PHM – PulteGroup

Q4: 2022-02-01 Earnings Summary

source: https://seekingalpha.com/article/4483212-pultegroup-inc-phm-ceo-ryan-marshall-on-q4-2021-results-earnings-call-transcript

Even with all the challenges, the homebuilding industry faced in 2021, from supply chain disruptions and labor shortages to municipal delays and COVID waves, we grew our closings by 17% to almost 29,000 homes, benefiting from the very favorable demand and pricing conditions, we increased homebuilding revenues by an even greater 27% to $13.5 billion.

We were then able to fully capitalize on this top line growth by expanding gross margins by 210 basis points to 26.4% and driving a 43% increase in our reported full year earnings of $7.43 per share.

I would also highlight that over the course of 2021, we continued our disciplined allocation of capital in alignment with our stated priorities. This allocation included investing over $4 billion in land acquisition and land development, increasing our dividend pay rate per share in 2021 by 17%, retiring $726 million of bonds and repurchasing $900 million of stock, reducing our shares outstanding by approximately 6%.

This demand strength drove an increase of 8% in our 2021 net new orders to almost 32,000 homes, including 6,769 orders in the fourth quarter. The reality is that these numbers could have been significantly higher, but COVID and other challenges impacted our availability of lots, labor and materials, which caused us to intentionally slow sales.

As part of our response strategy to these resource constraints, we raised prices in 2021 and actively restricted new home sales through lot releases or similar practices. We continue to implement these actions in the fourth quarter as we raised prices in effectively all our communities. At the same time, we continue to restrict sales in more than half of our communities.

As part of our response strategy to these resource constraints, we raised prices in 2021 and actively restricted new home sales through lot releases or similar practices. We continue to implement these actions in the fourth quarter as we raised prices in effectively all our communities. At the same time, we continue to restrict sales in more than half of our communities.

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Many builders are also waiting until homes are partially—or even fully—built before selling them to take advantage of fast-rising prices and make sure they can control their costs.

source: https://www.wsj.com/articles/home-builders-are-restricting-sales-pushing-up-new-home-prices-11628596801

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The limited supply of new and existing homes allowed prices to increase by double digits last year, but labor shortages and significant disruptions in the supply chain are limiting production and extending build cycles.

Unfortunately, we expect construction processes to remain difficult through much, if not all, of 2022.

Net new orders in the quarter totaled 6,769 homes, which is a decrease of 4% from last year. The decrease in orders reflects a decrease in community count as well as the ongoing actions to manage sales to better align the pace of our sales and production that Ryan mentioned.

On a unit basis, our backlog at year-end was 18,003 homes, which is an increase of 19% over last year. Backlog value at year-end was $9.9 billion, which is an increase of 45% over 2020.

As a result, we ended the year with 18,423 homes under construction, which is up almost 50% over last year.

Given the number of homes under production and equally important, their stage of construction, we currently expect to deliver between 5,600 and 6,000 homes in the first quarter of 2022.

For the full year 2022, we expect to deliver 31,000 homes. This estimate assumes no meaningful change in the state of the supply chain and in turn, our current cycle times.

If the supply of labor and materials does not allow for increased production, we’ll continue to emphasize price over pace, restrict sales as needed as we focus on driving the best returns within each community.

As we move through 2022, we are well positioned to meet buyer demand, given our expectations for sequential increases in our community count throughout the year. For the coming four quarters, we project our average community count (Net new orders (new orders for homes less cancellations) are directly affected by community count, where community is defined as a single land development in which new homes are constructed as part of an integrated plan. Community count is the number of communities that are open for sales of homes. The community development process typically takes 6-18 months and depends on various factors like local, state and federal statutes; the process of government approvals and utility service activations; type of offering; the size of the community; financing; availability of construction materials and skilled labor; weather conditions; consumer demand; and economic conditions of the housing industry. source: https://visiblealpha.com/kpi-guides/home-building-kpis/) to be 790 in Q1, 815 in Q2, 840 in Q3 and 870 in Q4. Given the land investments we’ve made, we expect this trend to continue and see further community count growth in 2023.

