PulteGroup (NYSE:PHM) reported its fourth-quarter 2024 earnings, surpassing expectations with an EPS of $4.43 compared to the forecasted $3.27. The company also reported revenue of $4.92 billion, exceeding the anticipated $4.65 billion. According to InvestingPro analysis, PulteGroup maintains excellent financial health with an overall score of 3.48 (GREAT), supported by strong profitability metrics and cash flow generation. Despite these positive results, the stock price fell 3.99% to $113.59 in aftermarket trading, reflecting mixed investor sentiment.
Key Takeaways
- PulteGroup’s EPS significantly exceeded forecasts by 35.2%.
- Revenue also surpassed expectations, marking a strong quarter.
- The company’s stock declined nearly 4% in aftermarket trading.
- The housing market remains robust but faces affordability challenges.
- PulteGroup anticipates a 3% increase in average sales price for 2025.
Company Performance
PulteGroup delivered 31,219 homes in 2024, a 9% increase from the previous year, achieving record home sale revenues of $1.73 billion. The company maintained industry-leading gross margins of 28.9% and a net operating margin of 21.3%. These impressive margins are complemented by robust financial metrics, including a return on equity of 27% and return on invested capital of 22%. InvestingPro data reveals the company operates with a moderate debt level and maintains strong liquidity, with a current ratio of 5.62. These results underscore PulteGroup’s strong positioning in a competitive housing market, despite challenges such as high mortgage rates and regional performance variations.
Financial Highlights
- Revenue: $4.92 billion, up from the forecast of $4.65 billion.
- Earnings per share: $4.43, significantly above the $3.27 forecast.
- Gross margin: 28.9%, maintaining industry leadership.
- Cash flow from operations: $1.7 billion.
- Investment in new land: $530 million.
Earnings vs. Forecast
PulteGroup’s actual EPS of $4.43 represents a 35.5% surprise over the forecasted $3.27. This significant beat highlights the company’s operational efficiency and strong market demand. The revenue surprise of $270 million further emphasizes the company’s robust performance in the fourth quarter.
Market Reaction
Despite the earnings beat, PulteGroup’s stock fell 3.99% to $113.59 in aftermarket trading. This decline may reflect investor concerns about the broader economic environment, including high mortgage rates and regional market variations. InvestingPro’s Fair Value analysis suggests the stock is currently undervalued, trading at an attractive P/E ratio of 7.72. The stock remains within its 52-week range, between $100.24 and $149.47, suggesting some resilience amidst market fluctuations. For deeper insights into PulteGroup’s valuation and 12 additional ProTips, consider exploring InvestingPro’s comprehensive research report.
Outlook & Guidance
Looking ahead, PulteGroup expects to close 31,000 homes in 2025, with an average sales price ranging from $560,000 to $570,000. The company projects gross margins between 26.5% and 27% for the year. PulteGroup is also preparing for a 10% increase in land costs and a low single-digit rise in construction costs, reflecting ongoing market pressures.
Executive Commentary
CEO Ryan Marshall expressed optimism, stating, "We believe that the long-term outlook for new home construction is positive." CFO Bob O’Shaughnessy emphasized the company’s disciplined approach, saying, "We’re not underwriting margin, we’re underwriting return." These comments highlight PulteGroup’s strategic focus on sustainable growth and shareholder value.
Risks and Challenges
- High mortgage rates above 7% could dampen buyer activity.
- Regional market variations, with mixed signals in Texas and Florida.
- Rising land and construction costs may pressure margins.
- Continued affordability challenges in the housing market.
- Potential macroeconomic pressures affecting consumer confidence.
Q&A
During the earnings call, analysts questioned the company’s regional performance variations and incentive strategies across buyer segments. PulteGroup addressed concerns about spec inventory management and clarified its land cost and development strategies, providing insights into its operational approach amidst challenging market conditions.
Full transcript - Pulte Group (PHM) Q4 2024:
Kelvin, Conference Operator: Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup Fourth Quarter twenty twenty four Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session.
Thank you. I would now like to turn the call over to Bob O’Shaughnessy. My apologies. Please go ahead.
Ryan Marshall, President and CEO, PulteGroup: All right. Thanks, Calvin.
Bob O’Shaughnessy, CFO (Outgoing), PulteGroup: Good morning, everyone, and welcome to today’s call. We look forward to discussing our and full year financial results. With me today are Ryan Marshall, our President and CEO and Jim Osowski, our incoming Executive Vice President and CFO. As always, a copy of our earnings release and this morning’s presentation slides have been posted to our corporate website at pultegroup.com. We will also post an audio replay of this call later today.
I would highlight 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 today. 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. With that said, let me turn the call over to Ryan.
Ryan Marshall, President and CEO, PulteGroup: Thanks, Bob, and good morning. We are pleased to speak with you today about how we are running the business and our outstanding and full year financial results. Before Bob gives you the detailed data relating to the I thought it would be appropriate to summarize some of the company’s many achievements in 2024. Delivered 31219 homes in 2024, which represents an increase of 9% over last year. We generated record home sale revenues of $1,730,000,000,0.0 We once again reported industry leading full year gross margins of 28.9%.
And we were able to do this in the face of increasing affordability challenges through the careful management of product offerings, pricing, incentives and absorption paces as we sought to maintain high profitability, while ensuring we continue to turn our assets. We continue to manage our overheads efficiently as our reported SG and A amounted to 7.6% of our home sale revenues, including the insurance benefits we recorded in 2024. And we reported strong operating results from our financial services operations, which generated $2.10,000,000 dollars of pre tax income compared to $133,000,000 last year. As a result, our reported net operating margin was 21.3% for the year. No matter how you look at it, our performance this year was outstanding as we have continued to navigate the turbulence in the markets over the last few years.
