普爾特房屋 (PHM) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Q2 2020 PulteGroup, Inc.

Earnings Conference Call.

(Operator Instructions)

I would now like to turn the call over to Mr. Jim Zeumer.

Please go ahead.

Great.

Thank you, Sharon, and good morning.

I want to welcome you to PulteGroup's second quarter earnings call.

We hope that you have been able to remain healthy and safe throughout these challenging times.

As with our Q1 call, we will provide an update on the pandemic impact on our operations, along with a detailed review of our second quarter financial results.

Participating along with me on today's call are Ryan Marshall, President and CEO; Bob O’Shaughnessy, Executive Vice President and CFO; Jim Ossowski, Senior Vice President of Finance; Jim and Bob are dialing in from outside.

A copy of this morning's earnings release and the presentation slides that accompanies today's call have been posted to our corporate website at pultegroup.com.

We will also post an audio replay of the call later today.

I want to highlight that we will be discussing our reported results as well as our results adjusted to exclude the impact of insurance and severance adjustments recorded in the period.

A reconciliation of our adjusted results to reported results is included in this morning's release and within our webcast slides.

We encourage you to review these tables to assist in your analysis of our results.

Also, 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.

I am very pleased to report that the recovery in new home demand that we experienced over the course of the second quarter was nothing short of outstanding.

Our second quarter results show a remarkable rebound in demand as April net new orders fell 53% from last year, only to see year-over-year orders increase 50% for the month of June.

Led by strong demand among first-time buyers, we saw meaningful improvement across all buyer groups and geographies as the quarter advanced.

This improvement culminated in June orders increasing 77% for first-time, 48% for move up and 21% for active adult over June of last year.

The rebound in demand during the quarter resulted in our aggregate second quarter orders declining only 4% from last year.

We are very encouraged by the fact that the momentum of this dramatic recovery continues as demand has remained strong through the first few weeks of July.

Improving industry dynamics in combination with disciplined business practices allowed us to drive meaningful gains in our operating results and financial position.

These gains include revenue growth, margin expansion and improved overhead leverage, which when coupled with our prudent financial planning and strong cash generation leave us in a position of strength as we work through the balance of the year.

For all the positive dynamics we are experiencing in our business, it's clear that COVID-19 continues to exact a severe toll on the economy and more importantly, the people of our country.

It goes beyond any business implications, but simply as human beings, one cannot look at the ongoing health impacts and loss of life and see it as anything but a tragic situation.

With this as a backdrop, it is our heartfelt hope that everyone on this call, your families as well as our employees, trade partners and the communities we serve, remain healthy and safe.

From our health officials to our frontline workers to pharmaceutical companies, the efforts to battle this virus have been heroic.

Before we get into discussing our second quarter financial results, let me provide a brief update on the impacts of the pandemic and insights on how we are running the business currently.

At the outset of the pandemic, we closed our sales centers and model homes and quickly pivoted to working remotely and selling virtually.

I am pleased to say that we began reopening our sales centers and models in early May, and we are now fully open and staffed to work with our walk-in and by-appointment customers.

As you would expect, our salespeople are using appropriate PPE, are adhering to social distancing practices, and are following enhanced cleaning and disinfecting processes to help protect the health of our employees and customers.

While our sales centers are open, we are interacting with customers on their preferred terms.

Because not everyone is comfortable with in-person meetings, we continue to take full advantage of available technology and tools that have successfully supported our efforts to sell homes virtually.

Except for a handful of markets, homebuilding was deemed an essential service from the start of COVID-19, so disruptions to our construction operations were minor, even during the early stages of the pandemic.

At present, our operations are fully functional in all markets across the country.

Again, in partnership with our trades, we are using appropriate PPE and are adhering to social distancing practices to protect workers on the job site and in the homes.

And finally, our financial services group truly did an outstanding job adjusting their business model to work remotely and handle every aspect of the mortgage and closing processes virtually.

At present, personnel are still working off-site, but as demonstrated by the strong second quarter financial results and high capture rate, the team continues to perform at a very high level.

Thanks to the tremendous effort of our purchasing team, working in conjunction with our suppliers, our supply chain has held up well with minimal disruptions to our homebuilding operations.

Working closely with sales and construction, our purchasing group has been able to navigate around potential shortages, and ensure ongoing availability of key building products.

Given the rebound in housing, we have been increasing our land acquisition and development spend.

This primarily relates to land deals where we negotiated purchase delays of anywhere from 30 to 90 days.

We are now completing most of these transactions when the new closing date arrives.

Unfortunately, it's clear that COVID-19 is not going away anytime soon, so we remain disciplined and thoughtful in our land investments.

This includes increasing our use of options, which now account for 46% of the lots that we control.

On the people side, I am very pleased to say that improved market dynamics have allowed us to bring back the majority of the employees that we furloughed during the quarter.

We have also had the opportunity to rehire a small number of the people we released in May, which is a good feeling.

I would note that most of the individuals returning to our organization are in the field construction roles.

Obviously, the demand for new homes has experienced a dramatic rebound over the past 8 to 10 weeks, following the initial shock from COVID-19.

While housing demand certainly continues to benefit from historically low interest rates, analyzing the drivers of demand suggest there are likely additional factors at work as well.

