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spk16: Thank you for standing by, and welcome to the Pulte Group, Inc. Q4 2023 Earnings Conference Call. I would now like to welcome Jim Zumer, Vice President of Investor Relations, to begin the call. Jim, over to you.
spk14: Thanks, Monty. Good morning, and let me welcome participants to today's call. We look forward to discussing Pulte Group's strong fourth quarter and full-year financial results. The period ended December 31, 2023. I'm joined on today's call by Ryan 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. Please note that consistent with this morning's earnings release, we will be discussing our debt ratio on both the gross and net basis, A reconciliation of our adjusted results to our reported financials is included in this morning's release and within today's webcast slides. And finally, I want to alert everyone that today's presentation includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments made 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? Thanks, Jim, and good morning.
spk13: I'm excited to speak with you today about Pulte Group's outstanding fourth quarter and full-year financial results. Over the past few years, we have faced macro challenges ranging from COVID to supply chain disruptions to skyrocketing mortgage rates. Through it all, we've remained disciplined and consistent in running our operations and but when needed, have quickly adjusted key business practices to position Pulte Group for ongoing success. The benefits of this approach can be seen in the strength of our reported results. Bob will detail our Q4 performance, so let me highlight several of our key operating and financial achievements for the full year of 2023. By strategically increasing our spec production, we had more inventory available to meet the demand of first-time homebuyers, and those consumers worried about mortgage rate volatility. Increased house inventory was a critical support to Pulte Group delivering 28,600 homes in 2023 and record home sale revenues of $15.6 billion. In the face of increased costs for land, labor, and materials, we carefully managed product offerings, pricing, incentives, and absorption paces to maintain high profitability while ensuring we continue to turn our assets. The result? We reported outstanding full-year gross margins of 29.3%, which helped drive a 6% increase in earnings per share to a record $11.72 per share and a 27% return on equity. We also continued to efficiently increase our land pipeline as we completed transactions to put approximately 40,000 new lots under control. Inclusive of these lots, 53% of our total land pipeline is under option, either with the land sellers or through our expanding land banking structures. Since making the decision to expand our use of land banking starting 15 months ago, we have placed approximately 25 communities representing $1.5 billion worth of future land and development spend into such structures. And finally, Consistent with our stated capital allocation priorities, we invested $4.3 billion into the business through land acquisition and development spend in 2023 and returned $1.2 billion to investors through share repurchases, dividends, and debt pay down. Inclusive of our 2023 spend, we have repurchased almost half of the 2013 shares outstanding since initiating the program over a decade ago. By remaining consistent in our business practices and making market responsive adjustments where needed, we reported another year of exceptional financial results. I want to thank the entire Pulte Group team for their tireless efforts and support in delivering superior homes and experiences to our homebuyers, while providing outstanding financial returns to our investors. Consistent with the broader housing market, we saw home buying demand being negatively impacted during the early part of the fourth quarter, as 30-year mortgage rates increased toward their 2023 peak of 8%. We then saw buyer sentiment and demand improved as mortgage rates finally rolled over, ultimately dropping more than 100 basis points as we moved through November and December. The decline in rates helped drive our December net new orders and absorption pace to be the highest month in the quarter. The increased home buying activity in December was an important driver of the 57% increase in our Q4 net new orders and demonstrates the desire for home ownership remains high across all buyer groups. It remains our view that the long-term outlook for new home construction is extremely positive. A structural shortage of housing caused by years of underbuilding has only been exacerbated by a lack of resale inventory as owners are financially and or emotionally locked into their low-rate mortgages. While the lack of existing home inventory will resolve itself over time, we believe that land entitlement and labor availability challenges mean it will be difficult to correct for the many years of underbuilding in this country. Given our constructive views on the outlook for housing demand, we are investing in our operations with the goal of growing unit volumes by 5% to 10% annually. Our decision to walk away from option lots as interest rates increased in 2022 will impact our community openings in 2024, leading to our growth this year being closer to the lower end of this range, as we expect closings of approximately 30,000 homes in 2024. For those of you who have followed Pulte Group's story for the past few years, you know it's never been about growth for growth's sake. Our focus is always on investing in our business to build shareholder value, so our objective is to grow our volumes while maintaining high returns on equity. To accomplish this, we must continue to intelligently invest in high quality and high returning projects while continuing to invest in our own assets through the ongoing repurchase of our stock. As we have demonstrated for much of the past decade, we expect to continue to generate strong cash flows, that will allow us to fund our business investment, pay our dividend, and return excess capital to our shareholders, all while maintaining our balance sheet strength and flexibility. Our expectation of continued financial success is reflected in this morning's announcement that our Board approved a $1.5 billion increase to our share repurchase authorization. With many forecasting interest rates to fall, the economy to stay relatively healthy, and conditions in the job market to remain favorable, there are certainly reasons to be optimistic about housing demand in the coming years. Let me now turn over the call to Bob for a review of our fourth quarter results.