Our performance is a product of the disciplined and consistent manner in which we are running the business, which has allowed us to quickly adjust key business practices to position PulteGroup for ongoing success. Our strong operating performance also allowed us to continue to manage our capital in a manner which leaves us with considerable financial strength. In the year, we generated $170,000,000,0.0 of cash flow from operations after investing $530,000,000,0.0 in new land. We continue to efficiently increase our land pipeline, putting approximately 43000 new lots under control. Inclusive of these lots, we now control 235000 lots of which 56% are under option.
In addition, we returned $170,000,000,0.0 to investors, including $120,000,000,0.0 through share repurchases, the payment of $168,000,000 in dividends and $3.10,000,000 dollars through the early retirement of senior notes. After all of that, we ended the year with $170,000,000,0.0 of cash and our gross debt to capital ratio was 11.8%. We are also very proud of the numerous awards recognizing our company’s culture, including being named to Fortune’s Top 100 Best Companies to Work For in 2024 for the fourth consecutive year. Looking to the future, it remains our view that the long term outlook for new home construction is positive. The U.
S. Economy has navigated recessionary concerns well, employment remains strong and the interest in new homes remains at high levels. In addition, the structural shortage of housing due to under building, ever increasing land entitlement challenges and ongoing labor availability challenges together with our expectation for continuing lower resale transactions due to a higher for longer rate environment leads us to believe that new home supply will continue to be absorbed without a significant increase in standing inventory. Given our constructive views on the outlook for long term housing demand, we are planning to continue to invest in our operations to support growing our business over time. Within our operating model, we set our start to pace to align with the sales environment rather than being based on a predetermined annual production volume.
As a result, home buying demand will impact our closing volumes and resulting growth from year to year. While there can be resulting peaks and valleys in our deliveries, our focus remains on investing in our business to grow volume while maintaining high returns. As we’ve 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 investors, 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 $150,000,000,0.0 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.
Having said that, affordability challenges and the generally high cost of living are certainly impacting the American consumer. Specific to homebuyers, we believe the recent volatility in mortgage rates, including the current increase back above 7% has contributed to the recent lower activity levels. Against this backdrop, we continue to carefully monitor our investment in production levels with a view towards generating high returns in our business. Consistent with how we have been managing our business in recent years, we are managing our starts activity with a view towards driving our spec inventory to be more in line with our desired levels, including targeting our total spec inventory to be between 4045% of our total units under production. Let me now turn the call over to Bob for a review of our results.
Bob O’Shaughnessy, CFO (Outgoing), PulteGroup: Bob? Thanks, Ryan. Starting with our income statement, wholesale revenues in the were $470,000,000,0.0 compared with $420,000,000,0.0 in the prior year. The increase in wholesale revenues for the period reflects 6% increase in closings to 8103 homes along with a 6% increase in our average sales price to $581,000 Our mix of closings in the quarter were comprised of forty percent first time, 40% move up and 20% active adult. Consistent with our commentary over the last two quarters, the slight decline in the percentage of closings from active adult buyers reflects the timing of recent active adult community closeouts and we continue to expect a normalization of contribution from these consumers when replacement active adult communities begin opening for sales in the In the closings were forty percent first time, 36% move up and 24% active adult.
I would note that the increase in our average selling price in the quarter relative to our guide is due primarily to the increase in the relative portion of our closings from move up customers. Our average community count for the was nine sixty, which represents a 4% increase over last year’s average of nine nineteen communities and was in line with our prior guidance. Looking at order activity in the quarter, our net new orders decreased 1% to 6167 homes. This decrease was primarily attributable to a 5% decrease in sales per store and a slight increase in our cancellation rate as a percentage of beginning backlog, partially offset by the 4% increase in our community count. Looking at demand conditions in the quarter, as we noted during our call, the market in Oct.
0 demonstrated a more typical seasonal demand pattern coming out of the This continued through the quarter as consumers faced economic uncertainty related to potential economic changes being considered by the incoming administration and the recent increase in mortgage rates. We also noted then given the macro issues consumers faced that the spring selling season would offer the best assessment of fundamental housing demand. Fast forward to today and we continue to believe that market fundamentals while still presenting affordability challenges to consumers are supportive of housing and the spring selling season will be the best barometer for how the consumer will behave in today’s economic environment. Looking at our quarter activity by buyer group, fourth quarter net new orders decreased 14% for first time buyers, increased 15% for move up buyers and decreased 1% for active adult buyers. We believe these activity levels reflect the continued interest of consumers for new homes, but also show the impact of the affordability challenges consumers face, particularly for first time buyers.
As a result of our sales and closings activity, our quarter end backlog was 10153 homes, which is down 16% from last year. On a dollar basis, our backlog of $650,000,000,0.0 is down 11%. Inclusive of the 7502 homes we started in the we ended the year with 16439 homes in production. 53% of our production is spec, including eighteen sixty two finished specs, which when combined with cycle times that are now largely in line with our historical norm puts us in position to meet buyer demand through the year. With that said, in the event that the spring selling season trends towards lower absorption rates, we will reduce our pace of spec starts in communities with higher spec inventory levels so as to better match local selling conditions and help reduce standing inventory.
As Ryan noted, our goal is to reduce our spec inventory back down to 40% to 45% of our total production by the end of the year. Based on our current production pipeline, we expect to deliver 31000 closings in 2025, including between 412800 closings in the Looking at pricing, we currently expect the average sales price of closings to be in the range of $560,000 to $570,000 in each of the of the year. Our gross margin was 27.5%, which is down 130 basis points sequentially, but within the guide we gave at the end of the Consistent with recent quarters, our margins reflect higher incentives, which increased 20 basis points sequentially from the to 7.2%. Based on our backlog and current sales conditions, we anticipate that gross margins in the will be approximately 27%. For the balance of the year, we currently expect gross margins to be in the range of 26.5 to 27% in each of the These estimates assume that incentives throughout 2025 will remain consistent with the incentives we recognized in the I would also point out that our margins beyond the will ultimately be influenced by the demand conditions during the year as we have a significant number of homes to sell and close over the balance of the year.