As mentioned, strong demand and pricing conditions in 2021 resulted in higher prices across all buyer groups, which has resulted in our average sales price in backlog increasing by 22% compared to last year. Given the price of homes in backlog and the mix of homes we anticipate closing, we expect our average sales price to be between $500,000 and $510,000 in the first quarter.

With 18,000 homes in backlog, we have good visibility on near-term gross margins, but we also know that input costs are moving higher and that we expect to continue to incur what are now commonly called scramble costs, as we work to ensure product and labor availability.

Based on what we can see today, we expect gross margin to be in the range of 28.5% to 29% in the first quarter and for the full year. This guide takes into consideration our current construction costs, as well as the recent run-up in lumber prices. Based on these factors, we anticipate being towards the bottom end of the range in the first quarter, but towards the higher end of the range by the end of the year.

As a result, we currently expect house cost inflation exclusive of land costs of 6% to 8% for 2022. More than ever, there are a lot of moving pieces, so we’ll update our gross margin guidance if needed as we move through the year.

For the year, we returned $897 million to shareholders through share repurchases, plus an additional $148 million of dividends. This brings the five-year total of share repurchases and dividends to approximately $3.2 billion. Having reduced our common shares outstanding by more than one-third over the past eight years, returning funds to shareholders has been a significant part of our capital allocation strategy. We fully expect such systematic repurchases to continue in the future, so we’re extremely pleased with the Board — announced today, approving a $1 billion increase to our repurchase authorization. At the end of 2021, we had $458 million remaining on the existing programs.

Q:

You talked about the full year for cost inflation. But can you talk about the moving pieces throughout the year that keep that guidance a little bit flatter through the year and maybe there’s a difference in inflation per se versus second half however you want to kind of frame that?

A: Sure, Mike. Obviously, inflation is real. And maybe principal among that interestingly is lumber, which had trended down we’re getting a little bit of a tailwind in the first half of the year, but pricing has moved right back up. And so that’s influenced the back half of the year.

source: https://www.nasdaq.com/market-activity/commodities/lbs

But I would tell you, you heard in the prepared remarks, we’re projecting 6% to 8% increase in input costs for the house, plus kind of every new lot comes with a little bit more expensive cost than the ones that we just costed off, which is consistent with what you’ve seen for a couple of years now in a rising market, as we bring new assets to market, they’re a little bit more expensive. So all those things factor in.

We think some of the structural changes that have occurred in buyer preferences for single-family living and perpetual work from home will continue to benefit this industry.

As far as rising rates go, Anthony, in our prepared remarks, we highlighted that we have not seen it impact demand, and I think a large part of that is because we’ve been restricting sales and because demand is outstripping supply.

we do believe that, history as a guide, housing can be strong in a rising rate environment as long as the broader economy continues to show strength, which it is.

We’ve got historically low unemployment. We’re seeing some real wage growth — and I think those are — and consumer confidence remains high. Those are things that I think will continue to prove — will bode well for the industry, even against a backdrop of slightly higher rates. That being said, even with some increases in the 30-year mortgage, they’re going to remain at historically really, really low rates, which we think is encouraging.

Yeah. Anthony, we don’t actually anticipate things to get better through 2022. So we’ve assumed that we’ll continue to have a shortage of what we want in totality. And most of that’s coming through either delays or allocations that we and frankly, the entire industry has been given from, from certain key supplies.

I think there are some real bottlenecks in manpower availability due to COVID, so some of the factories that our supplies come out of are running at less than full capacity because of manpower issues. We’re seeing less availability in terms of transportation in truck drivers. There was a shortage there to begin with, and then you factor in COVID, and that’s just further exacerbated. And that — those domino effects, I think we see flow through the entire supply chain.

Just in terms of the items that we’re seeing challenges with; roof trusses, appliances, sighting, paint to a certain degree. So things are pretty critical for us to build and deliver homes,

Well, Carl, we’re basically turning the majority of the land that we’re buying. We’re turning in about three years. So — or when we buy it, we essentially are putting under contract about three years’ worth of land. So a-third of that year one, a-third of that year two, a-third of that year three, so you’ve always got old land cycling out and new land cycling in. So there’s never a time when you’re going to have a complete fall off the cliff of the entire land book and a whole new land book comes on. There’s always a mixing going on.