moving homes versus built-to-order?
spk14: Yeah, Alan, it's a good question. I would tell you broadly we saw strength in all price points. That being said... there is a higher likelihood of the entry-level buyer transacting at this point in time because they don't have a home to sell. And so they're not hampered by the low interest rate that they may be hanging onto with their existing home. But look, as we've talked in prior calls, life continues to happen for buyers. marriages, more kids, relocations, job promotions, all the things that I think create a need for a family and a potential buyer to move into a different home for whatever reason. In our move up and our active adult business, they're certainly benefiting from that as well. We are seeing easing of sales price pressure in both the move up and the active adult segment which is allowing us to moderately raise prices and moderately pull back on incentives and i think that demonstrates some of the strength we're seeing we intentionally don't build a lot of spec in those price points we find the debt buyer group they prefer to have the built order model but when it comes to our our entry-level first-time syntax business you know, we're leaning in more with the spec first strategy and, you know, it's working for us.
spk11: Got it. That makes a lot of sense. And I guess on that note, you know, if we think about the price point segmentation and entry level, you know, seemingly a bit stronger in the near term, you kind of alluded to this when you talked about the margin differential reverting back to more historical norms where entry level is a bit of a lower margin, but higher turn business for you. How should we think about the margin going forward, assuming the mix of the business kind of continues on this current trajectory? You guided for margins to be down about 100 bps sequentially, which probably is some of that mix impact there. But can you quantify exactly what that mix looks like today and what it would look like if this mix holds steady here overall for the business?
spk15: Yeah, it's Bob. We haven't given a guide. There's a lot of moving pieces out in the market. We've got pretty good visibility based on our backlog and the sales activity we're seeing. The commentary was, if you think about the last several years, there's been sort of a compression in margins, and you saw it both in our results and our peers, where some of the folks that were selling entry-level had higher margins than they historically would have. That was based on availability, pricing dynamics, a lot of different things. What we've now seen is sort of in our book of business, and I think you see it more broadly in the market, you know, that differentiation in margins between first time move up and active adult for us pretty consistent in the most recent quarter with what I would characterize as the norm from several years ago. You know, obviously still very strong margins. You can see it both in our results and in our guide. You know, so as you go forward, You heard Ryan say about 40% of our business is targeted at that entry level. That's a little bit richer than it was four or five years ago for us. That was conscious on our part. And so if you think about mix adjusted over time, we'll see a little bit more contribution from a margin perspective. Worth it to always highlight, we don't underwrite the margin. We are focused on return. And you made the point, I'd agree with you, of that business by virtue of that velocity coupled with the margins that we're able to generate.
spk07: Understood. Appreciate that, Bob. Thanks a lot, guys. Keep going.
spk01: We'll go next to Stephen Kim at Evercore ISI.
spk06: Thanks very much, guys. Yeah, lots of interesting stuff here, encouraging news. Let's start with your orders. I'm kind of curious as to whether or not we whether you think that absorptions per community, you know, over the course of the next year or so can be higher than the roughly two point four per month over the course of the year that you did pre pandemic. And you talked about a production capacity gap. of 27 to 28 grand, you know, up from what you said last time. But I'm curious, does this assume any continued improvement in cycle times, or is this literally if things just stayed exactly the way they are right now?