Moving on to expenses, our reported SG and A expense was $196,000,000 or 4.2 percent of wholesale revenues, which compares with prior year reported SG and A expense of $3.00 $8,000,000 or 7.4% of wholesale revenues. It should be noted that our reported results for the and 2023 included two fifty five million dollars and $65,000,000 respectively of pre tax insurance benefits. Based on anticipated closing volumes, we currently expect SG and A expense in 2025 to be approximately 9.5% of wholesale revenues, including SG and A expense of approximately 10.5 of wholesale revenues in the In the our financial services operations reported pretax income of $51,000,000 which is up from $44,000,000 last year. The improvement in pretax income reflects the increase in our homebuilding closing as well as the continuation of favorable market conditions across our financial services platform. Our reported pretax income for the was $120,000,000,0.0 compared with prior year pretax income of $9.47,000,000 dollars In the period, we recorded tax expense of $2.69,000,000 dollars for an effective tax rate of 22.8%.
Our effective tax rate includes benefits related to energy efficiency credits and our purchase of renewable energy tax credits. Projecting ahead, we expect our tax rate in 2025 to be approximately 24.5, excluding the impact of any discrete tax events, including energy efficiency credits or the purchase of incremental renewable energy tax credits. Looking at the bottom line, our reported results showed net income of $9.13,000,000 dollars or $4,.43 per share. In the comparable prior year period, we reported net income of $7.11,000,000 dollars or $3,.28 per share. Reflective of our strong operating results, we generated cash flows from operations of $170,000,000,0.0 in 2024.
Given our current expectations for operating and financial results in 2025, we expect to generate cash flows from operations of approximately $140,000,000,0.0 Turning to our investment in capital allocation activities. We invested $150,000,000,0.0 in land acquisition and development in the of which 53% was for development of our existing land assets. For the year, our land investment totaled $530,000,000,0.0 of which 57% was for development. Given our constructive views on near and longer term housing dynamics, we currently plan to continue investing in land at a rate designed to allow us to grow over time. As a result, we expect to invest approximately $550,000,000,0.0 in 2025.
I would expect that approximately 55% of that spend will be for development. With my comments about our willingness to slow starts, we would also evaluate our spend on new land assets if absorption is slow as we seek to maintain a high level of return. Inclusive of our investments, we ended the year with 235000 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 2000 lots, while increasing our lots under option by 14000 lots. As a result, our percentage of lots under option increased to 56%, up from 53% last year.
I’m pleased to note that 69% of our new land approvals in the were under some form of option as we work towards a 70% option mix in our portfolio. Based on the investments we have made and our anticipated community openings and closings in 2025, we expect our average community count in 2025 to be up 3% to 5% in each quarter as compared to the comparable prior year period. Looking at our capital allocation priorities, we continued returning capital to investors in the which included the repurchase of 250,000,0.0 common shares at a cost of $3.20,000,000 dollars or $12,9.9 per share. As Ryan noted, our total return to investors in 2024 amounted to 1700000000.0 including the $120,000,000,0.0 of share repurchases, $168,000,000 of dividends and $3.10,000,000 dollars through the early retirement of senior notes. Based on the actions taken, our debt to capital ratio at the end of the year was 11.8%, down four ten basis points from last year.
Adjusting for the $170,000,000,0.0 of cash on our balance sheet, our net debt to capital ratio is now below 0. I’d like to take a moment to provide an update on our expectations for leverage in the future. As you know, we historically expressed that our target leverage level has been between 2030% of capital on a gross basis. Due to the strength of our operations and the resulting utilization of our cash flows over the last decade or so, we are well below that target range on a gross basis. And as I noted, we are actually now net debt free.
Looking forward, we expect to continue to generate sufficient cash flows for our capital needs. As a result, we are no longer targeting a specific leverage level. Instead, we will allocate our capital in line with our historical practice, continue to prioritize investment in the business and the payment of our dividend with excess capital being used to repurchase our stock and or retire our debt. Our resulting leverage position will therefore be an outcome that is dependent on the decision we make rather than targeted to a predetermined level. With that said, we would expect to see our leverage remain flat or decline in the future unless there’s a transaction where leverage augments our opportunity.
Specific to 2025, I would also highlight that our board recently approved 10% increase in our dividend per share starting in the And as Ryan noted, we also announced a $150,000,000,0.0 increase to our share repurchase authorization this morning. Now let me turn the call back to Ryan for some final comments.
Ryan Marshall, President and CEO, PulteGroup: Thanks, Bob. At the end of last year, I spoke about our successful navigation of the many challenges we faced in recent years. 2024 was no different as we have dealt with continuing interest rate variability and affordability challenges, significant weather events and ongoing geopolitical issues. I remain extremely proud of how our entire team has responded to these events and the exceptional operating and financial results PulteGroup has delivered over time. I believe that our strategy to focus on disciplined land investment while maintaining operational and organizational expertise has proven out as we have capitalized on market conditions and have grown earnings per share at a compound annual growth rate of 30% while delivering an average annual return on equity of 27.8% over the last five years.
Of course, those achievements reflect what we have done as opposed to what we will do and our future share price performance will depend on what we are able to achieve in the future. To that end, I think it’s important to share that we will continue to operate the business in a fashion that seeks to realize strong returns through cycle. For the long term, we’ve invested in high quality land positions that we believe will allow the company to grow over time. Importantly, the optionality we have achieved in our controlled lot position gives us the flexibility to pivot if the market faces unexpected headwinds. Similarly, in the near term, we have positioned our inventory production to be sufficient to meet projected demand.
