A daring merger of two of home building's top 5 home-building organizations in 2009 is proving to be a tough pill to swallow as the duration and depth of housing's downturn painfully twist a long-term strategic vision into an almost daily scramble to shrink costs ahead of revenues caught still on a slippery slope.
As he addressed Wall Street investment researchers and analysts trying to grasp how PulteGroup's Q4 numbers came in at such wide variance to consensus expectations in a post-earnings announcement call on Friday morning, CEO Richard Dugas and his financial management brain trust defended the central motivator for Pulte's coupling with Centex--huge land assets for a price worth paying.
While other home builders use a combination of cash and nimbleness to turn opportunistic land grabs into more compelling price points in their new communities, PulteGroup has stuck to its guns as it tries to work through its own 147,000 or so lot pipeline without playing like the others.
A Wall Street Journal article Saturday blasted Pulte management for its performance, questioning the $1.3 billion Centex acquisition in 2009.
PulteGroup "reported a fourth-quarter loss of $165.4 million, or 44 cents a share, compared with a loss of $116.9 million, or 31 cents, a year earlier. Pulte has posted a profit in just one of six quarters since the acquisition. And in its third quarter, the company took a charge of nearly $655 million on goodwill from the Centex purchase."
Dugas told analysts: "Our decision to retain critical land positions will benefit us greatly in the future, but right now, embedded margins are lower than those associated with distressed land deals, builders have been purchasing over the past 12 to 15 months."
The problem is, stakeholders, especially among public home builder institutional investors, don't tend to display a whole lot of patience when it comes to waiting around for a long term return, especially when they're tired of loss fatigue, and they're seeing other home building operations begin to flirt consistently with black ink.
Dugas and Pulte's management won't guide investors> on several key metrics for 2011, including profitability, sales volumes, and home building revenues. But what they are saying is that they're going to execute better and less expensively over the next 11 months and that their industry-lagging gross margin performance will start to improve from the second quarter of this calendar year through yearend.
Said Dugas, "During the turmoil of the past several years, having a breakeven home building business would have been acceptable or even good. With the broader economy getting stronger and the industry showing small signs of recovery, breakeven isn't good enough. As a company, we have to do better and we implemented a number of changes to improve the key financial drivers of our business."
Carl Reichardt, managing director and senior equity research analyst at Wells Fargo Securities wrote in a post-call note to his investor clients, "This was a messy quarter for PHM with severance, restructuring, early retirement of debt, and impairment charges clouding results. Guidance is for lower 2011 gross margins (offset somewhat by lower SG&A) and lower community count, which we believe translates into a less attractive growth profile than for some peers."
Analysts, generally laud Pulte's ferocious and ongoing whack, particularly at general and administrative corporate costs. What they can't help but question is whether the core strategy of maintaining a miles-long land strategy will prove debilitating or ingenious.
Ticonderoga Securities' Stephen East questioned the strategy's soundness, voicing what would probably be a refrain common among investors who're antsy about the exposure to risk Pulte maintains, especially in an anemic housing economy turnaround. Investors want to see strides in gross margin improvement that have been showing up in some of the asset-lighter balance sheets of Pulte's peers.
Dugas can only say he agrees the company's gross margin performance is below par, and that his team is doing all they can, including his own personal hunt for improvement.
"We're not at all satisfied with our margin performance and frankly, as I've gotten closer to the operations after some of our structural changes over the last summer, my eyes are significantly more open to our gaps than they were quite candidly. And we're doing a lot about that internally. I think that's one of the reasons that x interest, we're forecasting margin growth in 2011 in clearly a continued challenged environment. You reference a large gap we have versus the competition. I don't know how much of that we can make up quickly, but I can tell we're not satisfied with where it is. I would not underestimate the degree of house cost improvement we can make because the more that I see internally, I think we've got some embedded costs that frankly need to come out. And we're working aggressively on those. Unfortunately, with roughly four to six months of homes in production at any one time, you can't recognize it one day and see it the next quarter."
Operationally, Dugas has done a 180-degree turn on the centralization precepts he preached only 18-months ago as the merger of Pulte and Centex got underway. After reeling in much of the local decision making from the divisions, Dugas now acknowledges that in light of a much lower than assumed volume levels, it's division leaders who are going to capture more costs, and also generate more revenue opportunity by availing of submarket pockets of opportunity.
In particular, Dugas noted that by boxing divisions in on base-house plans, Pulte took a hit on its competitive agility by charging people for what they didn't want to pay for. Options will be back full-on as the recovery goes on.
One bright-spot area, although it's too soon to tell whether it's sustainable is Pulte's Del Webb brand, which has reawakened after hibernation during the stock market swoon. Dugas said that, even before a formal marketing opening, Del Webb's newest community of Sweetgrass in Houston had written 50 contracts in the month of January, a very promising start to the 1,300-home community.
Dugas said, "We were also hearing favorable comments about improving traffic at other Del Webb communities, so we believe this buyer segment is starting to recover. This is a group that got very cautious late into 2008 when the stock market melted down. Given the stock markets' recovery over the past year, it would make sense that these buyers are getting a little more confident. Now we'll have to see if Sweetgrass and our other Del Webb communities can build on this momentum."