spk14: So, Stephen, let me start with absorptions per community. You know, going back over the last several quarters, you've heard me talk about we're not going to be margin-proud. Um, and that we are going to, uh, work to take market share and, and turn our assets. And I think you've seen us do that. Um, I highlighted in my prepared remarks today that we're very pleased with the absorptions that we turned out, the absorption for our community that we turned out of the first quarter. Um, and we were able to do it at outstanding margins as well. So, um, I think we, we, we, um, we were successful on both fronts there. Going forward, we're going to continue to follow that same approach. We think it's really important to continue to turn the assets and to continue to have high, you know, reasonably high absorptions per community. And we'll combine that with what has been a historically, you know, best in class margin profile. And so we think we've got a lot of the elements of our playbook and our strategy um working well um in terms of um uh the second part of your question reminds me oh cycle times so stephen for our total year delivery um you know what we've highlighted is that we've got a production universe uh in process with what's in process and what we expect to start It'll give us a universe that will allow us to potentially close up to 27,000 to 28,000 homes. We have assumed the cycle times that we're currently seeing, so we have not incorporated any improvement. We have seen improvement, and we've incorporated that. We haven't incorporated further improvement, and certainly we've got lofty goals that we're endeavoring to claw back even more cycle time, but that's going to take a lot of hard work by our teams and our trades and suppliers.
spk06: Great. And if I could sort of just follow up on that last point, that production capacity of 27 grand to 28 grand is an encouraging number, obviously. And yet your starts this quarter were a little on the lighter side relative to what we had been thinking and certainly, uh, much lower than what you're expecting to close, uh, next quarter. So can you talk a little bit about, um, you know, why the start number was kind of where it was and what gives you confidence, uh, that that number can rise from here? Um, that would be, uh, that would be very helpful. Thanks.
spk14: Yeah, Steven. Um, you know, it's a, it's a, a multi-month, um, kind of program that we look at in terms of the, you know, our, our starts cadence and what we put into the ground. You know, I think it's, you know, widely well known that the first three months of the quarter tend to be more difficult on the weather side, especially for our businesses in the Midwest and the Northeast. It's probably a little bit of an impact on the number being a tad lower, but, you know, our forward plans in terms of our starts cadence, that's all wrapped up into the 27 to 28,000 unit range kind of production guide. I'd probably look at, you know, everything in its entirety. You know, not just what we started in Q1, but what was in backlog, what was in production, what we started in Q1, plus the kind of implied, you know, Q2 start rate. I think that all, you know, that all works into the way that we're running, you know, we're running the business.
spk06: Okay. So I'm hearing there that you expect 2Q starts to increase. I don't remember, Bob, did you actually give a start forecast for 2Q? Because that would be helpful if you had it.
spk14: That's not a number we provided, Stephen.
spk07: Okay. Okay. That's what I thought. Okay. Thanks, guys.
spk01: We'll go next to Anthony Pettinari at Citi.
spk04: Good morning. The cancellation rate came down pretty sharply quarter over quarter. I'm just wondering, was there a particular month where that step down was most significant or was it pretty smooth throughout the quarter? Just wondering if the kind of normalization in cancellation rates is maybe more of a change in overall, you know, buyer psychology or maybe just reflects kind of the backlog working itself through. Any thoughts there?
spk15: Yeah, it wasn't a cliff. It was a pretty consistent cadence, and I think your point is a good one. The consumer has, I think, largely now oriented themselves around the stability and rates that Brian talked about. They're moving, but they're not moving anywhere near as much as they were in the back half of last year. Couple that with the fact that most of the backlog and folks that signed contracts back when rates were much lower and got to a much higher rate at the closing table and the kind of the shock and cancellation impact from that has largely worked through the system. So I think, you know, the combination of those two things has the current contracted, you know, customer base and people signing contracts today are less sensitive to those rate movements than we saw in the back half of last year. And I think that's why you've seen the can rates. And candidly, the reason we provided it, we had less, total cancellations in the first quarter than we did in the fourth, I think for all those reasons.
spk04: Okay. Okay. That's very helpful. And then just, you know, from a big picture perspective, when you look at the quarter and think about the drivers of your, you know, gross margin beat versus your expectations, you know, was it primarily, you know, stronger pricing or executing on the cost side? And, you know, maybe without cutting it too finely, I'm just wondering what sort of surprised you the most around the quarter.