First, looking at the number of Internet searches related to home buying, the data indicate that there has been an increase in consumer interest in homes, particularly new homes.

Utilizing available Google trends data, we can view patterns for specific search terms commonly associated with buying a new home.

Despite the overlay of COVID-19, searches for new home related terms has been growing since mid-March.

In fact, we have routinely seen multiyear highs in the number of searches related to shopping for a new home.

I would note that we have seen a similar pattern in terms of Google searches for Del Webb, which are up dramatically in May and June.

In fact, unique visitors to our Del Webb site are now approaching 70,000 per week and are trending higher than they were at this time last year.

Second, while we can debate the magnitude, ZIP code level analysis on buying patterns points to a movement of renters and homeowners from urban centers into the surrounding suburbs.

Based on an internal survey, roughly half of our division presidents report that their business has experienced a modest increase in demand from urban buyers while several of our divisions referenced a material increase in such demand.

And finally, we see the third and possibly largest driver of demand for new homes being the very limited supply of existing housing stock available today.

At the end of May, the total housing inventory was 1.55 million units, which was down 19% from the prior year.

I'm sure we can all appreciate that it's hard to be comfortable opening your home to strangers during a global pandemic.

The strong demand has also helped to absorb some of the spec inventory which had built up in the system in March and April.

Data show that in markets where we operate, the number of quick-moving homes available for sale fell by 16% from the end of March through the end of June.

A lot has been made about the advantage of having spec units available but the drawdown in supply and a build cycle of less than 80 days for our first-time buyer product allows our build-to-order model to compete very effectively and with less risk.

The combination of strong demand and limited inventory has also allowed us to raise prices across many of our communities.

In fact, more than half our divisions report raising prices in 50% or more of their communities.

The typical price increase is in the range of 1% to 3% and includes changes in base price and/or reductions in incentives.

The positive change in market dynamics from April to the end of June has been dramatic and gives us greater confidence about the business moving forward.

As such, we are reestablishing guidance for the remainder of 2020, which Bob will provide as part of his review of our second quarter results.

In this regard, I want to say that the volatility caused by the pandemic is unlike anything this industry has experienced even during the worst of the Great recession.

The swings in demand during the second quarter alone were fast and severe.

Fire demand has clearly experienced a dramatic recovery in the quarter and has remained strong through the first 3 weeks of July.

That being said, COVID hotspots continue to grow in size and number, which, in turn, is slowing down the reopening of state and local economies.

It is impossible to forecast how these dynamics will unfold in the coming weeks and months.

For PulteGroup, we will be optimistic about future market conditions but remain very disciplined and measured in how we manage our business.

Now let me turn the call to Bob for a review of our second quarter results.

Bob?

Thanks, Ryan, and good morning.

Similar to our first quarter call, I won't go through our typical detailed analysis of our income statement and balance sheet, but I'll talk about the business in the context of COVID-19.

Also, given the volatility in market conditions during the quarter, where needed, I will provide some insights on the change in our business as the quarter progressed.

And finally, as Ryan stated, we will be providing guidance on our expected third quarter and full year 2020 results.

For our second quarter, home sale revenues increased 3% to $2.5 billion.

The higher revenues in the period were driven by a 6% increase in closings to 5,937 homes, partially offset by a 3% decrease in average sales price to $416,000.

Consistent with recent trends, the lower average sales price primarily reflects changes in the product and geographic mix of homes closed.

I would highlight that these changes were exaggerated in the quarter as the pandemic caused temporary market shutdowns in several higher-priced locations, including Northern California, Michigan, Pennsylvania and the state of Washington.

Closings for the quarter consisted of 31% first time, 44% move up and 25% active adult.

This compares with prior year closings of 28% first time, 46% move up and 26% active adult.

Net new orders for the second quarter totaled 6,522 homes, which is down 4% from last year.

Given that we started the quarter with April orders down 53% from the prior year, this represents a tremendous turnaround in demand.

For the entire quarter, first time orders were up 17% to 2,327 homes.

Move up orders were down 7% to 2,873 homes, and active adult orders were down 22% to 1,322 homes.

We've gotten questions over the quarter about how active adult buyers are behaving.

So I want to note that demand among this improved in each month to the quarter.

In fact, June orders were up 21% over last year, with active adult buyers more comfortable going out and with the amenities now reopened in our communities, the buying and selling process is feeling more routine.

At the same time, active adult buyers are finding a strong demand environment if they have to sell an existing home.

So we are optimistic about an ongoing recovery in this part of our business.

For the quarter, our cancellation rate was 19% compared with 14% last year.

The higher cancellation rate was driven by elevated cancellations in April as the cancellation rate fell to only 12% of our orders in June.

As we discussed during our Q1 earnings call, we have seen that buyers are excited to close.

We ended the second quarter with 13,214 homes in backlog, which is an increase of 12% over last year.

At the end of the quarter, we had 10,946 homes under construction, which is down 4% from last year.

Of the homes currently in production, 2,121 or 19% were specs.

In aggregate, the lower number of homes under construction is consistent with our decision to tightly manage starts as demand collapsed early in the pandemic.

While we are focused on building sold homes, we have started to increase the number of speculative starts in an effort to get us closer to our target ratio of specs, representing approximately 25% to 30% of units in production.

Based on our backlog and the number of units in production, we currently expect to deliver between 6,000 and 6,300 homes in the third quarter.

