Pultegroup, Inc. · NYSE:PHM
Pultegroup — Investor Day (December 2014)
151 slides from Pultegroup's investor day presentation, Dec 9, 2014
Slide 1: PulteGroup Investor Day December 9, 2014
PulteGroup Investor Day December 9, 2014 Part 1
Slide 2: Forward-Looking Statements
Forward-Looking Statements This presentation includes “forward-looking statements.” These statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities, as well as those of the markets we serve or intend to s
Slide 3: Richard J. Dugas, Jr., Chairman, President & CEO
Richard J. Dugas, Jr. Chairman, President & CEO 2
Slide 4: Today's Agenda
Today’s Agenda • The History of PulteGroup’s Value Creation Strategy R. Dugas • Capital Discipline – Supporting Value Creation B. O’Shaughnessy • Building Capability – Next Steps R. Marshall / M. Wyatt • Mortgage Update D. Still • Field Operations: Aligned with Our Vision H. Smith • Financial Policy
Slide 5: 20 Years of Data Show Homebuilding is a Good Business
20 Years of Data Show Homebuilding is a Good Business 10,000 Value of $100 invested in Dec 1990 ($) Average Annual TSR 1990 – 2010 Industry 11% 1,000 S&P 500 9% 100 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Note: TSRs are December throug
Slide 6: Historically, PulteGroup Focused on Volume / Revenue Growth at the Expense of Key ROIC Drives
Historically, PulteGroup Focused on Volume / Revenue Growth at the Expense of Key ROIC Drives 1990 - 2010 PulteGroup Top Bottom PulteGroup Average Quartile Quartile Quartile Revenue Growth 10.2% 16.7% 0.6% 2nd EBIT Margins 1.7% 8.9% 2.8% 4th Asset Turns 0.90x 1.28x 0.88x 3rd ROCE 2.3% 9.0% 2.4% 4th
Slide 7: PulteGroup's Relative TSR Performance Lagged Peers Throughout the Cycle
PulteGroup's Relative TSR Performance Lagged Peers Throughout the Cycle 1990 - 1994 1994 - 1999 1999 - 2005 2005 - 2010 1990 - 2010 Avg. Avg. Avg. Avg. Avg. TSR Rank Peer Annual Peer Annual Peer Annual Peer Annual Peer Annual TSR % TSR % TSR % TSR % TSR % 1 Competitor 106 Competitor 54 Competitor 69
Slide 8: Summary Statistics – PHM vs. Top Peers
Summary Statistics – PHM vs. Top Peers Higher gross margin, lower leverage, asset turns, free cash flow correlated with TSR & Valuation 1999–2010 Top Middle Third PHM Overall size not an apparent value driver Peers grouped Revenue ($B) 2.2 2.5 1.3 5.1 • TSR leaders range from $1.6B to $8B by TSR Rev
Slide 9: Key Takeaways From Analysis of 20 Years of Data
Key Takeaways From Analysis of 20 Years of Data (Good Cycles & Bad) •The most relevant measure of "good" in homebuilding is ROIC 9 ROIC drives Total Shareholder Return (TSR) more than any other single metric • Keys to systematically driving higher ROIC 9 High gross margins on product (keeps numerato
Slide 10: Key Takeaways From Analysis of 20 Years of Data cont'd
Key Takeaways From Analysis of 20 Years of Data (Good Cycles & Bad) cont’d • Keys to systematically driving higher ROIC 9 High relative market share in each market • Better access to land • Better leverage with trade base • Better leverage of overheads • For PulteGroup, success required a re-tooling
Slide 11: Given the Data and Facts, Change Was the Only Real Option
Given the Data and Facts, Change Was the Only Real Option Einstein’s definition of insanity: doing the same thing over and over again and expecting different results. 10
Slide 12: Most Successful Turnarounds Start with Fixing the Core Business
Most Successful Turnarounds Start with Fixing the Core Business and Raising ROIC Before Increasing Investment Successful turnarounds: "C" curve profile of Unsuccessful turnarounds: Reinvest for growth improving profits then reinvesting for growth before successfully raising profitability ROIC ROIC 1
Slide 13: PulteGroup's Previous Business Model Relied on Outsized Land Plays
PulteGroup’s Previous Business Model Relied on Outsized Land Plays Needed to Feed Growth Focus High Big bets with Long-term big bets, near-term realization high volatility likely Risk appetite Status quo Consistent, through- in near-term cycle performance Low Short-term "sprint" Long-term "marathon"
Slide 14: Early 2011: Begin Focus on Delivering Consistent Returns