It is important to remember that we are seeking to keep all of our communities productive and have made sure that we have the inventory and planned start activity in place to meet that end. However, as discussed earlier, we have higher spec inventory than we’ve traditionally carried. We’ve often said, we will not be margin proud and we’ll find pricing to make sure our standing inventory moves. We will continue to do that and as noted earlier, we will work to adjust our pricing and inventory positioning with a view towards driving our spec inventory levels back in line with recent norms. I know stocks reflect performance, so we are seeking to grow our business and deliver ROE that remains among the industry leaders while generating positive cash flow and maintaining a low risk profile which we believe will drive the best returns for our shareholders.
With all of that said, I’d like to take a moment to acknowledge the change that we announced back in July 0. As you know, Bob notified us of his retirement as our CFO, which will be effective after we file our 10 ks next week. As part of our succession plan, Bob will transition to a new role for the balance of the year in part to ensure a smooth transition of the CFO role, but during which time he will also oversee our growth and strategic partnerships platform, including our land banking efforts, our asset management committee and our financial services operations. I’d like to thank Bob for his fourteen years of service and look forward to working with him over the coming year. I would also like to more formally introduce Jim Osowski who will be taking over as our CFO.
Jim is a twenty two year veteran of Pulte having come to us after working for a national accounting firm at the start of his career. Jim has served in many capacities for us, including a number of field and corporate leadership positions. In fact, in his current role, he has been involved in all of our significant strategy and operating initiatives over the last thirteen years. Throughout his career, he has demonstrated a strong understanding of the homebuilding business and has developed deep relationships with our board, our senior leadership team and our field operating teams. He has also exhibited a great ability to work with our service providers.
Based on the depth and breadth of his experiences and relationships, I am eminently confident in Jim’s ability to seamlessly step into the CFO role. And finally, before I close, I would like to take a moment to express my continuing gratitude and thanks to each of our employees for their tireless efforts in supporting the delivering of superior homes and experiences to our homebuyers, while providing outstanding financial returns to our investors. We’re now prepared to open the call for questions in order that we can get to as many questions as possible during the remaining time of this call, we would ask that you limit yourself to 1 question and 1 follow-up. Thank you. And I now ask the operator to again explain the process and to open the call for questions.
Kelvin, Conference Operator: The first question comes from the line of John Lovallo of UBS. Please go ahead.
John Lovallo, Analyst, UBS: Good morning, guys. Thanks for taking my questions and Bob, best of luck to you. The first question is, maybe just help us with the sequential walk from the into the and then through the remainder of the year for gross margin. I think you’re talking about 27% in the and then 26.5% to 27% in to I mean, how would you sort of bucket the headwinds in terms of maybe working down some of that spec inventory, higher incentives, product mix and stick and bricks and land cost inflation?
Ryan Marshall, President and CEO, PulteGroup: Yes, John, good morning. Thanks for the question. The we feel really good about what our order results were in the despite it being a more difficult selling environment. The walk from Oct. 0 through Dec.
0 matched what we would consider to be a more seasonal pattern as you progress through the Oct. 0 being the best, Nov. 0 a little less and Dec. 0 the lowest total month. As we turn the corner into 2025, we saw the continuation of what we would expect to to be a normal seasonal selling pattern, including as we move toward the really important spring selling season.
We’re starting to see some green shoots. There’s been some positive order activity. We know that it’s still early, in that kind of spring selling season and we typically look to February, timing to be the official start, but we’re encouraged and optimistic by what we’re seeing. In terms of the margin guide, we think we’ve done a really nice job in a tough environment balancing the pace price mix and continuing deliver what our industry leading gross margins. We noted that 27% will be our margin guide with the range of 26.5% to 27% for the balance of the year.
We believe based on what we know now today, we’ve factored in not only what’s in our backlog, but also what we would expect to sell the standing inventory for inclusive of anticipated discounts, which the big assumption that we’ve made John is that those incentives are going to remain consistent with what we’ve experienced in the If things turn out differently than that, then we’d certainly have to have a different conversation. But we feel pretty confident about where we sit now that we position ourselves well to continue to have success in and beyond.
John Lovallo, Analyst, UBS: Okay. That’s helpful. And then you’re talking about If I
Bob O’Shaughnessy, CFO (Outgoing), PulteGroup: could sorry, if I could just add 1 thing. Sure. Sure. In terms of the structural kind of 26.5% to 27%, it does include a flat incentive from the exit from Just for your perspective, it’s assuming relatively flat pricing. You can hear that in the guide we gave on ASPs.
But I would note that land costs are up about 10% year over year. So that’s the primary driver of our cost increases.
John Lovallo, Analyst, UBS: Understood. That’s helpful. Thank you. And then you guys mentioned sort of normal seasonality and then you talked about some green shoots. When we think about the absorption, I think historically it’s been like 40% positive sequentially into the I mean is that a reasonable guide as we look into the spring selling season here?
Ryan Marshall, President and CEO, PulteGroup: Yes, John, we haven’t given a guide. So I think we’ll leave the comments kind of as we’ve made them to this point, but we’re encouraged by what we’re seeing.
Bob O’Shaughnessy, CFO (Outgoing), PulteGroup: All right.
John Lovallo, Analyst, UBS: Thank you guys. Good luck.
Kelvin, Conference Operator: Your next question comes from the line of Karl Reichardt of BTIG. Please go ahead.
Karl Reichardt, Analyst, BTIG: Thanks. Hey guys, congratulations Bob and welcome Jim. Bob sounds like you’re going to be busier in retirement than you were even as a CFO based on all the stuff you’re going to be doing.
Bob O’Shaughnessy, CFO (Outgoing), PulteGroup: I’m sure we don’t have to be, Carl.
Karl Reichardt, Analyst, BTIG: Fair enough. You talked about incentives, I think seven twenty bps this quarter up a bit. Can you talk about the difference between move up active adult versus the first time buyer? Is the spread between the incentive you’re using on both really wide or is it relatively narrow?