Further, we now expect deliveries for the full year to be in the range of 23,500 to 24,000 homes.

With an average price in backlog of approximately $438,000, we expect third quarter ASP to be in the range of $425,000 to $435,000.

For the full year, we expect average sales price on deliveries to be between $420,000 and $430,000.

As always, the mix of deliveries will influence the average sale price we realized in any given quarter.

Back to my review of our second quarter results.

Gross margin for the quarter was 23.9%, which represents an increase of 80 basis points over last year and a sequential gain of 20 basis points from the first quarter.

Margins in the quarter benefited from the strong sales environment in the back half of 2019, when the majority of these homes were sold.

Our margins also reflect lower incentives as sales discounts were down 40 basis points from last year to 3.5% and down 10 basis points from the first quarter of this year.

Given today's favorable demand conditions, we expect gross margins to remain strong through the back half of the year.

Currently, we expect gross margin for the third quarter to be in the range of 23.9% to 24.2%, with full year gross margin to be in the range of 23.8% to 24.1%.

Our reported SG&A expense in the second quarter was $197 million, or 8% of home sale revenues.

Included in our reported SG&A was a $61 million pretax benefit resulting from the reversal of an insurance reserve, partially offset by the previously announced $10 million pretax charge for severance resulting from staffing actions taken in the quarter.

Excluding these 2 items, our adjusted SG&A expense for the quarter was $247 million, or 10% of home sale revenues, which is 80 basis points better than in the second quarter of last year.

The improvement in overhead leverage was driven by the volume growth realized in the quarter, along with the actions taken to lower overhead expenses in response to changing market conditions.

While we typically give guidance only for full year SG&A expenditures, we are providing Q3 numbers as well.

We currently expect SG&A expense to be in the range of 9.9% to 10.4% of revenues for the third quarter, and our adjusted SG&A to be in the range of 10.3% to 10.7% of revenues for the full year.

Turning to financial services.

Our operations generated $60 million of pretax income, representing an outstanding 141% increase over the prior year.

The increase was driven by an improving -- an improved margin environment, higher loan volumes resulting from growth in the company's homebuilding operations and a higher capture rate.

In fact, our mortgage capture rate for the second quarter increased to 87% from 81% last year.

The improved capture rate reflects the opportunity our homebuilding operations are finding to leverage Pulte mortgage in providing value-added services to our customers.

The investments our financial services team have made in building their technology platform allows them to transition to off-site operations with virtual processing without missing a beat.

Closing out my comments on our income statement.

Our second quarter income tax expense was $108 million, which represents an effective tax rate of 23.7%.

This compares to tax expense of $80 million or an effective rate of 24.9% last year.

Our effective tax rate for the quarter was lower than last year and our historic guidance, primarily because of energy tax credits realized in the period.

Going forward, we continue to expect our tax rate to be approximately 25%, excluding any discrete permanent differences like the energy tax credits that may arise.

Our reported net income for the second quarter was $349 million or $1.29 per share, while our adjusted net income was $311 million or $1.15 per share.

Prior year net income for the period was $241 million or $0.86 per share.

Moving over to the balance sheet.

We finished the quarter with $1.7 billion of cash after having repaid the $700 million we drew down from our revolving credit facility in March.

In addition to our strong operating results, our second quarter cash position benefited from our actions to strategically defer investments in land and vertical construction costs as well as our decision to suspend our share repurchase activities.

Having repaid the revolver, we ended the quarter with a debt-to-capital ratio of 32.1%, while our net debt-to-capital ratio fell to 15.5%.

In the second quarter, we invested $452 million in land acquisition and development, which is down from $619 million in Q1 this year and $857 million in the second quarter of last year.

I would note that last year's spend included $136 million related to the American West acquisition.

Through the first 6 months of 2020, we have invested approximately $1.1 billion in land acquisition and related development.

Given the improving market conditions, we are increasing our investment in both land development and the purchase of new land assets.

As such, we expect our full year land investment will be approximately $2.7 billion as we begin completing land deals that we previously deferred.

I would like to highlight pandemic and any material impact it has on housing demand where the consumer and the broader economy could influence how much capital we ultimately invest.

We ended the quarter with 163,000 lots under control, of which 46% are optioned.

This represents our highest option position in over a decade as we continue to progress toward our target of 50% owned and 50% optioned.

Let me now turn the call back to Ryan for some final comments.

Ryan?

Operating in the midst of a global pandemic and extreme market volatility, the company delivered an outstanding quarterly earnings performance while generating strong cash flows that further strengthen our financial position and flexibility.

I want to say that we are certainly encouraged by the rebound and acceleration in demand that we've experienced over the past few months.

While there are different thoughts on the drivers of this demand, what is clear is that the desire for homeownership remains high for all buyer groups.

Whether it's the first-time buyer looking to exit a shared living space, or the active adult buyer looking for a new adventure, people want a place to call their own.

That being said, we continue to monitor the acceleration of COVID-19 cases in cities across the country, along with delays and even step-backs in the reopening of local economies.

Given these conditions, we remain committed to taking a disciplined and thoughtful approach to running our business.

While we have had to adjust business practices, our fundamental goals and strategies have not changed as we continue to focus on generating high returns through time.