spk15: Bob? Thanks, Ryan, and good morning. As Ryan mentioned in his comments, market conditions changed meaningfully as the fourth quarter progressed and as mortgage rates began to fall. Our report of financial results for the period were influenced by these evolving market dynamics, so I'll note any important areas of impact in my prepared remarks. Home sale revenues in the fourth quarter were $4.2 billion, compared with $5 billion in the prior year. Our lower home sale revenues for the period primarily reflect a 14% decrease in closings to 7,615 homes, along with a 2% decrease in our average sales price to $547,000. I would highlight that our fourth quarter closings came in about 5% below our previous guide, as sales early in the quarter were negatively impacted by higher mortgage rates and the general softening in overall buyer demand. As Ryan noted, unbuying demand accelerated the back half of the quarter, but sales, particularly sales of finished spec homes that would close in the quarter, finished below our assumptions. We could have captured incremental sales and closing value by offering higher incentives, but we didn't see that as a worthwhile tradeoff. Given that buyer trends have remained positive in January, I think we made the right choices as we have inventory available to meet the stronger demand. Our mix of closings in the quarter were comprised of 40% first time, 36% move up, and 24% active adult, which is in alignment with our stated goal for the buyer mix for our business. In the fourth quarter of 22, closings were 36% first time, 39% move up, and 25% active adult. Our average community count for the fourth quarter was 919, which represents an 8% increase over last year's fourth quarter average of 850 communities and was in line with our prior guidance. Looking at order activity in the quarter, our net new orders increased 57% over last year to 6,214 homes. The large increase over last year reflects both improved demand in 2023, as well as the extremely difficult operating environment in the fourth quarter of 2022. As discussed previously, demand conditions grew increasingly difficult early in the fourth quarter this year as mortgage rates climbed to 8%. But we experienced a notable improvement in buying activity as rates decreased over the back half of the quarter. On a sequential basis, our absorption pace improved from November to December, and we would attribute much of this improvement to the decline in interest rates. Along with stronger demand conditions, the year-over-year increase in fourth quarter net new orders benefited from a decrease in cancellations. In the most recent quarter, cancellations as a percentage of beginning period backlog fell to 9%, down from 11% in the comparable prior year period. Looking at our order activity by buyer group, fourth quarter net new orders increased 70% for first-time buyers, 78% for move-up buyers, and 15% for active adult buyers. Our order numbers indicate that demand improved across all buyer groups, is a very positive dynamic when assessing potential housing demand in 2024. as a result of our sales and closings activity our quarter end backlog was 12 146 homes which is effectively flat with last year reflective of the increased mix of first-time buyers and their lower average sales prices our ending backlog value declined slightly to 7.3 billion dollars Inclusive of the 7,128 homes we started in the fourth quarter, we ended the year with 16,889 homes in production. 44% of our production is spec, including 1,263 finished specs, which puts us in a strong position to meet buyer demand as we head into the spring selling season. By the end of the fourth quarter, our construction cycle time was down to 100%. which is a sequential improvement of about two weeks from the end of the third quarter. Going forward, we continue to target getting our cycle time down to 100 days or below by the end of the year. Based on our production pipeline, we expect closings in the first quarter of 2024 to be between 6,200 and 6,600 homes. And given our units under production, we expect full-year deliveries to grow by 5% to 30,000 homes. We currently expect the average sales price of closings to remain in the range of $540,000 to $550,000 for the first quarter and the full year of 2024, which is consistent with our fourth quarter pricing. At the midpoint, this would imply price stability over the course of the year. Our fourth quarter gross margin was 28.9%, which is down approximately 50 basis points for both the fourth quarter of last year and the third quarter of this year, but likely remains the industry leader among the big builders. As with the entire year, our fourth quarter margins reflect higher incentive and input costs. Incentives, which primarily impact revenues, increased 50 basis points sequentially from the third quarter to 6.5%. On the cost side, lower lumber prices offset inflation and other material and labor, but higher land and land development costs impacted margins in the period. Keep in mind prior comments that we expect pricing to be flat in 2024, We anticipate that land and house cost inflation will result in gross margins to be in the range of 28 to 28.5% for each quarter during the year. We reported fourth quarter SG&A expense of $308 billion, 7.4% of home sale revenues, compared with prior year SG&A expense of $351 million, or 7.1%. The 30 basis point drop in overhead leverage can be attributed to the lower closings and revenues realized in the quarter versus the prior year. It should be noted that we recorded $65 billion of pre-tax insurance benefits in the fourth quarters of both 2023 and 2022. Based on anticipated closing volumes, we expect SG&A expenses for the full year of 2024 to be in the range of 9.2% to 9.5% of home sale revenues. Given our typical seasonality of closings, we expect SG&A expense in the first quarter to be approximately 10% of home sale revenues, with overhead leverage improving as we move through the remaining quarters of the year. For the fourth quarter, our financial services operations reported pre-tax income of $44 million, which is up from $24 million last year. The improvement in pre-tax income reflects more favorable market conditions across our financial services platform, coupled with higher capture rates, including an increase to 85%, up from 75% last year in our mortgage operation. Our reported pre-tax income for the most recent quarter was $947 million, compared with prior year pre-tax income of $1.2 billion. In the period, we recorded tax expense of $236 million, or an effective tax rate of 24.9%. Projecting ahead to 2024, we expect our full-year tax rate to be in the range of 24, 24.5%. Looking at the bottom line, our reported fourth quarter results show net income of $711 billion for $3.28 per share. In the comparable prior year period, we reported net income of $882 million for $3.85 per share. For the full year of 2023, we reported net income of $2.6 billion and a record earnings of $11.72 per share. Reflective of our strong operating results, In 2023, we generated cash flows from operations of $2.2 billion. Given our current expectations for operating and financial results, along with our plans to increase land investments to $5 billion in the coming year, we expect 2024 cash