Early 2011: Begin Focus on Delivering Consistent, Above- Average Returns Over the Long-Term and Avoiding “Big Bets" High Big bets with Long-term big bets, With this position, we must: near-term realization high volatility likely • Recognize the industry is cyclical • Maintain or grow Risk competitiv
Slide 15: Operational Improvement
Operational Improvement • In late 2010, PulteGroup introduced Value Creation (VC) 9 Long-term shareholder value to be primary metric for measuring success • Goal of VC: deliver better ROIC in any housing environment and deliver top quartile TSR over time 9 Drive continuous improvement in margin, SG&
Slide 16: Distinct Changes to PulteGroup's Operating Model
Distinct Changes to PulteGroup’s Operating Model Pre 2011: “Opinion - Based” View 2011 Forward: “Fact - Based” View Primary objective Maximize profitability and growth Maximize total shareholder returns Company focus Homebuilding is our primary business, Land first, homebuilding second supported by
Slide 17: Which Drove Sharply Increased Profitability on Modest Volume Growth
Which Drove Sharply Increased Profitability on Modest Volume Growth Pretax Income (Loss) ($ millions) $600 $400 $528 $200 $184 $0 -$200 -$310 -$400 2011 2012 2013 3 Year 2011 2012 2013 Change Closings 15,275 16,505 17,766 16% Gross Margin 12.8% 15.8% 20.5% Up 60% SG&A % of 102.6% 71.6% 51.0% Cut 52%
Slide 18: By Dramatically Improving Gross Margin
By Dramatically Improving Gross Margin Gross Margin 28% LEN 26% 24% PHM 22% RYL 20% DHI 18% 16% TOL 14% NVR 12% KBH 10% 2011 2012 2013 2014 17
Slide 19: And Gaining Significant Overhead Leverage
And Gaining Significant Overhead Leverage SG&A as % of Gross Margin 180% KBH 160% TOL 140% RYL 120% DHI 100% PHM 80% LEN 60% NVR 40% 2011 2012 2013 2014* * 2014 excludes $84M insurance reserves charge 18
Slide 20: Which Have Driven Operating Margins Higher
Which Have Driven Operating Margins Higher Operating Margin 15% LEN 10% PHM NVR 5% RYL 0% DHI -5% TOL KBH -10% 2011 2012 2013 2014* * 2014 excludes $84M insurance reserves charge. Operating margin calculated as gross margin less SG&A 19
Slide 21: And Helped Increase Returns Above our Cost of Capital
And Helped Increase Returns Above our Cost of Capital 30% Return on Invested Capital NVR 25% PHM 20% RYL 15% LEN 10% DHI 5% TOL 0% KBH -5% 2011 2012 2013 2014 ROIC calculation: LTM EBIT divided by Average Debt and Equity (5 Quarter Average) 20
Slide 22: While Building a Strong Financial Base
While Building a Strong Financial Base Debt – to – Capitalization 90% KBH 80% RYL 70% LEN 60% TOL 50% DHI 40% NVR 30% PHM 20% 2011 2012 2013 2014 21
Slide 23: And Achieving Our Goal of Higher Shareholder Returns
And Achieving Our Goal of Higher Shareholder Returns Total Shareholder Returns 180% 160% PHM 140% LEN 120% 100% RYL 80% 60% DHI 40% 20% NVR 0% TOL -20% -40% KBH -60% 2010 2011 2012 2013 Sep-14 22
Slide 24: In Summary, Our New Approach is Delivering Results
In Summary, Our New Approach is Delivering Results Industry Rank Out of 7 Competitors Metric 2010 Sept 2014 (TTM) GM 6 2 SG&A % 7 3 Operating Margin 6 2 Debt-to-Cap 6 1 ROIC 7 2 Industry Peers: Pulte, DR Horton, KB Home, Lennar, NVR, Ryland and Toll Brothers 23
Slide 25: Today's Agenda
Today’s Agenda • The History of PulteGroup’s Value Creation Strategy R. Dugas • Capital Discipline – Supporting Value Creation B. O’Shaughnessy • Building Capability – Next Steps R. Marshall / M. Wyatt • Mortgage Update D. Still • Field Operations: Aligned with Our Vision H. Smith • Financial Policy
Slide 26: Bob O'Shaughnessy, EVP & CFO: Capital Discipline
Bob O’Shaughnessy Executive Vice President & Chief Financial Officer Capital Discipline – Supporting Value Creation 25
Slide 27: Attacking the Balance Sheet: Instilling Capital Focus and Discipline
Attacking the Balance Sheet: Instilling Capital Focus and Discipline • Keys to systematically driving higher ROIC based on 20 years of data: 9Efficient management of house and land inventory (keeps denominator small) • Enhance capital deployment (land capital focused on high return projects) • Move
Slide 28: Attacking the Balance Sheet: Instilling Capital Focus and Discipline – cont'd