This means allocating capital in alignment with our stated priorities of investing in the business, paying our dividend and when appropriate, returning excess capital to shareholders through share repurchases.

This also means operating against the same risk-weighted criteria that we have used so successfully to invest in land for the past 8 years.

Although given today's environment, we are certainly working to assess any elevated risks associated with operating during a global pandemic.

I want to thank all of our teams from our corporate and division offices to our front-line field personnel for their tremendous efforts during these very challenging times.

Everyone has pulled together as we transitioned our operations to work remotely and then where appropriate, move back on-site if sales centers could reopen and markets exited their lockdowns.

From implementing new technologies and virtual selling strategies to using PPE and appropriate social distancing, our people have been smart, fast, resilient and maybe most of all, invested in each other and in our company.

Let me turn the call back to Jim.

Great.

Thanks, Ryan.

We're now prepared to open the call for questions.

(Operator Instructions) And Sharon would ask that you just repeat the instructions, and we'll get started.

(Operator Instructions) Your first question comes from John Lovallo with Bank of America.

The first one is obviously the bounce that we've seen has been remarkable in terms of strength and sustainability here.

But I guess the question is, going forward, the big question in our mind is how sustainable is this going to be?

And I know that's a very difficult thing to answer, but what I'm wondering is, what are the things that you're kind of monitoring to gauge whether you should kind of step on the gas here or maybe pull back a bit?

Well, John, it's Ryan.

Thanks for the question.

We're monitoring all the same metrics that we typically monitor when we run the business.

So we're looking at what's going on with consumer behavior, what are we seeing the desire for homeownership, what's happening in the new home searches on the Internet, some of the things that we described in our prepared remarks.

We clearly pay attention to what's happening in the resale market, which still to this day remains our biggest competitor.

Certainly, we have new home competitors.

But with the majority of home sale being dominated by resale, we certainly pay attention to what's happening there.

We look at what's happening in the job market with unemployment, with job creation, et cetera.

So we're really focused, John.

The biggest thing that I would emphasize is we're focused on delivering high returns through time.

And so while we certainly have got a little bit of a tailwind at our back right now with consumer demand, the investments that we're making, the way that we're running the company, the way that we're managing debt, the way that we're managing cash, we're very much focused on those being through-cycle type movements.

The other thing, I think, in the more kind of short term that we've got to pay attention to is state shelter-in-place orders and what might potentially happen as local economies may revert back to Phase I, Phase II, et cetera.

Certainly, that could have an impact on the kind of shorter-term demand that we might see in a sales office.

That's helpful.

And then maybe just on the Vegas market specifically in American West.

Are you seeing any improvement there as some of the casinos have begun to reopen?

Yes.

Surprisingly, John, if you remember at the end of the first quarter call, I highlighted Vegas as a market that we were quite concerned about, given the dominance of tourism and travel-related economy.

That market has performed incredibly well and, in fact, had a spectacular June.

So with the reopening of the casinos, even at a limited capacity, we've seen a lot of the local workers go back to work.

And folks are back in the casinos and staying at the hotels.

So our Vegas business did quite well in June, and we're very happy about that.

Next question comes from Mike Dahl.

This is Chris on for Mike.

My first question, which -- I want to ask what your latest price versus [paid] thoughts are in the current demand environment.

You guys mentioned you were able to raise pricing in over 50% of your communities, which is kind of in line with what we were seeing as well.

And I was hoping to see if your thinking has changed at all in terms of pricing, when should we think about price moving up at that 1% to 3% you mentioned, given where demand is running right now?

Yes, Chris, it's the same process that we've always used, which is we evaluate it on a community-by-community basis, taken into consideration what's happening in the local resale market that we compete against as well as what we're doing in our competitive efforts against our other new home competitors.

Those are the things that really influence what's going on in our pricing decisions.

We're certainly focused on driving the best through-cycle returns that we can.

And so that continues to be the overarching theme and umbrella that we use to make decisions.

I would remind you that you need to really pay attention to rent as well.

Especially with our first-time buyer business, that is an alternative source of shelter for that consumer.

And so they're going to constantly look at the economics of what's more advantageous.

So while demand is good, we don't believe that you can raise prices in an unfettered way.

Got it.

That makes sense.

And then just my second question.

I was hoping you could drill in a little deeper into the latest demand trends you're seeing in some of the COVID hotspots in Texas, Florida, Arizona.

I realize it's tough to gauge what demand ultimately look like there.

But for the last few weeks, have you seen any sort of decipherable trends as far as the impact at that?

Yes.

So those markets have been incredibly strong for us, Chris.

The 3 that you highlighted, Arizona, particularly Phoenix, Texas and Florida, not only are they hot in temperature right now, they're also hot in terms of sales pace.

So despite the fact that there has been an increase in COVID cases in those markets, they have been some of the most aggressive in reopening the local economies, and we've certainly seen that translate into success in our sales offices as well.

Next question comes from Mike Rehaut with JPMorgan.

Congrats on the recent results.

Where that hit, and I know it's a little tough to go too detailed.

But the June results, obviously, incredibly strong.

And you talked about July showing strength as well.

But I think there's obviously a lot of focus around the exit rate coming out of the quarter.

I assume you don't want people to model 50% order growth in the back half of the year.

So I was just trying to get a sense of maybe to give a rough idea so far how July is trending.