flows from operations to be approximately $1.8 billion. Turning to our investment and capital allocation activities, we invested $1.3 billion in land acquisition and development in the fourth quarter, of which 59% was for development of our existing land assets. For the year, our land investment totaled $4.3 billion, of which 59% was for development. Given our constructive views on near and longer-term housing dynamics, as noted, our plan is to increase our land spend to approximately $5 billion in 2024. We would again anticipate a roughly 60-40 split between development and land acquisitions. This increase in investment is consistent with Ryan's earlier comments regarding positioning the business to routinely grow future delivery volumes by 5% to 10% per year. Inclusive of our fourth quarter investments, we ended 2023 with 223,000 lots under control, which is an increase of 5% over the prior year. I would highlight that on a year-over-year basis, we lowered our owned lot count by 4,000 lots. while increasing our lots under option by roughly 16,000 lots. As a result, our percentage of lots under option increased to 53%, up from 48% last year. There's still a lot of runway ahead of us to achieve our goal of 70% optioned lots, but we're moving in the right direction. Based on the investments we've made and our anticipated community openings and closings in 2024, we expect our average community count in 2024 to be up 3% to 5% in each quarter as compared to the comparable prior year period. Consistent with our stated capital allocation priorities, we continued to return capital to shareholders in 2023. To that end, we paid out $142 million in dividends and have increased our dividend per share by 25% starting in the first quarter of 2024. We also repurchased 13.8 billion common shares at a cost of $1 billion, or an average price of $72.50 per share, which included $300 million of repurchases and an average price of $83.03 per share in the fourth quarter. With the 13.8 billion shares acquired in 23, we have repurchased approximately half of the shares outstanding at the time we initiated the program back in 2013. Having repurchased these shares at an average cost of $32.16 per share, we believe it's been a great investment for our shareholders. In addition to buying our stock, in the fourth quarter, we took advantage of market conditions by using $35 million in cash on hand to pay down a portion of our debt. For all of 2023, we retired $101 million of our 2026 and 2027 senior notes through open market transactions. helping to lower our quarter end debt to capital ratio to 15.9% down 280 basis points from last year. Adjusting for the $1.8 billion of cash on our balance sheet, we ended the year with a net debt to capital ratio of 1.1%. Now let me turn the call back to Ryan for some final comments.
spk13: Thanks, Bob. Successfully navigating our business through the past 12 months of rising interest rates has been challenging. The same could be said about the past 24, 36, and 48-month periods as we battled through COVID and the global collapse in supply chains. I am extremely proud of how our entire team responded to these events and the exceptional operating and financial results Pulte Group has delivered over an unprecedented period. Looking back over the five-year period of 2019 to the just recently completed 2023, We grew volumes 5% annually and delivered just under 135,000 homes. To support our growth during this period and for future years, we invested almost $19 billion in cumulative land acquisition and development spend. Through our disciplined land investment, operational focus, and organizational expertise, We capitalized on market conditions to grow earnings per share over this period at a compounded annual growth rate of 34% while delivering an average annual return on equity of just over 26%. It's this type of strong financial performance during an extended period of market volatility that has prompted increased discussion about the need to reconsider how the large home builders are valued. I think that if you want to be valued differently, you must demonstrate a fundamental change in how you operate the business and the results you deliver, not just for a year or two, but over an extended period of time. What's different about the past five years is that while investing $19 billion into our operation, we also generated almost $7 billion in net cashflow from operations during the sustained period of growth. In fact, We recorded only one year of negative cash flow from operations since shifting our focus in 2012 from just top line growth to driving high returns over the housing cycle. We paid off $1.1 billion of debt while cutting our leverage by more than half to end 2023 with a debt to capital ratio of 15.9% and a net debt to capital ratio of 1.1%. We returned $4 billion to shareholders through stock repurchases and dividends. I'd add that the reality is we've been operating our business in just this way for really the past 10 years. I know stocks reflect performance, so I believe that if we can continue to both grow our business and deliver ROE that remains among the industry leaders while generating positive cash flow and maintaining a low risk profile, that our stock price and shareholders will ultimately be rewarded. Let me now turn the call back to Jim Zoomer.
spk14: Great.
spk13: Thanks, Ryan.
spk14: We're now prepared to open the call for questions. So, Mondeep, if you would explain the process, we'll get started.
spk16: The floor is now open for your questions. To ask a question at this time, simply press the star followed by the number one on your telephone keypad. We ask that you please limit yourself to one question and one follow-up question.
spk02: We'll now take a moment to compile our roster.
spk16: Our first question comes from the line of Carl Reichardt with DTIG. Please go ahead.
spk09: Thanks. Morning, guys. Hope you're doing well. Ryan, I wanted... Good. I wanted to ask a little bit more about January. Could you maybe expand on how business has been? And what I'm really interested in is have you seen enough traffic or sales rates to start to think about more broadly pulling incentives down or even starting to raise base across the footprint?
spk13: Carl, you know, so Bob highlighted in the prepared remarks that, you know, and specifically the Q4, October and November were really below expectations, and it was driven by high rates. We had a great December, highest month in the quarter in terms of absolute sales and absorption per community. So that was certainly an anomaly for typical December seasonal patterns. And the strength is really continued into January, Carl. So we're feeling pretty good about how the year is starting. In terms of kind of where it sets us up for reduced discounts, increased prices, You know, we're going to watch it closely, and I think we've demonstrated through past behavior that we're always looking to find the sweet spot between pace and price. It won't come as a surprise to you, Carl, that affordability with the buyers remains a challenge. And so I think we're going to have to, you know, be thoughtful about what we do on both the incentive and the price increase front. But, you know, we're feeling pretty good about how the year started.