spk15: Yeah, I'd like to tell you it's cost, but it really wasn't. I mean, that was for the stuff that we closed in the quarter. Those costs were baked in. We're working with our trades to find efficiencies going forward. Lumber was obviously a benefit, but we knew that. So that was in our guide. I think it really, and we highlighted this in our remarks, it was reflective of the sales environment. It was the relatively strong demand. It was our ability to manage our incentive load. So we've had a national mortgage rate buy down program in effect since the beginning of the year. And what we've been able to do is use that as another selling tool. And so for some people, it's, hey, get my rate as low as you can get it. For others, it's, I want my rate down a little bit and I want you to help me with closing costs. The nice part is that that incentive replaced the incentives that we were offering before as opposed to added to it. And then you couple that with the fact that we highlighted that, you know, we were able to stop reducing prices and actually started to increase prices in more than half of our communities. Now, these aren't massive increases, but it's the, you know, the psychology of sales. You know, that relative strength was better than we had forecast in our guide for the quarter and showed up in the margin for the quarter. Okay, that's very helpful. I'll turn it over.
spk07: Thanks, Anthony.
spk01: We'll move next to Michael Rehout at J.P. Morgan.
spk13: Thanks. Good morning, everyone. First question, I just wanted to zero in a little bit, if possible, on the pricing trends. You know, as you mentioned before, you said that you had increased prices maybe in about 50% of your markets. Just wanted to get a sense between the reduction or moderation incentives that you've seen so far year to date, as well as maybe between that and some of the base price increases. If you could give us a sense of how much net pricing has improved from 4QN to 1QN.
spk14: Yeah, Mike, we haven't given that level of granularity. I think the previous question that Bob just answered really highlighted what we've seen, which has been a build of sales momentum. If you remember going back to November, December of last year, the market was still pretty tough. But we did comment our year-end report that we had in January that we were starting to see know some momentum building in the back half of january or december and into january um we've seen that continue and that's allowed us to pull back on incentives it's allowed us to take some very moderate price increases but it's definitely a change in uh you know kind of the sentiment that we're seeing from buyers i think some of that is interest rate stabilizing i think some of that is the interest rate incentives that we've done um i think a lot of that is kind of buyer psychology And then, you know, the biggest thing is I go back to we've got a housing shortage in this country, and that hasn't changed. And so in the places where we've been able to demonstrate value, which we've worked very hard to do, we're seeing some nice momentum on the sales floor. And, you know, I think you've heard from us, we've seen that continue into April. And, you know, that's allowed us to be optimistic and bullish with our forward startup.
spk13: balance of the year great I appreciate that Ryan I guess secondly looking at the gross margins for the second quarter you're expecting about a hundred two hundred and fifty bits of potential contraction just wanted to get a sense of if that is just due to the lagged impact of you know higher incentives from the back half of last year I believe you also mentioned that, if I heard right, and I apologize if I didn't, but that you're also going to see the benefit of lower lumber costs in the second quarter. But if the driver is that lagged impact of higher incentives from back half of 22, do you feel that that will have mostly played itself out? by the second quarter, or could there be incremental negative impact in the back half of 23?
spk15: Well, we haven't given a guide beyond Q2, and there's a lot of moving parts in the market. It's the reason I mentioned that we are only going to go out one quarter. We've got lumber. It's ticking up again. That'll be later in the year or into next year. You know, it's worth it while, you know, looking at the cost environment, you know, we still see inflation. We think that it's a little bit lower in rate than we probably projected at the beginning of the year. But we are still feeling cost increases and, you know, labor in particular is pretty sticky. We've talked about that. And, you know, obviously, you know, if you look at the production cycle, our land is typically more expensive as we move through time. So we've got, you know, incremental costs against a relatively flat and at some points during the last two quarters, decreasing pricing. So I think that's what's actually resulting in the margin decline year over year. You know, the strength in the market that we saw last year produced, you know, margins we had never seen before, Mike. And this is just, you know, a reflection of the reality that costs are up and we haven't been able to offset all of those to date.
spk07: Great. Thank you.
spk01: Our next question comes from Matthew Bowie at Barclays.