Obviously, there's a lot of movement within the quarter.

There could be some pent-up demand; it can also be some increased incremental demand from REITs and perhaps COVID itself.

But any directional help around how July is going so far?

And around any expectations of where that order growth may or may not settle out in the third quarter would be helpful.

I know it's very forward looking, but the numbers are just very, very volatile currently.

Yes, Mike.

And thanks for the question.

June was a spectacular month, and we're very pleased with that.

To your point, I do think there was some pent-up demand for a lot of the reasons that we listed in our prepared remarks and some of the things that you've highlighted.

So to assume that growth rates like that would continue forward, that's -- time will tell.

What I will tell you about July, and we're not going to deviate from our traditional practice other than to comment on how the first 3 or so weeks of July have been.

The first 3 weeks in July have continued to be strong, albeit on a somewhat seasonally adjusted basis as we go into the kind of dog days of summer.

So we're very happy with how July has performed, we're optimistic about kind of what the summer selling months will hold for our business, but we'll stop short of kind of providing a full forecast for the third quarter.

Okay.

No, I appreciate that.

And obviously, I had to try there because, again, there's a tremendous amount of focus.

Second question, I guess, talking about the price increases and about [hector] communities, which is encouraging.

Obviously, you've had a spike in lumber costs as well.

Traditionally, actually, when you've had cost inflation, you've actually had -- the industry has typically had margin expansion as top line gains exceed the cost side of the business.

Do you see the current environment as being anything different?

Because you mentioned obviously trying to not allow pricing to get out of hand and you don't want to price yourself out, maybe similar to a couple of years ago.

But how do you see your ability to at least offset cost inflation in the current environment?

Mike, it's Bob.

And a fair question.

Certainly, lumber has trended to candidly all-time highs.

We've given a guide on our margins for the balance of the year.

And I think most folks are familiar with the way we purchased lumber.

It's on a trailing 13-week basis.

And so our lumber package pricing for the balance of the year is pretty much set.

So these increases will really be more of an impact in '21, depending on how the market -- the lumber market performs over the next 3, 6 weeks, 12 weeks.

So on balance, actually, the market is pretty good for commodities, lumber being an outlier.

And I think most builders were able to try and work with their trades to drive pricing down.

We'll see some benefit for that; that's incorporated into our guide for the balance of the year, so why you see margin improving as we continue through the year.

Given the pretty quick ramp-up in the business, I think it's reasonable to expect that the trades will be looking for some of that money back as time goes by.

In a world where we can get some modest price increases, that's, to your point, usually sufficient for us to offset it -- those potential increases in costs.

So we're not giving a guide on margin beyond 2020.

But you can tell from the guide for the balance of the year, which is up from where we were in Q3, which is -- sorry, Q2, which was up from Q1 and up a lot from last year, that the market's pretty good.

And so we are always conscious of overall affordability; to Ryan's point, rent is always the biggest competitor, and/or resale.

But we feel pretty good about our pricing opportunities and our cost controls today.

Next question comes from Kenneth Zener with KeyBanc.

Can you -- given your -- I appreciate the outlook and the volatility.

Given your closing guidance for 3Q, it's actually a little higher as a percent of your units under construction than as normal, which reflects lower initial construction phase in the second quarter.

But can you talk to how you think the industry or Pulte, in particular, might be constrained in terms of production?

There's obviously a lot of order growth, demand in the time of job losses.

But what is really constraining your growth?

I mean is it that your build construction times?

You don't want to go out more than 6 months.

You made very specific comments around a pre-build model.

It's not what you want to do, but you said you guys can do first-time buyers, I believe, in 80 days.

So what is really the production constraints you're seeing within given communities that kind of limits your units under construction as we think about where you can go in the second half of the year?

Ken, thanks for the question.

When we think about production constraints, it's -- the #1 continues to be labor, which is not a new theme.

The entire industry has talked about that for a long time.

And it's one of the big reasons that we made the acquisition of ICG down in Jacksonville earlier in the year as we felt that moving to more off-site type manufacturing was going to be one of the ways that we could really look to eliminate some of the pinch points over time over the long pull with labor by being more efficient with the way that we're able to manufacture the shell.

So labor, I think, continues to be the #1 theme.

What we are finding is that the labor wants to work.

So as shelter-in-place restrictions have been lifted more and more and using appropriate PPE and social distancing, we've been able to get homes built.

There are additional requirements.

I would tell you that it probably adds a few days in some places to cycle time, just because it's a little bit slower than what you'd maybe ideally like.

So that might be a little bit of an added overlay constraint directly related to COVID.

The other one is municipalities.

So municipalities are typically fairly lean in inspectors and permit -- their back office permitting facilitation.

And so as those municipalities have sheltered in place and they've asked their city and county employees to do the same, we have seen and experienced a bit of delay in our overall cycle time just in our ability to get permits and get inspections.

Next question comes from Truman Patterson with Wells Fargo.

Nice results, and thank you for all the detail.

There's a lot to digest there.

So first question, big picture, you're seeing some buyers exit more densely populated urban areas.

Which metros or regions are you seeing this the most pronounced?

And on top of that, are you actually seeing migration from more densely populated regions like the Northeast to less densely populated areas like the South?

And just looking forward, how do you think this kind of plays out over the next year or 2?

Truman, it's Ryan.