spk09: All right. Thanks for that, Brian. And then I'm going to ask a couple of questions just on move up. Obviously, the entry-level business has been strong for volumes. Move up, a number of your peers have kind of shifted some of their investments more towards the low end. That's been going on for quite some time. Can you talk a little bit about how you look at that business this year? Is there any alteration and mix in terms of communities? and whether or not maybe your can rate in that business is improving faster than the other businesses. We're trying to see if the existing housing market's unlocking enough that you can start to see, you know, even more strength in that particular segment. Thanks.
spk13: Yeah, you know, Carl, our movement business performed incredibly well in the quarter. We had, on a year-over-year basis, the growth was north of 70%. So, you know, I think that segment performed very well. The margins out of our move up as well as our Dell web business continue to be some of our best gross margins. So we're seeing real financial strength there also. And then in terms of kind of community mix for Carl, we're kind of right in line with where our long-term strategic targets are in terms of kind of that part of our business being about 35% of our overall mix. So we feel pretty good about where that business is positioned.
spk15: Yeah, just maybe another point of clarification that they not only were the sales strong, it was our strongest absorptions on a same-store basis. So that consumer actually has performed well, to Ryan's point, strong margins and absorptions.
spk02: Thank you, Bob. Thanks, Ryan.
spk16: Our next question comes from the line of Matthew Booley with Barclays. Please go ahead.
spk08: Good morning, everyone. Thanks for all the details and for taking the questions. Question on the high-level growth algorithm that you gave Ryan around the kind of 5% to 10% growth annually. You know, you're talking to the low end of that this year because you walked away from some deals in 2022. So my question is, is this kind of sort of a one-year pull, so to speak? And, you know, do you have the land that you need today to kind of get back to your algorithm? by 2025, or how should we think about getting to that level of growth going forward? Thank you.
spk13: Yeah, Matt, thanks for the question. We feel really good about how we position the land pipeline. We've been investing for growth for a number of years, and we've been trying to do it in a very responsible way, specific to having less owned and more optioned land. um you know the fact that over the last 15 months we've made significant headway with our land banking platform has helped with that so we really like the number of lots that we have under control at 225 000 plus or minus and we like the ownership structure uh or the way that we've controlled those lands we think it's a really capital efficient structure specific to your growth target number um yeah we're we're going to be at the lower end for 2024 Beyond that, we feel that we've got the right structure to be in that range for future periods.
spk15: Yeah, maybe I'd add to that. The land 425 is under contract and probably in development right now. We have line of sight to 24, 25. You get out to 26, we're still working through some of that, but You can see from the approvals that we did in this most recent quarter or for the year, 40,000 lots. No issues from our perspective in terms of lining up that type of growth rate.
spk08: Got it. Okay, that's super helpful. Thanks, guys. Second one, back to the gross margin question. I think you're guiding 24 margins to be down at roughly 70 basis points from where you exited. The fourth quarter, I think I heard you say, Bob, that it's kind of flat pricing, and then you've got some headwinds in land labor and materials. I'm just curious if you kind of unpack that a little bit and maybe specifically focus on the land side. How are you kind of thinking about those headwinds to the margin, and how does that kind of play into that guide in 24? Thank you.
spk15: Yeah, fair question. And I think we laid it out this way. To try and answer that question, I'll give you a little more color. know we see pricing flat during the year now you might see different um pricing at different consumer groups um you know the first time is the most affordability challenge that's where we saw actually the biggest decline in the current quarter but we think pricing is relatively flat through 24. um we see modest call it two to four percent house construction cost increases um kind of mid to upper single digit land increases which is what we've experienced this year um and so when you kind of mix that all together um we and the one other point i guess i'd offer to clarify is we're assuming incentive loads stay about the same at the six and a half percent that we saw in this quarter So when you marry that all up together, a little bit of a decline year over year, but still 28 to 28 and a half percent, pretty strong margin.
spk08: Perfect. All right. Thanks, Bob. Thanks, Ryan. Good luck, guys.
spk16: Our next question comes from the line of John Lovello with UBS. Please go ahead.
spk10: Hey, guys. Thank you for taking my questions. The first one, just maybe talking about January again, curious how orders looked you know versus you know normal seasonality if you will i think you know first quarter absorptions typically rise you know caught 40 to 45 percent sequentially is there anything that would you know preclude that from happening in your opinion um outside of rates maybe in in the first quarter of this year uh
spk13: Yeah, John, we didn't give a specific increase out of December. We kept more of our commentary around the qualitative side of things, which I'd reiterate, we're very pleased with how things are performing in January, and we'd expect that strength to continue. So we continue to be in a situation where there's low supply. affordability has definitely gotten better. You heard Bob's comment about kind of what we've assumed with our incentive load. So, yeah, I'd expect us to have a strong Q1. The one thing, other thing I'd offer that's probably of note is we're starting to see some real signs of life in our Western markets. You know, those have been, that's been a part of the country that was slow for the majority of kind of 2022 and most all of 2023, but In the last 30 to 45 days, we're really starting to see those markets pick up, which is a welcomed outcome.