Attacking the Balance Sheet: Instilling Capital Focus and Discipline – cont’d • Initial areas of focus 9 Evaluate current inventory position • Liquidate non-core land • Enhance land turns 9 Move away from spec-build model • Enhance house turns 9 Implement new processes for future investment • Better
Slide 29: Attacking the Balance Sheet: House & Land Inventory
Attacking the Balance Sheet: Instilling Capital Focus and Discipline • Restrict new land investment House & Land Inventory ($ millions) 9 Force focus on optimizing operating $5,000 performance 9 Divisions prioritize and aggressively $4,000 pursue the “best” deals • Reduce house investment and $3,000
Slide 30: Attacking the Balance Sheet: Lots Under Control
Attacking the Balance Sheet: Instilling Capital Focus and Discipline Lots Under Control 160,000 • Challenge existing land inventory Owned Optioned 9 Comprehensive assessment of every 140,000 lot position 120,000 • Keep the best positions; sell the assets we would never build or were many 100,000 yea
Slide 31: How We Invest in Land Today
How We Invest in Land Today CFO Signoff • In 2011, introduced risk-weighted criteria on new investment 9 Replaced flat 21% hurdle rate with formal 13-point risk / return weighting AMC on new projects All land Approval investments 9 Focus investment in markets where require PulteGroup has strong rela
Slide 32: How Do We Evaluate Land Transactions
How Do We Evaluate Land Transactions • Project Feasibility Report • Feasibility report completed 9 Comprehensive review and for every project analysis completed for every • Asset Management transaction 1. Project overview Committee reviews every 2. Financial Summary including risk transaction to val
Slide 33: What Are the Risks We Assess?
What Are the Risks We Assess? IRR 18% 18% 18% 18% 18% 19% 19% 20% 20% 21% 21% 22% 22% 23% 24% 25% 26% 27% 28% 29% 30% Threshold Score 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 • Four major categories to determine risk profile 1. Strategic Marketing 9 Location, marketability, sup
Slide 34: Leading to Improvements in Balance Sheet Metrics
Leading to Improvements in Balance Sheet Metrics… Land Inventory ($ millions) House Inventory ($ millions) $3,500 $1,400 $1,200 $3,000 $1,000 $2,500 $800 $2,000 $600 2010 2011 2012 2013 2010 2011 2012 2013 33
Slide 35: And Gains in Key Business Ratios
And Gains in Key Business Ratios… Spec Units Inventory Turns $4,000 6 Total Finished House Total $3,500 5 $3,000 4 $2,500 $2,000 3 $1,500 2 $1,000 1 $500 $0 0 2010 2011 2012 2013 2010 2011 2012 2013 Note: Inventory turns calculated as COGS over average house and land inventories 34
Slide 36: Significant Improvement in Capital Efficiency & ROIC
…Which Are Driving Significant Improvement in Capital Efficiency & ROIC Return on Invested Capital 16% 12% 14% 8% 8% 4% 0% -2% -4% 2011 2012 2013 3 Year 2011 2012 2013 Change Invested $5.3 billion $5.0 billion $5.4 billion 2% Capital ROIC -2.3% 8.1% 14.4% 1,670 bpts Closings 15,275 16,505 17,766 16%
Slide 37: And Improving Relative Performance
…And Improving Relative Performance Return on Invested Capital 30% NVR 25% PHM 20% RYL 15% LEN 10% DHI 5% TOL 0% KBH -5% 2011 2012 2013 2014 ROIC calculation: LTM EBIT divided by Average Debt and Equity (5 Quarter Average) 36
Slide 38: Improved Operating Performance Translated into Financial Strength and Flexibility
Improved Operating Performance Has Also Translated into Financial Strength and Flexibility Senior Notes Outstanding Debt-to-Total Capital ($ billions) (as of Q3 2014) $4.5 90% $4.0 80% $3.5 70% $3.0 60% $2.5 50% $2.0 40% $1.5 30% $1.0 20% $0.5 10% $0.0 0% 2009 2010 2011 2012 2013* KBH RYL LEN TOL DH
Slide 39: Capital Discipline
Capital Discipline • Implementation of Value Creation has fundamentally altered the Company’s direction and results 9 Driven greater discipline and efficiency into our operations 9 Elevated key performance metrics 9 Created financial strength and flexibility 9 Reduced risk within the business model
Slide 40: Today's Agenda