Thanks for the question.

As far -- I'll answer your second question first.

As far as Northeast to the South, that's a trend that we've been experiencing for a long time.

So it's hard to suggest that it's any more than what it already was due to [salt] or housing affordability and a number of other things because some of the southern states, I think it really worked to ramp up their job creation and create opportunities in the South.

So I would suggest that, that continues to kind of happen, and I wouldn't necessarily suggest that it's accelerating.

As far as the markets that we highlighted where we are seeing an increase in our local business as a result of an urban exodus, if you will, I'll use that term loosely.

San Antonio, North Florida, Southwest Florida, which for us would be the Naples-Fort Myers-Sarasota, kind of West Coast of Florida, and then we're also seeing a bit of it in the Northeast corridor, which is middle and southern Jersey and into Pennsylvania.

So there I think we are seeing some folks that maybe we're living closer to the city, New York City, that is, looking for an opportunity to be a little bit more suburban in New Jersey and Pennsylvania.

Okay.

Okay.

And then on your entry level, just some of your thoughts moving forward, you all -- it seems like now you're making a bit more of an aggressive push towards the first time buyer, entry-level segment.

What portion of your business are you kind of targeting at this point?

Is it primarily through expanding through your Centex brand nationwide?

And it seems like everybody that makes this rotation, it's really been actually a benefit to gross margin.

Can you just talk about some of those moving parts for us?

Sure, Truman.

I'll take you on a bit of a time machine trip and go back to the fall of 2016.

We talked as a company that we felt that we had an opportunity to reposition our business to be a bit more balanced in the consumers that we target.

And we laid out that ideally, we wanted our first-time buyer business to be about 35% of our business.

What we highlighted was that we wanted to do it the right way and intentionally go out and buy parcels of the land that would allow us to be -- to effectively and successfully and specifically target the first-time buyer business.

We've done that, as is evidenced by the lots that we control currently for our first-time buyer business equal 34% of the total lots we control are targeted to the first-time buyer business.

And what we talked about is that it would take some time from the time that we acquire and secure that land to where you see it coming through in the business.

The most recent quarter, 31% of our closings represent or were specifically targeted to the first-time buyer; that compares to 32% of our closings in Q2 -- or in Q1.

So we're -- and then compared to prior year second quarter, we were 28%.

So what you've seen is it's gone from our business being 26%, 27% first time to we're now in the 31%, 32%, and we're moving much closer to that ideal target of 35%.

So we think it's done wonders for our business.

We're seeing nice growth there.

We're probably just a few percentage points shy of where we ideally want to be in terms of closing mix at this point in time.

But we've got the land pipeline that will drive that.

Next question comes from Alan Ratner with Zelman & Associates.

Nice quarter and congrats on the execution during this difficult time.

Ryan, just on that last point on the land pipeline.

Obviously, you're starting to gradually ramp the acquisition and development back up again.

And presumably, the land you're buying now is probably for maybe late '21, '22 deliveries, I would imagine at this point.

But just trying to think forward here, you're in a difficult spot where you kind of do have to take a view on the sustainability of the trends you're seeing now.

You could do certain things to mitigate the risks such as optioning more.

But when you look at '21 and the pipeline you have, assuming this is sustainable, do you foresee any air pockets on the supply side, thinking about the land pipeline primarily, where you would not be in a position to grow in '21, assuming this kind of flurry of activity continues through the end of the year?

Or do you think the pipeline is sufficient to continue growing through 21?

Yes, Alan, thanks for the question.

I appreciate it.

We're not giving any guidance on '21 at this point in time.

What I will tell you just broadly about our land pipeline is it's healthy.

We control over 160,000 lots.

And to your point about how sustainable and how you can manage that risk with that forward view, it's a big reason that we've been driving towards the 50-50 mix on owned versus option.

I'm really proud of what our team has been able to do in pushing that number to 46% options, which is the highest that we've ever seen in our business in over a decade.

So that's a real win.

And when we look at the lots that we've actually approved in the current year, the percentage of options are over 60%.

So while we've moved the entire portfolio inclusive of Del Webb, when we isolated just to 2020 acquisitions, we're north of 60%.

So I think that's a big part of it.

We've got a really big backlog, Alan.

We're over 13,000 homes in backlog, 12% increase over prior year.

So we're well positioned to not only deliver the next 6 months of the year.

But that gives us a really nice kind of running start into early 2021 as well, which we think is a real advantage in kind of our build-to-order model is that it gives us so much forward visibility.

And we know that it's a big part of what continues to contribute to the outsized margins that our business is able to generate.

We did highlight in Q1, and again, as part of kind of our land spend numbers in this quarter, we did -- we were cautious in the amount of land development dollars that we outlaid early in Q2.

Certainly, that will have a bit of impact on our ability to get new communities opened on the original time line.

We think that's a short-term kind of blip and is not something that's going to materially impact our ability to continue to perform well.

Got it.

That's helpful, Ryan.

I appreciate that.

And then second, you had some positive comments on Vegas earlier, and it's good to see that market continuing to -- or performing well in the face of a tough job environment there.

As you look at the land spend for the back half of the year and your footprint, you have the benefit of being very well diversified.

Are there any markets, thinking about Vegas or Orlando, maybe where you're going to be a little bit more conservative on land spend and perhaps reallocate those dollars elsewhere?