spk10: Makes sense. And then on the share buyback that I was encouraging to see, I think could be a good driver of returns as we move forward here. Over the past few years, I think you guys have done about a billion per year. The authorization now is closer to 1.8%. How are you thinking about 2024 buybacks relative to the past few years? I mean, should we expect north of a billion?
spk15: Honestly, I'm going to defer. We typically do. We report the news on that. I think you highlight we've done about a billion dollars a year the last couple of years. We have a billion eight cash. We have offered that we project about a billion eight of cash flow from operations in the current year. So our capital allocation priorities don't change. We've said we're going to increase our land investment to $5 billion. That's up about 16% year over year. We increased our dividend 25%. That's not a huge cash element, but still, I think, reflective of our confidence in the business. We do have a billion aid of authorization. And like I said, we'll report the news You saw this year we bought back $100 million of our notes because it was attractive. The rate environment has made that a little less attractive, but we always look at liability management as part of the equation. So really no change to our capital allocation priorities.
spk02: Okay. Thank you, guys.
spk16: Our next question comes from the line of Stephen Kim with Evercore ISI. Please go ahead.
spk05: Yeah, thanks very much, guys. First question relates to your land on the balance sheet. I think that your cash flow guide seems to suggest, at least for my modeling, a modest rise in your own lot count while you keep a year's supply of owned lots fairly stable. I was wondering if that's right and if there's any opportunity or desire to actually reduce your land holdings in years further.
spk13: yeah steven so uh a couple things there we we are increasing our land spend in 2024 from 4.3 billion to 5 billion um you know our mix of developed spend versus uh uh land acquisition spend will continue to probably be about 60 percent development 40 percent land act and then you know our long-term desire is to have 70 percent of our land controlled via option Um, you know, we highlighted in the prepared remarks this year, we moved that 48% option to 53% controlled via option. So we're, you know, I think both in, uh, we demonstrated through results over the past number of years, as well as kind of articulated long-term goals. We want to be land lighter. Um, we're going to continue to do it the right way. Um, all with an eye toward delivering, you know, a lower risk model. that's very capital efficient as well.
spk05: Well, I guess, Ryan, I mean, you gave most of that information in your opening remarks, so I appreciate that. But I guess the gist of my question, trying to incrementally understand what your plans are a little bit more, is to try to understand the actual amount of owned lots. Are you looking to get to your 70% optioned versus owned mix by keeping your owned lot count kind of flat or your supply flat with where you are? Or are you actually looking to reduce that in addition to increasing your option lot exposure to kind of get to that 70% eventually?
spk13: Yeah, Stephen, in terms of years owned, we'd expect to probably keep that right around the level that we're at, maybe a slight decrease. And then ultimately we would we would start to flip from a year's own to year's option. You'll see a little bit of a trade in that mix.
spk05: Okay, that helps. And then when you talked about land banking and continuing to increase that, could you describe for us the, you know, when you think generally about what you're seeing in the market in terms of pricing, in terms of, you know, the way these negotiations are going with your land bankers, what kind of anticipated haircut to gross margin do you typically get when you go from just sort of buying versus doing a land option? And what's the benefit to your inventory terms that you typically think about? So what's the trade-off basically in your mind, some rules of thumb for us?
spk15: Yeah, I don't know that there's a kind of a hard and fast answer to that, Steven. It depends on the mix of the business that we've got. know in terms of margin you know it can be a couple of hundred basis points on a relative basis um and in terms of inventory turns you know certainly it's going to be more efficient than a bulk raw transaction um but it depends on the life of the asset so you know it you know in dell web it's going to be very different than it is in the in the syntax business for us so i wouldn't want to you know paint that with too broad a brush.
spk02: Okay. Okay. That's fine. I appreciate it. Okay. Thanks, guys.
spk16: Our next question comes from a line of Joe Ahlersmeyer with Deutsche Bank. Please go ahead.
spk12: Yeah. Thanks very much. Good morning, everybody. Just a question on the assumption on the incentive load in the gross margin guidance. I'm wondering if that represents more just a state of conservatism right now waiting to see what happens with rates further, or if it's more about your philosophy as rates fall that you might allow that to flow through to affordability and drive volume versus letting it be a big margin benefit. If you could just talk about that trade-off.
spk13: Yeah, Joe. I think the reason we've assumed that the incentive load stays about where it is is just because affordability continues to be challenged. We've got low supply, but interest rates are relatively higher. And because of low supply, I think there's still some pressure on prices being elevated historically. So we've talked a lot in 2023 about how successful we were in helping to solve some of the affordability challenges with the incentive dollars that we put toward the forward mortgage commitments. We'll continue to use that as a tool in 2024. Now, as rates fall, we think the cost of those forward mortgage rate commitments will become less. We've made an assumption that we reallocate some of those incentive dollars to other things that help to solve the affordability challenge and get a buyer into their home. So is it conservative? Time will tell. um i think what you've seen from us historically is you know we're not afraid to raise price we're not afraid to cut discounts and you know we're always looking to optimize pace and price you've also heard me talk the last several quarters we're not going to be marching proud um so we're doing things to be responsive to what the market is to do uh derive an outcome that yields the best return for our shareholders You know, and you'll see us actively managing all things, pays, price, incentives, forward mortgage commitments, et cetera.
spk12: Understood. Thanks a lot for that. And I appreciate your comments about the valuation. Sounds like you think that cash flow is a bigger part of that potentially even than just percentage of option lots or any metric on the land side. It's about the cash flow. I tend to agree. And so just wondering if you are internally starting to think about your leverage in the context of cash flow or profits and not so much on what it makes up relative to your inventory balance. It's kind of thinking almost more like a manufacturer or distributor because right now you're in that depth at about 13 days of operating profits. Just thinking about the potential for using more debt going forward. Thanks.