Bob O’Shaughnessy, CFO (Outgoing), PulteGroup: Yes. Carl, it’s interesting. We haven’t provided that level of granularity, but I’ll offer clearly the first time buyer who is focused on monthly payment more than say move up an active adult gets a richer look. And so especially if it’s a government type loan, we’ve got programs that are for conventional end coveys. So those are typically going to be a little bit more expensive.
When you get to that move up buyer, there might be other incentives that get mixed in with it. We’re trying to again meet their desires as well as their financial needs. And then when you get to the active adult buyer, a lot of them are taking small or no mortgage at all. So the incentive package looks a little different there. And that’s not inconsistent with history, right?
I mean, that’s always been the case. So I don’t know if that helps, but just a little more color.
Karl Reichardt, Analyst, BTIG: Okay. Thank you, Bob. I appreciate that. And then, Bob, in your remarks about leverage, you used a word I hadn’t heard in a while, which was transaction. And I haven’t asked this in a while, but Ryan, we’ve talked in the past about your potential interest in M and A or lack thereof.
There have been a lot of movement there on the public to private side. I’m curious as to whether or not that it becomes potentially a more interesting opportunity for you given the value of the stock on a relative basis, but really also the desire to want to grow the business long term, especially via the new vehicles you’ll be using off balance sheet as you go forward. So love your comments on that. And thank you.
Ryan Marshall, President and CEO, PulteGroup: Yes, Carl, it’s a great question. I would summarize it by saying our views really unchanged. We’ve always been open to kind of M and A activity with the strong kind of caveat we prefer to grow the business organically, but we look at a lot of things. I was looking at a tally sheet that we use. I think we evaluated something north of 20 plus potential acquisition opportunities last year, most of them pretty small.
And you’ll note that we didn’t do any of them. So we look at a lot of things, but we’re really selective, really judicious. We’ve got a great operating platform. We’ve got really good relative market share in most of our markets. So we remain open and we’ll evaluate a lot of things, but we’re going to be super thoughtful because of how disciplined we’ve been in underwriting our own land, which has been the primary driver of our outperformance on ROE.
And we want to stay disciplined with that.
Karl Reichardt, Analyst, BTIG: I appreciate it, Ryan. Thanks a bunch, fellas.
Kelvin, Conference Operator: Your next question comes from the line of Stephen Kim of Evercore ISI. Please go ahead.
Stephen Kim, Analyst, Evercore ISI: Yes, thanks a lot. Guys, appreciate it. Just first question, I guess, relates to the gross margin. Actually, before I say that, welcome, Jim, and best of luck to you also, Bob, and also our best wishes for Jim Zimmer as well. My first question on margins, taking the gross margin first, if we look at your guidance that you’ve given, I’m curious whether that trajectory over the year assumes any benefit at all from having more active adult communities by the end of the year or is that margin benefit likely to be only seen in And can you give us a sense for what you think the sort of the long term sustainable growth or operating margin you feel comfortable with this?
Ryan Marshall, President and CEO, PulteGroup: Stephen, thanks for the question. As it relates to gross margin in active adult specifically, the replacement communities will start to come online toward the middle part of this year, middle to end part of this year from a open grand opening and starting sales, which means the majority of the margin benefit won’t be felt until we get into 2026. And then we haven’t given kind of that long term kind of outlook, long term view in terms of where margins can go. There’s just I think too many factors to influence that. We have given a full year guide and for this year, which we feel good about given kind of the assumptions that I think we’ve articulated, but we haven’t really gone much beyond that in terms of guide.
Stephen Kim, Analyst, Evercore ISI: Okay, great. Appreciate that. It does feel that you’ve sort of maybe some contrary to some competitors have sort of said that you’re going to to not be beholden to a particular volume level, you’re going to modulate that with demand. And so I would think that you would have a little bit more margin stability than your competitors may, which is why I asked the question. But second question, actually, I’m going to shift gears and talk a little bit about the labor side of the equation.
Obviously, 1 of I think the additional big wild cards this spring is going to be whether or not we see any accelerate particularly active ICE enforcement in the construction industry. And I’m curious if how or if you are preparing your divisions for any potential rates or maybe more likely just potential slowdowns, you’ve made a you’ve seen we’ve seen supply shocks before. We saw them during the pandemic. And I think what a lot of investors think is that in a supply shock and inflation environment, spec building offers a lot of advantages because you’re not locking in the home price early and then bearing that cost and margin risk that could come later. So I’m curious, you’ve said that you’re going to reduce your spec activity, but would you agree in general that in a period of supply shocks that actually spec building can afford some advantages and you’d be would you be willing to pivot in some way if you were to see slowdowns brought on by increased ICE activity?
Ryan Marshall, President and CEO, PulteGroup: Yes, Stephen, it’s a good question. Maybe let me first start with it’s been a longstanding policy of our company that all of our trade partners and the labor that are on our job sites, we require verified residency status and or work permits that allow them to work legally in The U. S. That’s been our position for a long time. It’ll continue to be our position.
In terms of kind of impacts to the broader labor force even beyond just construction labor, to the extent that there are deportation activities. There’s no question there’ll be less labor available and that will have an impact on all wage rates and we’ll certainly have to deal with that as that becomes more clear. Your final question on spec and is spec inventory more beneficial in a supply shock environment? Yes, I think it can be and we certainly saw that in the kind of post COVID era. What you’ve seen from our company is that we are capable of running a mostly built to order business.
We’re also capable of running a kind of medium, kind of low medium to medium spec business as well, which is where I think we’re operating today. We’ve set that number of 40% to 45% is what we think is optimal for our consumer and our brand mix that allows us to get the benefits of both the built to order margins from the move up and the active adult buyers that are personalizing their homes, but still gives us enough spec inventory in the first time to use the powerful forward commitment incentives and also to protect some of the margin if there are supply shock, supply chain shock type situation. So if we’re at 53 today, we’re going to work it down into the historical range. If we needed to turn it up a little bit more, I think we’ve clearly got the ability to do that.