Or do you feel like your whole portfolio right now has an equal look at land opportunities?

Yes, Alan, it's Bob.

I think the simple answer to that is that all the markets are open.

We are seeing positive demand trends across the country, as Ryan walked you through.

And so our view is until we see something change, we're willing and able to invest everywhere.

You heard Ryan say that we're looking through with a little bit tighter lens.

And so as an example, for the things that we deferred 30 or 60 or 90 days ago, we have a new process that we've instituted where just asking the asset management team actually refreshes our expectations of market conditions.

So an approval that got me for argument's sake, 10 months ago, waiting for some final entitlement.

Before we move money, we're actually going back and saying, "Okay, did the pro formas that we built then, do they still apply?"

And so I think what I would characterize it is we're using the same discipline we always have.

We've put one more hurdle in the purchase process, and that hurdle is applicable to every market.

And so using Vegas or North Florida in your example, certainly as Vegas has opened and improved, our attitude towards it has gotten a little bit better.

And so really, we're looking at current on-the-ground data.

We're listening to what the state regulators, governments are saying about shelter in place.

And we think we're making educated investment decisions.

So I don't know if that gets you all the way to where you want it to be, but in general, we're open for business, but we are being disciplined in that thought process.

Next question comes from Stephen Kim with Evercore ISI.

I'm really intrigued about the opportunity for you guys to raise prices.

I know you said you raised prices in more than half of your communities in 1/2 of your divisions.

And I'm thinking that you've probably crossed over the absorption rate threshold in their communities, and most of your communities by now, above which further growth lead you to raise price.

We're also seeing mortgage rates down 80 basis points year-over-year.

And so I'm thinking that the median monthly payment that your entry-level buyer is paying is probably down quite a bit and probably down a lot more than the decline they're seeing in rents.

So I'm curious, when was the last time you think you saw buyers' monthly payments down this much versus rents?

And is there any reason to think that there is going to -- that's going to be -- provide you a lot of headroom to raise prices in a way that it's very different from what we've seen in the last few years?

Yes.

Stephen, a tough question.

There's a lot in that.

I'll try and unpack it.

And maybe easier than unpacking it is just to simply say, it's a really favorable demand environment out there.

And I think as we highlighted, there's a number of factors that are driving that.

One, money is very affordable right now.

And so the prospect of being able to afford a new home is probably better than it's been in a long time.

I will caveat it by saying the first-time buyer's still got to have a down payment.

So there's got to be enough savings from somewhere in order to make that happen.

And we don't see that being a huge impediment, but it is a restricter out there that our hurdle rate or hurdle that needs to be cleared before the first-time buyer can enter the home buying market or the homeownership market.

To your point, Stephen, I think it's not been often that the decline in interest rates and resulting payment has been faster than the decline in rent.

And so you combine that with the fact that there's a desire to probably not live in more densely constructed apartment-type complexes, I think those are really positive, positive tailwinds for the entire industry.

And certainly, as we move our business closer to 35% being first time, we think that bodes well for the future of the business.

Yes, it certainly does.

My follow-up relates to the down payment comment that you made.

Historically, you're right; down payment has been viewed as like 1 of the key impediments to first-time buyers.

But I'm thinking in this environment, we've seen student loan forbearance through -- from March to September, we found that the average payment on that student debt is nearly $400 a month.

If you take a couple with -- that both may have student loans, I mean ramp it out till or grow it through September, plus a couple of $1,200 stimulus checks.

I mean that alone can pretty much match -- go a long way towards providing the down payment.

So I'm curious as to whether or not you are hearing from the folks in your communities -- the sales folks, that the ability to come up with a down payment is not the hurdle that it once was.

And in fact, that hurdle may actually be getting lower given the increased savings.

Yes, Stephen, I don't know that we've specifically heard direct feedback on down payment related concerns, that there's anything there that I would highlight.

What I would tell you is evidenced by the year-over-year growth rate that we highlighted in our June sales from the first time segment, we were up 70%, 70-plus percent in the first-time buyer segment.

So if you use that as a data point, it would largely suggest that those buyers are able and are finding ways to come up with a down payment.

Whether it's from the means that you suggested or something else, the money is clearly there, and that's translating into a favorable sales environment out of that segment.

Next question comes from Susan Maklari with Goldman Sachs.

My first question is, can you give us a little bit more color on the SG&A side, especially as it sounds like you have taken back some of those people that you furloughed and perhaps are even adding to the headcount from some of the more permanent reductions that you did.

How should we think about that flowing through?

And can you give us some sense of where you are in terms of the headcount?

Yes.

Sure, Susan.

I think if you kind of piece together everything that we included in the remarks, because the business has been strong, we have brought back almost all of the furloughed folks that we had asked to wait to come back to work.

We've even rehired a couple of people.

But on balance, we had announced about $65 million worth of save in fiscal '20 related to the actions that we took and I would tell you, that remains pretty much where we think we landed.

We may reintroduce a couple of costs, and principally, I'm thinking on the IT side, to make sure we continue to advance that work beyond where we thought we would based on the work we did in May.

So with that, our spend is pretty much what we thought it was going to be.

That is reflected in the guide that we gave.