spk05: Good morning, everyone. Thanks for taking the questions. So just thinking about kind of the strength of sales pace during the quarter, kind of look back on the quarter. Obviously, there was a period where mortgage rates reached over 7% again. We had the sort of regional banking crisis where perhaps there was some impact on housing activity for a few weeks. I'm curious from Pulte's perspective, did you see kind of impacts to your own sales pace during those periods, any kind of color on sort of the cadence through the quarter and You know, as we've kind of moved past that, you know, how is sales pace trending to sort of exit March and into April relative to, you know, some of those uncertain periods during the quarter? Thank you.
spk14: Yeah, Matt. What we saw in the quarter was a strengthening of sales pace as we move January to February, February to March. Sequentially, sales paces got stronger. And then we've seen April continue to the first, you know, three and a will continue to perform at a really strong level. So we're pleased with what we're seeing. To your point, I think in certain markets, particularly on the West Coast during the banking, regional banking crisis, I think certain buyer groups in certain cities were probably more impacted psychologically than others. I think most of the things that we were seeing resulting from that have dissipated. And we're continuing to see good momentum on the sales floor.
spk05: Got it. Thank you for that. And then secondly, you mentioned at the top some eventual opportunities to sort of put your liquidity to work if credit constraints with smaller builders mount. I guess I'm curious how that might take shape from your perspective, kind of what are you seeing and hearing on the ground today from a competitive perspective versus these smaller builders?
spk14: Yeah, nothing necessarily on the ground yet, Matt. I think we're more being responsive to some of the things that have been widely written about and talked about, that the smaller banks that provide operating lines and project-specific financing Um, we're not in a position where we use project specific financing. We're self funded, um, for almost everything that we do. And we have the ability to, you know, given our size to tap into the, you know, the public capital markets, if so, so needed. So, um, I think when it comes to land development, uh, land acquisition, um, you know, the desire or the, the decision to put more spec into the ground. We've got tremendous flexibility because of the way that we're capitalized. And I do think that could potentially give us the opportunity to take advantage of any kind of dislocation that might appear. You know, it's an always-on mindset, which we've always had. Not, you know, trying to send any kind of a message there other than there was a banking crisis, credit has gotten tighter, and, you know, we've got our trade for us.
spk05: Got it. Well, thanks, Ryan. Good luck, guys.
spk01: And we'll move next to Mike Dahl at RBC Capital Markets.
spk16: Good morning. Thanks for taking my questions. Just to follow up on the land dynamics and competitive dynamics, you did raise your RAM spend and the top end is up quite a bit versus last quarter. So I wanted to just ask, you know, is that incorporating any potential flex in acquisition spend as you look to take advantage of, you know, potential disruptions later this year? Or is that more of kind of a core, something changed, either more deals, kind of penciling that you thought you'd walk away from, or something else going on with either development or act spend that you care to highlight in terms of that increase in forecast spend?
spk15: Yeah, fair question. That is just our projection of what we see on the ground. And so the increase in absorptions that we've seen, the relative stability in pricing gives us a little bit more confidence as we're looking at some of the deal flow that we, for land transactions, it does not anticipate or incorporate any M&A or anything of that sort. That would happen separate from that, and we would evaluate it.
spk07: But we haven't projected that in the overall increase. Okay. Thanks, Bob.
spk16: And then my follow-up, you know, you called out the order trends by buyer segment, which was pretty interesting. Could you help us, you know, understand maybe the community count or absorption by buyer segment, first time move up, active adult? I think you said that the total was maybe up 18 in first time, but then down in the 20s on the other two segments.
spk15: We haven't given that level of detail in a while. You know, I think, you know, from a community account perspective, you've heard us say we're investing in the entry level. So a lot of the growth that you saw, we had growth across all three buyer segments in our community account. It was more oriented towards the first times. And, you know, interestingly, then next to the move up and the active adult is, you know, those are bigger positions. And so they don't, you know, we don't have quite as much flexibility in those over time. But the 13% was spread across all, but it was largely in the first time.