spk15: Yeah, that's an interesting question. You know, I'm not sure we can think like a manufacturing company completely. The risk profiles are different. But having said that, I think they're, you know, based on the strength of the operation, based on the cash flow that we've consistently shown despite growth, which historically is not the way this industry has behaved, you know, we believe there is an opportunity um for people to think a little bit differently about the equity um in terms of how we manage the leverage on the balance sheet a lot of that will have to do with um our opportunities to invest in the business and what we do on the share repurchases um but you know even you know you look at the rating agencies um they've been slow but they've been responsive um to kind of i think seeing the value in the business model and also the way the debt gets looked at. So would we use more debt for something? Without question, if it were for the right thing.
spk02: That's helpful, Bob. Thanks so much. Take care. Our next question comes from a line of Michael Reholt with JP Morgan.
spk16: Please go ahead.
spk03: Thanks. Appreciate it. you know wanted to circle back just on incentives and you know where we are today and you know to the extent that there's the potential for those to decline um how we should think about the impact on 24. so when you talk about um i think assuming in 2024 six and a half percent of a load rate for incentives and i believe you said that was uh similar to the fourth quarter If you could just remind us where you were in the fourth quarter versus the third and earlier in the year. And to the extent that, you know, perhaps incentives ticked down a little bit in the first quarter of 24, should we be thinking that that would be a 3Q or a 4Q impact? Just trying to get the sense there of the lag.
spk13: Yeah, Mike, I'll take the first part of that and then I'll have Bob do the last piece. So we're up 50 basis points from Q3. We were 6% in Q3, 6.5% in Q4. You know, in terms of what that means for 2024, you know, I think I addressed it on a prior call. We're going to actively be managing our incentive load, but we've shared with you what our assumption is in kind of current form. If there's an opportunity to peel those back, we'll do it and we'll certainly share that with you. In terms of kind of the quarter that it would impact, right now about 50%, somewhere around 50% of our sales are spec. So those are closing in kind of the following quarter. You know, spec sales now would either be late Q1 closings or early Q2 closings. If it's a dirt sale, Q1 closings typically end up being Q3 or early Q4 closing. So, you know, we factored all of those assumptions into the margin guide that we gave for the year, which is, you know, 28 to 28 and a half, just to repeat that. And then, Bob, I don't know if you have the incentive load for Q1, Q2. I think that was the only piece I didn't answer.
spk15: It was about 6% in each of the first, second, and third quarters. And it was 4.3%.
spk03: the fourth quarter of last year great no that's helpful thank you for that um you know i guess secondly i'd love to kind of shift a little bit to the sgna side um i think he gave guidance for the uh first quarter but you know you've been running last couple years you know plus or minus around nine percent uh low nine percent um obviously we've heard a little bit about um Higher commission rates coming back, maybe in a more choppy market at points in the past year or so. Overall, solid market, but still, we've heard a little bit about commissions maybe coming up a little bit. How should we think about SG&A and the potential for further leverage over the next couple of years against the growth algorithm that you talked about? If commissions, let's say, are stable from here,
spk13: um you know could we see an eight percent at some point or getting closer to an eight percent number just love your thoughts on that yeah mike we've um you know i think we've we've always been uh thoughtful in how we spend sgna dollars um we have historically made uh some extra investments in the quality of the homes that we build and deliver in the customer experience that we provide for our homeowners um and then we and we invest incremental dollars in the culture of our uh you know our workforce so we've we've tried to maintain balance within the sgna structure as well um we're not trying to run um kind of the leanest and and um you know the lean on the lean end we're also you know not trying to overspend i think we're trying to be very balanced um in terms of the leverage for 2024 specifically um you know we've kind of given the guide which will put us kind of in the low uh you know low nines um and that's really reflective of kind of what bob guided to on the average sales price which we're expecting to be flat and against that you've still got um wage inflation for kind of our internal employees running close to you know three and a half four percent so um you know there's some um you know pressure there's there's pressure on the sgna front that we're not necessarily getting the benefit of on the asp increase side so in terms of kind of where it goes into the future um time will tell but you know we've given the best visibility that we can for 2024. bob i don't know if you anything you'd add on the sgna you know bob bob keeps us honest they'll tell you that um we're not we're not overspending uh anywhere um
spk02: At least not under Boss Watch. Great. Thank you. Our next question comes from the line of Sam Reed with Wells Fargo.
spk16: Please go ahead.
spk06: Hey. Thanks so much, guys, for taking my question here. Wanted to drill down a little bit on the first-time buyer. You guys have given a lot of good color on pricing. it does sound like price did move lower for this buyer group a bit again during the quarter maybe help us unpack the relative split perhaps between you know higher incentives for this buyer group as you try to make these uh you know homes more affordable versus perhaps some of the other other affordability levers that you might be pulling like smaller floor plans etc kind of any color here would be appreciated yeah i would tell you you know if you look
spk15: know year over year pricing at 422 to that buyer is down six percent year over year it was down about one percent versus the trailing quarter so the third quarter of this year and i would tell you it is largely um incentive related and you know so we're not we haven't in the last three months or the last 12 months had a radical redesign of the product that we're offering to people you know communities when they get um entitled You have product approvals. So to a degree, you can see people saying, I want the smaller floor plan. I would tell you that's not the driver of the price change. It is the incentive load that we've introduced. So it's that 220 basis points, which for that buyer is about, call it $8,000. That's the price decline.