Stephen Kim, Analyst, Evercore ISI: Got you. Great. Thanks a lot guys.
Kelvin, Conference Operator: Your next question comes from the line of Alan Ratner of Zelman. Please go ahead.
Alan Ratner, Analyst, Zelman: Hey guys, good morning. Thanks for all the great info so far and congrats to Bob and Jim as well. Ryan, I guess first question on the closing guide for roughly flat closings and you guys have done such a great job of balancing pace and price over the years. So I understand the interplay there and kind of the perhaps more competitive discounting environment today than maybe we thought we would be in three or six months ago. But I think you gave kind of a longer term guide of 5% to 10% growth.
And I’m just curious as you look at where your margins are today, how much margin do you feel like you would need to give up in order to achieve that 5% to 10% growth that it seems like a lot of the industry is targeting kind of entering 2025?
Ryan Marshall, President and CEO, PulteGroup: Yes, Alan, thanks for the question. And we still think the long term growth guide 5% to 10% is appropriate. And we’ve we really look at it first and foremost from the way that we’re investing in land and new communities. You’ll note that we grew community count in 24% by 4% and we grew our volume deliveries by 9%. As we move into 25%, we’re projecting for community count to still be in that 3% to 4% range, but we’ve seen a bit of a pullback on community absorptions given the discounting environment.
So we’re projecting for we’re projecting for a flat volume growth. Certainly in 2024, we got the benefit of moving some more homes out of the backlog as we reduce cycle time. But I think we’re definitely positioning the company from a land investment standpoint to deliver that long term kind of multi year growth target. We do believe, as I highlighted in some of my prepared remarks that from a overall return on invested capital basis, we’re comfortable managing the pace price balance in a way that we think yields the best outcome on return. In this current environment, the amount of incremental discount that we’d have to apply in order to drive more valve volume, we don’t believe that’s a favorable return outcome.
And so we’ll continue to pressure test those assumptions. What we’ve laid out for 2025 is what we think yields the best outcome for how we position the business.
Alan Ratner, Analyst, Zelman: Understood. I appreciate the thought process there. Second question, if we could spend a second talking about Florida, I feel like that’s probably a lot of the concern surrounding your company that we hear from investors, just the exposure there about a quarter of your business in Florida. But not only that, I mean your margins historically in the state have been incredibly strong and it feels like with the building resell inventory environment there, concerns over storms and homeowners insurance and just general softening that if there was a bear point we hear it’s that you’re going to have a hard time sustaining those types of margins in Florida. So kind of a big picture question on the state, but what are your current thoughts on Florida?
And where do you see that business going for you guys going forward?
Ryan Marshall, President and CEO, PulteGroup: Yes, Alan, thanks for the question. Florida has been a just tremendous market for the company. We’re in 5, we’ve got 5 divisions there in most of the major cities in Florida and our move up in active adult lifestyle oriented communities have been really the driver of the outperformance in Florida. Margin and the margin that we generate out of Florida is certainly important, but once again, like you’ve heard from us a lot, return is the focus. So whether it’s an investment in Florida or an investment in Cleveland, Ohio, we’re looking at return on invested capital ultimately.
We’ve got an insurance agency that has been very effective at continuing to be able to provide coverage to our homeowners in Florida. I’d also know and your point about storms, concerns around storms are certainly valid. But I note that where our communities are located, the way they’re built and designed, they’re higher, they’re further inland, they’re less susceptible to some of the kind of tragic catastrophic things that you see of homes and communities that are right on the water. So, Florida’s, there’s a lot of sun there, there’s a lot of jobs there, there’s very, there’s 0 state income tax. So there’s a tremendous, there’s no snow for the Northern folks.
So there’s still a lot of attractive things about Florida despite maybe having a few recent challenges. So, we’ll keep our head up and pay attention to what’s happening in Florida. For the time being though, we’re still very encouraged by what business can do there.
Bob O’Shaughnessy, CFO (Outgoing), PulteGroup: Thanks very much.
Kelvin, Conference Operator: Your next question comes from the line of Mike Dahl of RBC. Please go ahead.
Bob O’Shaughnessy, CFO (Outgoing), PulteGroup: Hi, this is Chris on for Mike. Just going back to the 26.5%, twenty seven % gross margin range for this year, is that where you guys are currently underwriting land to on a gross margin basis or should we still expect some downward pressure as newer land bids just come through?
Ryan Marshall, President and CEO, PulteGroup: Yes, Chris, we don’t underwrite the margin, we underwrite the return. So the margin guide that we’ve given is for the closing business in 2025.
Bob O’Shaughnessy, CFO (Outgoing), PulteGroup: Fair enough. I guess, so what are you guys seeing this year in terms of or what are you expecting this year for lot cost inflation and stick and brick inflation?
Jim Osowski, Incoming Executive VP and CFO, PulteGroup: On the sticks and bricks, as we exited 2024, we’re at about $82 a square foot, so really minimal. As we baked our guide or created our guide for 2025, we again expect very low single digit increases. That’s absent any potential impacts from tariffs that are being discussed, but again expect very low single digit increases on the house side. And
Ryan Marshall, President and CEO, PulteGroup: then land, Jim?
Jim Osowski, Incoming Executive VP and CFO, PulteGroup: And on the land side, as Bob stated earlier, we’re expecting a 10% increase in land costs this year.
Ryan Marshall, President and CEO, PulteGroup: So that’s inclusive of raw land and developed cost, develop lot cost overall inclusive of land and development be close to 10%.
Bob O’Shaughnessy, CFO (Outgoing), PulteGroup: Understood. Appreciate the color.
Kelvin, Conference Operator: Your next question comes from the line of Michael Rehaut of JPMorgan. Please go ahead.