spk07: Okay. Thank you. Thanks, Mike.
spk01: We'll move next to Susan McLaury at Goldman Sachs.
spk00: Thank you. Good morning, everyone. My first question is talking a bit about the SG&A. You mentioned that you are cautiously adding some headcount there. Can you just give some sense of how that's trending and where you expect that that can go over time as you think about the level of deliveries you're targeting?
spk14: Yeah, Sue, I think Bob highlighted in his prepared remarks just with the increased potential for production in the year. We raised our production potential by 2,000 to 3,000. So we've added sales and construction headcount in the right locations that match us up where we've been able to kind of turn up the volume there just a little bit. I think Bob highlighted, we'll continue to maintain SG&A leverage as a percentage of revenue. So no hidden message there, nor should there be an expectation that you would see dilution to our leverage rates.
spk00: Okay. And you increased the authorization on the buybacks this quarter as well. Can you talk a bit about your appetite to buy back the stock here and Any thoughts on how you're thinking of the cadence of that going forward?
spk14: Yeah, we don't provide forward guidance, Sue, but in terms of appetite, I think the increased authorization, which we're very pleased our board made the decision to increase the authorization by a billion dollars, I think it shows that we've got a continued appetite for this to be a part of our capital allocation philosophy, which it has been a consistent part you know, for going on nearly 10 years. So, you know, if consistency is a virtue, if it's not, we should make consistency a virtue. I think we're, you know, we're demonstrating that we're living up to the capital allocation philosophy that we've articulated for our shareholders.
spk00: Okay. Thank you and good luck.
spk01: We'll go next to Dan Oppenheim at Credit Suisse.
spk10: Great. Thanks very much. I was wondering if you can just talk about the West, where you talked about the tougher conditions. How are you thinking about spec at higher price points and where it's more challenging? Do you have much less in terms of spec per community in the West than you have in other regions? I'm just curious how you're handling that.
spk14: Yeah, Dan, in terms of the West, for us, it encompasses the coastal markets, California, Seattle, but also includes Las Vegas, Nevada, Colorado, New Mexico. So there is a mix of different cities and geographies and product type in the West. When we get into the coastal markets, we build a lot of multifamily, three- and four-story product. And so those buildings actually generally start as spec just by the nature. So there is spec there. And there's not anything, you know, that we're necessarily concerned about. We have, you know, I would highlight in the West, we have seen some strengthening in Las Vegas and particularly in Phoenix over the last two to three months. We've actually started to see those markets firm up and start to get back on to, you know, some pretty positive sales trends and positive footing. So, you know, the two places that we're continuing to kind of pay attention to Northern California and Seattle, those are markets that I think are pretty tech-heavy. The price points are generally higher. Affordability is more challenged. Also, a couple of the areas that are probably more directly impacted by some of the regional bank crisis. But on the whole, we're still very optimistic about the way our West business is positioned. Just relative to Texas, the Southeast, and Florida, those markets have done exceptionally well.
spk10: Sure. Makes sense. And I guess you talked about cycle times coming down. How much, if we think about the conversion, how much would you say is driven by some improvement in cycle times versus just the specs and then shorter time from contract to closing on those specs?
spk14: Well, Dan, the way we're really looking at it, we're looking at it from start to final. And certainly we pay quicker flow through on the spec side. But when we talk about cycle time, it's separate and independent from anything related to a buyer. It's purely within how long does it take us to build a home? And that's where we're starting to see some gains being made, particularly on the front end. So for homes that are going into the ground now, you know, we measure it from slab to kind of frame as an example, frame stage. some pretty meaningful gains out of that front end of construction. You know, the back end of the homes that are finishing now, they're still, you know, those homes are still on longer cycle times, but we would expect to extend, you know, the gains that we're recognizing currently on the front end. As those homes get into the back end trades, we'd expect to pick up time there as well.