So if you think about it, our full year guide at 10.3% to 10.7% of revenues in SG&A is better than, by about 20 basis points, the guide that we had at the beginning of the year, which we obviously took down at the beginning of the pandemic.

So we don't see a lot of creep back into the business, which is good, and we want to be disciplined about that.

We hadn't included the furloughed folks in the save.

And so we had hoped and expected to bring those folks back to work.

They've come back -- to Ryan's point, they're mostly field personnel, so they're serving revenue-producing activities.

So we feel pretty good about our expense structure for the -- for where we are in the business.

And if the business continues to perform at a heightened level, we might need to bring some more people back.

But again, I think that would be well leveraged from an overhead perspective because they would be bringing them back to do things once again that are revenue producing.

Okay.

All right.

That's very helpful.

And then given the trends that we've seen, and obviously, the relative confidence in your outlook, can you just talk a bit to what you need to see to get comfortable to start to resume some of the repurchase activity?

And any color on what the timing of that could potentially be?

Yes.

So I think in fairness, we've come through a pretty tough time.

We fully drew our revolver.

We were able to pay that back comfortably.

We have a very nice cash position.

Debt-to-cap is at 32%.

And a year ago, it was at 35%, so we've made progress there.

If you look at it on a net basis, it's at 15.5 million, down from 29% a year ago.

So feel really good about our financial position.

Having said that, we're still in the midst of a pandemic.

And so I think what we will do is very consistent with what we've done historically is we'll report the news.

So as and when we get into the market after we've done that, you'll hear about it.

But the process will be, Ryan and I and the team here will work through what are our medium- to longer-term capital needs.

What do we think the business produces.

No different than pre-pandemic.

Share and work through that with the Board and come up with a game plan for how to repurchase equity.

You heard Ryan say it earlier in the call, our capital priorities have not changed.

It's still invest in the business at high return.

It's pay our dividend.

And if we have extra, we will use it to buy back stock.

We also talked about leverage.

We're in a good spot there.

We do have a maturity in March next year, $420 some odd million that will be something that we would likely, at this point, think that we're going to use cash to satisfy.

But obviously, market conditions needs for cash and capital will weigh on that as we get closer.

So we'll have more to say about that as time goes by, Susan.

Next question comes from Jay McCanless with Wedbush.

I guess the first question I had is, could you give us any color on where you expect community growth for the rest of this year and maybe a hint or preview for '21?

Yes.

So community count growth, we are thinking, is going to be somewhere from between 2% and 4% down in Q3 and Q4, each versus the average in the preceding year quarter, so Q3 versus Q3 the year prior.

Certainly, the development delays and the land purchase delays, you heard Ryan talk about it earlier in the call, that come from what we did, call it, beginning of April through the middle to late June, we've started to ramp that back up, but that will have an impact on our community count as we go forward.

We have not provided any guidance for fiscal '21.

We'll give you that as we get closer to the end of the year and we go through our planning process.

Okay.

That's helpful.

The second question I had in terms of what you're looking for, for new land acquisition and some of the migration away from the urban core you guys talked about.

I mean is Pulte as a company starting to look at further outland positions, larger land positions, more lots?

I mean has COVID and everything we've seen over the last 4 months affected the way you guys are buying land or thinking about land going forward?

Yes.

Jay, this is Ryan.

I think what we highlighted is that the process that we've used to evaluate risk associated with buying land remains very consistent.

So we've not made major changes there.

Certainly, I do think the changes in consumer behavior from COVID, that will clearly influence things over time.

I think some of the bigger influences are going to be on home design, quite frankly.

But our business always has been somewhat -- or mostly suburban, just because that's where available land is.

So as far as going into the exurbs and into B and C type locations and really making big bets on land, I don't know that you should expect to see that from us.

We're going to continue to be very disciplined in where we invest.

We still think that access to transportation corridors, good schools, employment, entertainment, shopping, et cetera, we still think those things all matter.

And so we're going to continue to look at buying in locations where we think buyers want to be pre-COVID, post-COVID.

And those are the elements that we think drive through-cycle return.

Do you think that -- and from a plan standpoint, you guys are in good shape?

Or are you seeing a lot more requests for the double work from home or the students and the kids working from home environment?

Are you guys adapting to that?

And what are you hearing from your customers right now as far as that goes?

If you're not going to go further out, maybe talk about what you're going to do with some of the house plans, et cetera.

Yes.

So Jay, I think it's one of the things that's been a real strength for the company is our consumer-inspired focus and the research that we've been doing for the past 7 or 8 years with our commonly managed plans.

We've really been designing and creating just some spectacular floor plans that not only, I think, meet current consumer needs, they allow for great flexibility.

So in our build-to-order model, there are a number of things where we have flexible spaces that can be turned into a gym or a home office or a second master or an in-law suite.

Those are all things that our current portfolio of plans allow for.

We'll continue to listen to the customer, especially in light of what's currently changing, to see if there's more opportunity to accelerate that.

But keep in mind what I highlighted earlier in the call, our biggest competitor is resale.

And I can promise you that any of the new plans that we have are far better than a housing stock that's 10, 20, 30 years old.

And at this time, I will turn the call over to the presenters.

Great.

Thank you very much.

Appreciate everybody's time this morning.

We will be available for questions over the remainder of the day, and we look forward to speaking with you on the next call.

This concludes today's conference call.

You may now disconnect.