Michael Rehaut, Analyst, JPMorgan: Thanks. Good morning, everyone. And Bob, best of luck. Great working with you. And Jim, congrats on the promotion.
First, I’d love to just review if possible just a little bit more of around the regions, how you feel trends have been. Obviously, there’s a lot of concern as talked about earlier with inventory levels in Florida, as well as Texas, but just look to get around your footprint, which markets maybe you would characterize as better than average versus worse than average and how things have trended so far in this year?
Ryan Marshall, President and CEO, PulteGroup: Yes, Mike, thanks for the question. I’d start by giving some well deserved acknowledgement to our Midwest and Northeast business. They’ve been incredibly resilient and have performed well. The discounts that we’ve had in those locations have been less than in other places. And I think it’s reflective of the highs and those spots aren’t typically as high and the lows aren’t typically as low.
So Midwest And Northeast has been a nice bright spot for the company. The other places I would tell you have been about as expected and kind of flat year over year. We did have a slight decline in our Texas orders on a year over year comparison basis. And that’s really reflective of what we highlighted with our first time buyer business being down in the quarter, mostly driven by affordability concerns. And we’ve got a lot of our business in Texas is oriented against that first time buyer business.
So, and then Florida, I think is the other 1 that folks are focused on. There’s a lot of questions. Our sign ups on a year over year basis in Florida were flat. So, we’re and we’re as I talked about when we asked when I think John asked about to Texas and Florida included in this. We’re seeing some green shoots and some positive energy from the sales floor.
So, we’ll continue to look toward the spring selling season.
Michael Rehaut, Analyst, JPMorgan: Great, great. Thanks for that. And second question, I just wanted to circle back to some of Bob’s comments earlier on leverage and kind of I guess moving off of that prior gross leverage target of 20% to 30% and it sounds like kind of implying a more persistent even lower level of leverage compared to that. But just to push a little bit on how we should think about share repurchase. I mean, certainly, even with the current trends, it looks like your leverage is only going to go further south.
And just trying to understand, why shouldn’t we as investors or sell side buy side expect some level of a solid step up in share repurchase in 2025 that even with a solid step up, you’d still probably have by our estimates even more conservative leverage in 2025 versus 2024. Is there anything that we’re missing? Obviously, I know you like to have some optionality for transactions or other things, but if lot optioning is only going up, it looks like your balance sheet even with leverage getting more conservative could still support a solid step up in share repurchase in 2025. So just trying to understand if we’re missing anything or if that’s kind of directionally the way we should be thinking about it?
Bob O’Shaughnessy, CFO (Outgoing), PulteGroup: Yes, Mike, it’s a fair question. And I think we’ve demonstrated over the last almost fifteen years that we’re going to be pretty disciplined about this and see consistency. So we haven’t seen us take a lot of big swings on equity. Really the only time we did was back in 2016 and 2017, where we bought a lot of stock in a relatively short period of time. But you go back over the last five years and what we’ve been doing is using the cash that we’re generating in the business to buy back stock or pay down debt.
And so we don’t have any maturities in the next twelve months. So I think unless we went out and did a tender, which we’ve done in the past, but unless we did that, I wouldn’t expect leverage to move from here. The rate environment tells us how to think about that and the way our bonds trade obviously. So when we do, if we’re buying back debt, it’s because it’s NPV accretive, right? We want to invest wisely.
Could the company withstand more leverage? Absolutely. We were never uncomfortable with 20% to 30%. It’s just that the decisions we were making were leading us to a lower number and we wanted to reflect that. We got asked a bunch of times, hey, when are you going to borrow to get inside that 20% to 30%?
And our answer was always like, if we have a reason to, we will and we’ll tell you about it. So we’ve historically not wanted to guide on share repurchase activities. We’ve told you we’ll think about that and we have haven’t yet come to the point of doing that. Maybe Jim will. But at the end of the day, again, I think our track record is pretty consistent and is demonstrating a desire to do more.
We just announced the $150,000,000,0.0 authorization increase. So we’ll report the news, but again a fair question. I don’t know that we’ve got a complete answer for you, but there you have it.
Michael Rehaut, Analyst, JPMorgan: Great. Thanks a lot. Appreciate it.
Kelvin, Conference Operator: Your next question comes from the line of Trevor Allington of Wolfe Research. Please go ahead.
Trevor Allington, Analyst, Wolfe Research: Hi, good morning. Thank you for taking my questions. First question just back on the finished inventory level. I think if I heard you correctly, your finished spec number implies about 1.9 finished spec per community. Clearly above your historical 1% or 1 target, but then you’ve also moved your model to be more towards spec.
You’re talking about moving spec production lower going forward, but I think I also heard you suggest maybe it also depends on how demand plays out in the spring selling season. So I guess the question is, have you already started to pull back on your specs? Are you waiting to see how demand shakes out in the spring selling season? And then maybe just some commentary on how you view completed inventory levels in the markets you play in for industry as a whole?
Ryan Marshall, President and CEO, PulteGroup: Yes, Trevor. So, yes, we’ve already pulled back on start rate. We started doing that the And we’ll continue to monitor that as we move through the the rate at which we start homes will appropriately match to the sales environment. In addition to that and part of the reason we’re so comfortable with the inventory level that we have despite being a little higher than we normally run at. We’re optimistic about what spring selling season can provide.
We wanted to have some incremental inventory which we put into the ground. Given the softness of we probably have a little bit more than we thought we would. But we’re other than making some modest changes, I don’t think that we have an emergency type issue. In terms of kind of inventory in the markets where we compete, certainly inventory has increased in most regions, both on the new home and the resale level. But even though there’s been an increase, we still think that there are both numbers are below except for a couple of specific markets.
Most of the inventory is still way below what would be considered normal. We talked a lot about in the prepared script, we still think demand for housing is at high levels and we’ve got a healthy economy with a good job market and affordability is probably the 1 headwinds that’s out there. But, I continue to think that the economy will figure out ways to solve for that.