spk06: No, that's helpful. And maybe one more on pricing here, just from a slightly different vantage point. You guys have given good color in the past on option and lot premiums and the impact on ASP. I want to say it's been around 100K or north of 100K across your entire mix throughout 2023. Curious as to where that trended in Q4, and maybe give us a sense of your outlook for that piece of the price component into 2024.
spk15: Yeah, in the fourth quarter, it was $105,000 per unit, so it's down about $4,000 versus the prior year. And so I think that speaks to the sales team, and I give them a lot of credit. Where we've needed incentive has been less around options and lot premiums and more oriented towards financing. So we didn't see a big change there, which I think is a real positive. It also is, interestingly, for that move up in active adult buyer, and we've highlighted the relative strength from them in this quarter and the relative pricing strength there. So just like our first time was down about 6%, our move up pricing was actually flat quarter over quarter, and our active adult was actually tough 3%. And I think it's reflective of the way we go to market, the way we sell the lots that we've got, the options that people put in houses. So our teams are still doing a really good job of providing value for that which people desire.
spk02: Helpful color all around. I'll pass it on, guys. Thanks.
spk16: Our next question comes from a line of Ken Zenner with Seaport Research Partners.
spk02: Please go ahead. Morning, everybody.
spk07: I've got two very simple questions. First is on land banking. What percent of closings do you expect to be from finished lots once you reach your 70% option owned scenario? Generally.
spk15: That's an interesting question. Certainly the land banking would be finished lots, but for the optionality that we have with
spk13: with individual sellers many of those were self-developing and so i don't i don't have that in mind yeah my my and this is a little bit of a guess and roughly 20 to 25 percent of our total closings once we get to 70 30 we'll be finished lots um you know the rest will there'll be a lot of optionality in there but bob's point a lot of our options we take down as you know, raw land chunks, and then we self-develop those. You know, still highly efficient. It's just a different form of, you know, an option structure.
spk07: Right. I assume that's kind of reflecting your entry-level exposure as well. Second question is, talk to options. Again, could you update us what percent of your ASP is coming from options? And then comment on the margin benefit. you get from that, if you could, so we could discern, you know, your operating construction costs versus your strategy of bringing in these options. Thank you.
spk14: Sorry, I want to make sure I understand the $40,000, the $105,000 that you just gave, how much of it is options? No, I think it's- Right.
spk07: Right. You're a, you know, you're total ASP. You have a certain option exposure, more at move up
spk15: and adult active adult but could you talk to the margin impact of that as well thank you yeah so of the of the hundred and five thousand dollars of option a lot premium eighty thousand dollars is options twenty five thousand dollars that's lots premium um you know i i could say for instance lot premiums are pure margin um i'm not sure that that's fair right you know pricing doesn't really work that way But in terms of the option spend, typically it's going to have a relatively rich margin mix, call it 50%. And so it is accretive to the overall margin. And the way we try and go to market, Ken, and I don't know if this answers it better, we put a base price house that we think is kind of market standard and what people can and should expect to pay for that house. Then we start talking about, okay, which lot do you want? What are you willing to pay for that lot? That's what generates the $25,000. And then, okay, now in the house, if we're offering optionality, and we don't for everyone, right? So for the Centex buyer, we may have curated packages or no choices at all. But for the folks that can do structural options or fit and finish, that's what's driving that $80,000 of incremental revenue.
spk02: Thank you very much.
spk16: Our next question comes from the line of Alan Ratner with Zellman and Associates. Please go ahead.
spk04: Hey, guys. Good morning. Thanks for all the details so far. Question on cycle times. So congrats on the improvement there. Sounds like you expect to see further improvement in 24. Curious, to get to the 100-day target from 130 where you're at right now, you guys are targeting 5% growth. We've heard some other builders maybe a little bit higher than that. Is there a level from a labor perspective where if builders try to push starts more significantly that you think cycle time improvement might stall a bit? Are there any constraints that you could foresee, or is the unleashing of the normalization of the supply chain just kind of
spk13: independent of whatever the start pace might look like in 24. yeah and i it's a fair question um you know based on the total amount of production that's happening um you know i don't see the industry stressing the labor availability i'm not suggesting there's a whole bunch of excess labor running around out there but at least for the big builders i think we've got great um you know trade relationships and um know i think we'll continue to get um not only schedule performance but uh you know but the labor on on our job sites i think um the pressure likely comes on dollars before or more so than time um you know if if we're running into labor uh pinches because of a volume increase i think it's probably dollars more than time a lot of the you know the decreases that we'll take it'll be because We're getting things on a predictable schedule like we used to pre-COVID. So that's working better, which allows us to take some kind of dead days out of our schedule that we had. We built in for things to go wrong or for time when we were just literally waiting for material to show up. So it's a little bit of that, a little bit of we're just getting back to the cycle times that we had pre-COVID. um we trimmed out about 30 or so days in 2024 we'll get over in 2023 rather you know we think we can get another 30 or so days by the end of 2024 and we'll be back uh largely in line with pre-covered cycle times great appreciate those added thoughts ryan and then i guess in the similar vein was curious if you could just give an update on the the icg um
spk04: growth plans there and kind of how that's been trending and what your current thinking is as far as additional market expansion, if there is any?