spk10: Great. Yeah, I was thinking about in terms of the backlog conversion from those two issues. Great. Thanks very much.
spk01: Next, we'll move to Truman Patterson at Wolf Research.
spk03: Thanks for taking my questions. First, on the entry-level orders, I believe you all said we're up like 18% year over year. That's quite a bit stronger than where we think underlying entry-level spec demand is. Could you help us understand that a little bit? Is it easier comps, community location? Have you all, you know, early in 1Q, did you bring incentives more in line with the market, et cetera? Just trying to understand that result a little bit better. And then could you help us understand just where overall absorption stood exiting the quarter in March?
spk15: I was going to say it's hard to react to that. I think what What we've seen reflected in our results is that we started a fair number of homes that were speculative last year. They were available, and we've been able to sell them. I wouldn't characterize it as a huge incentive. I mentioned earlier we have a national rate buy-down, and it is probably most appealing to that buyer group. But it probably is only a relatively small percentage of our total population of signups that actually took that. Other things are more important to some buyers.
spk14: The one thing, Truman, that I think I'd probably highlight is that our entry-level product tends to be on the higher side of the entry-level price band. The locations are excellent. And so I think we've got a well-located product that's still within the affordable range that appeals to a first-time entry-level buyer. And so if our performance exceeds maybe kind of what you were expecting, my guess is on a relative basis, that's probably some of the strength is we've got excellent locations for those entry-level communities. And then as far as Kind of the exit rate for the quarter, that's not a number that we've quoted. I did highlight, though, in one of the previous questions, we saw absorption strength progress as we moved through the quarter. So March was our highest sales and the highest absorption rate of the quarter. We've seen strength continue as we've moved into April.
spk03: Perfect. Thanks, guys. And then... Can you provide an update on the strategic relationship with Invitation? I'm just wondering if that might have been pushed back a little bit in the current environment with higher rates and higher cap rates.
spk14: We're very happy with the relationship that we have with Invitation. I probably answered the question more broadly about single-family rental. You know, we've made it a small part of our overall, you know, production environment. We're, you know, we're looking at opportunities where we can provide a very, very small number of our total deliveries to the build for rent operators, invitation being a big part of that. So, we're happy with how it's performing. You know, we talked about it, you know, being something in the range once we get to full capacity of about 5% of our annual deliveries. We're still on track as we get this ramped up that that's about what it will be. And we're pretty comfortable with that.
spk07: All right. Thank you.
spk01: We'll take our final question from Rafe Jadrusich at Bank of America.
spk09: Hi, good morning. Thanks for taking my question. I just wanted to follow up on some of the comments on tighter credit. Can you talk about the potential impact to your land developers? Are you seeing any stress out there, and could that have any impact on your ability to option, or would you have to support your partners or take on more lots for yourself?
spk15: Yeah, candidly, no. Most of the folks that we work with are pretty well capitalized. They're big developers in their market. And the truth is that we self-develop a great deal of the land that we control anyway. The vast majority of our business is actually self-funded. But for those deals where we've got partners, they are typically pretty well capitalized.
spk09: Thank you. That's helpful. And then you mentioned earlier that the improving sales environment contributed to the gross margin upside. Versus your expectation, was the stronger sales improving traffic or better conversion or like a combination of both? Any color you can give on sort of quantifying which one of those drove upside to your initial expectation?
spk14: Yeah. Traffic, I think, was pretty consistent with what we expected. Conversion was was better, and the incentives that we had to provide to get that conversion were better than our expectations, which is what really contributed to the margin outperformance.
spk07: Great. Thank you.
spk01: And that does conclude today's question and answer session. I'll turn the conference back over to Jim for any closing remarks.
spk12: Appreciate everybody's time today. We're certainly available for the remainder of the day for any follow-up questions. Otherwise, we'll look forward to meeting with you on the next board.
spk01: And that does conclude today's conference call. Thank you for your participation. You may now disconnect.
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