Bob O’Shaughnessy, CFO (Outgoing), PulteGroup: Yes, it makes a lot
Trevor Allington, Analyst, Wolfe Research: of sense. Definitely encouraging, regarding the spring. And then second question is just on cycle times. How did those trend sequentially? You previously talked about getting under one hundred days here early in 2025.
Is that the expectation still? And then do you expect to see further improvement beyond that point in 2025? Thanks.
Jim Osowski, Incoming Executive VP and CFO, PulteGroup: So in the we were at 111. I’d tell you that most of our divisions are down to their pre COVID cycle time levels. So, as we exit the year, we think we’ve gotten down to our goal and still would expect to be down to 100 in the
Ryan Marshall, President and CEO, PulteGroup: the 1 thing I would highlight on that is, part of what’s driving the one hundred and eleven days is we’ve got 4 or 5 divisions that build big multifamily buildings that take well in excess of a year to complete. So, but as Jim highlighted our markets that are kind of pure play single family, and townhome type builds were below one hundred days and we think our construction procurement teams have done an unbelievable job getting back to that pre COVID cycle time level.
Trevor Allington, Analyst, Wolfe Research: Thank you for all the color and good luck moving forward.
Ryan Marshall, President and CEO, PulteGroup: Thanks.
Kelvin, Conference Operator: Your next question comes from the line of Matthew Willey of Barclays (LON:BARC). Please go ahead.
Ryan Marshall, President and CEO, PulteGroup0: Good morning, Thank you for taking the questions. I guess just a couple around the margin. You mentioned kind of finding the right price to move that spec inventory if needed. So I guess just how does that balance with the assumption that you’re assuming incentives would stay unchanged from Like to the extent that finished inventory has been rising, would that signal that we have not found an equilibrium, so the incentives would need to move higher to move those homes? Or is your view perhaps based on history that normal rising seasonality of housing demand into the spring, that would be enough that you wouldn’t have to alter incentives.
So just kind of any color on how you’re approaching that? Thank you.
Ryan Marshall, President and CEO, PulteGroup: Yes. Matt, it was a fairly, it’s a tough sales environment in back half of and into and you can see the heavier incentive load. So I I think the short answer is, we believe that the and Bob mentioned it, but we believe that the incentive load that we had in as an exit rate is sufficient to deliver the volume and the margin guide that we have in Combined with healthy economy, combined with spring selling season, when we factor all of those things in, we feel good about the guide that we’ve given. So, I’m not sure that I can probably add any more color, Bob or Jim. I don’t know if you guys have anything else you’d add to that question.
Still does.
Ryan Marshall, President and CEO, PulteGroup0: Okay. Thanks for that, Ryan. And then the second margin question is just, I guess, to have flat or nearly flat gross margins going forward. I guess everything else needs to be kind of flat or offsetting each other sequentially. So you mentioned land up 10% on a year over year basis and construction costs, I think I heard you say up low single digits.
And I guess you’re guiding to delivered ASP up around 3% in 2025. I’m not sure how much mix plays into that. But again, just given those moving pieces and you do have higher lot in construction costs. I mean, what is it that would allow you to hold the margins flat sequentially beyond that
Ryan Marshall, President and CEO, PulteGroup: So Matt, it’s basically all of those pieces. You just mentioned we’ve got about a 3% increase in ASP. That’s enough to offset what we’re anticipating in lot and house cost increases.
Michael Rehaut, Analyst, JPMorgan: All right. Got it. Thanks guys. Good luck.
Kelvin, Conference Operator: Your next question comes from the line of Rif Jadrosich of Bank of America. Please go ahead.
Ryan Marshall, President and CEO, PulteGroup1: Hi. Good morning. Thanks for taking my question. Just starting first on the incentives, just can you talk about from a regional perspective, were there meaningful differences with the incentive level?
Ryan Marshall, President and CEO, PulteGroup: Yes, right. We don’t give that level of granularity. I think Bob talked a little bit about it on a question that Carl asked earlier by consumer group. The incentives and the types of incentives vary between entry level move up and first time, but we typically don’t give a breakdown of incentives by region.
Ryan Marshall, President and CEO, PulteGroup1: Okay. And then just on the land cost inflation comments of burning up 10% right now. Can you just talk about how you would expect that to trend sort of through 25% or maybe even to 26%? Like the land that you’re contracting today, are you seeing any relief on land prices or even like the horizontal development side? And then just within that, can you remind us how much of your own development you’re doing right now and how you expect that to change going forward?
Ryan Marshall, President and CEO, PulteGroup: Yes. So I’ll take the last part first. We do the majority of our own development, probably something north of 85%. We directly manage, so the rest of it we buy as finished slots. That’s an expertise that we have and certainly something that we think adds value to the overall equation of our offering.
In terms of land, Rave, we’re literally buying land every day. We’re not buying it in big chunks. So, I think over the last twelve months, you’ve probably seen a little more stability in raw land prices, but it varies market to market. And then there’s been on the horizontal side, you’ve seen a little bit of wage pressure certainly from the heavy machinery operators and some of those things. And then you’ve got all the things like asphalt pipe, kind of dirt import.
There’s a lot of moving parts and pieces in there. But I think the easiest way to look at it is just with the guide we’ve given that on a year over year basis, we expect to have about 10% inflation. Most of that I think is coming from the prices, the raw land prices that were contracted in years prior when we were in a in a higher inflationary environment.
Ryan Marshall, President and CEO, PulteGroup1: Thank you.
Michael Rehaut, Analyst, JPMorgan: All
Bob O’Shaughnessy, CFO (Outgoing), PulteGroup: right. Sorry, thanks, Rafe. I think we’re going to in respect of everybody’s time, we’re going to end the call there. As always, we’re available if you have any further questions. Thanks.
Kelvin, Conference Operator: Ladies and gentlemen, that concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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