spk13: Yeah, Alan, it continues to go well. We have two plants today. Both are focused in the southeast part of the U.S. Our growth plans are still largely on target to have approximately eight factories. So we haven't announced anything new. We'll similar to our share buybacks, we'll probably report the news on that as opposed to give, you know, forward-looking forecasts.
spk04: And I guess if I could sneak one in on that, I mean, you know, it's hard for us to conceptualize what impact that has on your business, and obviously it's concentrated in a handful of markets right now, but are there certain kind of metrics that you can share with us, whether it's cycle times or costs, margin, et cetera, that, you know, you can kind of demonstrate on a case study basis how that's contributing to your business right now?
spk13: yeah alan so that's um we haven't given a bunch of guidance on that just because it is concentrated into a couple of markets and we don't uh we don't feel it's appropriate to extrapolate the entire enterprise yet um as we get further down the path we'll share more um conceptually it's exactly what you highlighted we're getting cycle time improvements we're getting better quality and there are some raw material cost savings that we believe we're getting as well i appreciate that thanks a lot
spk16: Our next question comes from the line of Susan McClary with Goldman Sachs. Please go ahead.
spk01: Thank you. Good morning, everyone, and thanks for fitting me in. My first question is just around the specs. You know, you mentioned that you had about 44%, I think, of your production that's in spec. As you think about the year and the way that the demand may come together, any thoughts on where that may move or how you're thinking about it longer term?
spk13: Yeah, Susan, I wouldn't anticipate a massive change from the percentage. We're probably on the higher end of the range that we'll have in spec right now. Specific to the fourth quarter, we put more spec starts in the ground than what we sold, and that was intentional. We wanted to have some additional inventory going into the spring selling season, which we have. So as we move throughout the year, probably right in line with where we're at or a tad lower.
spk01: Okay, that's helpful. And then when we think generally about the potential for rates to come down this year and that possibly driving some increase on the existing home side of the market, any thoughts on what the implications of that could be, especially perhaps on the move up and the active adult parts of the businesses and any initiatives you have relative to that?
spk13: yeah susan i i uh you know with the with the rate cuts that are forecasted um i don't see it being at a level that's going to unleash uh a tidal wave of resale inventory so um you know is it better than where we're at today certainly um will that start to free up some resale inventory i think so And I think that's probably helpful against the backdrop of we continue to be undersupplied in the country. So on balance, I don't think it has much impact at all on what we're projecting for our business in 2024.
spk02: Okay. Thanks for the color and good luck. Our final question comes from the line of Rafe.
spk16: with Bank of America where we've reached the time allotment for this morning's call. Please go ahead.
spk11: Great. Thank you. Thanks for taking my questions. In terms of the additional 30 days of build cycle improvement you're expecting for 2024, can you talk about what the build cycles are in homes that you're starting today? Are you already at that 100-day level? And is that improvement embedded in your cash flow guide?
spk13: Yeah, Rafe, it's a fair question. Homes that we're starting today will deliver in kind of late. You know, homes we're starting today will deliver in Q2, basically. So, no, we're not at 100 days yet. Now, that being said, there are some... markets and some communities where we are at the 100 days. And in fact, we were at the 100 days last year. When you blend it all together, we think it'll be Q4 before we're at the 100 days that we've highlighted as our goal.
spk15: And Ray, our guide does factor in what we see in terms of cycle times during the year. The cash flow guide to your question.
spk11: Got it. Thank you. That's helpful. And then a really helpful caller in terms of the land inflation you're expecting in your gross margin for 2024, and you have the land that you need through 2025. On the land that you're contracting today, what are you seeing in terms of inflation? Is it at a similar level, or are you actually seeing that come down? And then can you kind of help us understand the difference between development cost inflation relative to what you're seeing for raw land?
spk02: Yeah, so, sorry, I forgot the first part of the question.
spk11: You spoke about the land inflation.
spk15: Oh, I'm sorry. Listen, it's interesting. Land prices don't come down very often. They're sticky. And we've seen and we've highlighted sort of sequential increases in lot costs. I would tell you that the land we're seeing today is consistent with that. You know, prices are pretty robust, and it's a pretty competitive landscape out there. You know, we have the right to return, and so we look to see can we get return out of that. So I think, you know, no change, honestly, in the land market. In terms of the inflationary aspect, you know, What we are seeing is that that labor constraint influences the development of land just like it does building of houses. And with general cost inflation that we were seeing last year in particular, it was influencing the stance of pipe. Everything that we do to do the development of the communities was running pretty hot too. So again, we've highlighted we think it's going to be a little bit more expensive. in terms of our lot increase this year for 24. And again, I think that just reflects all the activity that was going on and some of the cost inflation that we saw in 23 feeding into our lot this year in 24. Good news is the vertical we're seeing pretty benign in market, whereas that had been running pretty hot last year, obviously. So the slowdown in inflation, we feel it now in the house. Hopefully, we'll feel that a little bit later and land. It would be an opportunity for us, I'm sure.
spk02: Great. Thank you. Appreciate all the color. Thanks, Rick.
spk16: I would now like to turn the call over to Jim Zoomer for closing remarks.
spk14: I appreciate everybody's time this morning. I'll certainly be available over the rest of the day if you have any additional questions. Otherwise, we'll look forward to speaking to you on our next conference call.
spk16: This concludes today's call.
spk02: You may now disconnect.
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