Today’s Agenda • The History of PulteGroup’s Value Creation Strategy R. Dugas • Capital Discipline – Supporting Value Creation B. O’Shaughnessy • Building Capability – Next Steps R. Marshall / M. Wyatt • Mortgage Update D. Still • Field Operations: Aligned with Our Vision H. Smith • Financial Policy
Slide 41: Ryan Marshall: Extending the Gains of Value Creation
Ryan Marshall Executive Vice President Homebuilding Operations Extending the Gains of Value Creation 40
Slide 42: Opportunities to Extend Value Creation Gains
Opportunities to Extend Value Creation Gains Homebuilding Operations Our business is straight forward: • Buy and develop land • Price, sell, and build homes • Design product • Service the home PulteGroup’s Value Creation Journey YESTERDAY TODAY FUTURE Below Average TSR Above Average TSR Superior TSR
Slide 43: Attacking the Income Statement by Building Processes, Technology and Capabilities
Attacking the Income Statement by Building Processes, Technology and Capabilities Initiatives have improved Home results, but opportunities Building remain to build an even Operations, Marketing higher performing, & Sales repeatable operating system 42
Slide 44: Attacking the Income Statement: Sales
Attacking the Income Statement: Sales • Strategic Pricing Tools Home • Digital Selling Tools Building Operations, • Centralized New Hire Marketing Training & Sales • Sales Recognition 43
Slide 45: Attacking the Income Statement: Sales – Strategic Pricing
Attacking the Income Statement: Sales Extending Strategic Pricing Opportunities • Shifted pricing approach 9 Great base house with an offering of Revenue Thru 2010 more options/upgrades Breakdown 9/30/2014 9 Greater choice to consumers and greater margin opportunity for Pulte Base House 93.5% 83.6%
Slide 46: Attacking Every Component of Margin
Attacking Every Component of Margin HIGH PERFORMING DIVISION LOW PERFORMING DIVISION 40% 31.2% 31.7% 31.0% 29.8% 30.6% 35% 6.1% 5.6% 6.5% 6.7% 5.6% 22.0% 30% 22.1% 22.0% 21.4% 19.8% 6.3% 7.0% 2.7% 2.7% 7.2% 7.2% 6.5% 3.4% 3.4% 25% 3.0% 5.7% 6.9% 23.5% 23.1% 5.7% 7.4% 20% 22.7% 22.9% 6.2% 21.9% 18.3%
Slide 47: Attacking the Income Statement: Better Option Selling Tools
Attacking the Income Statement: Sales Better Option Selling Tools • Tool allows consumers to efficiently select and price hundreds of options • Helps increase option sales while decreasing field construction issues • Arizona pilot confirmed additional revenue and margin opportunities 46
Slide 48: Using Data Analytics to Optimize Performance
Using Data Analytics to Optimize Performance Sales Consultant Coaching Tool (SC KPI) Consumer Experience Measures and Quantitative Business Results enable performance management. SALES LEADERBOARD YTD RESULTS THRU 9.30.2014 Sales Leaderboard Recognizes our most productive and well-rounded Sales Cons
Slide 49: Attacking the Income Statement: Marketing
Attacking the Income Statement: Marketing • Improved online presence Home Building • Voice of the Operations, Marketing Consumer Scorecard & Sales • Consumer Insight Process 48
Slide 50: Building a Better Internet Presence
Attacking the Income Statement: Marketing Building a Better Internet Presence • Over 43% of media budget allocated to Social Media Commentary online activities; up from 26% in 2010 Positive Negative • During the TTM, over 7 million visitors 100 to our brand websites 90 • Ongoing website enhancements
Slide 51: Voice of the Consumer Scorecard
Voice of the Consumer Scorecard TODAY TOMORROW Current Measures Additional Measures Voice of Consumer Scorecard • Will be the repository for Product Development New Consumer Validation Experience Survey all consumer feedback (replaces CSMS) Sales Experience • Will provide actionable Surveys Enhanced
Slide 52: Mike Wyatt: Capturing Construction Efficiencies
Mike Wyatt Senior Vice President National Homebuilding Operations Capturing Construction Efficiencies 51
Slide 53: Attacking the Income Statement: Home Building
Attacking the Income Statement: Home Building • Purchasing Zones • Common Plan Management Home Building • Value Engineering Operations, Marketing • Should Costing & Sales • Build Quality • Process Standards 52
Slide 54: Key Takeaways from the 2010 Work
Key Takeaways from the 2010 Work We had more than 3,000 Were not leveraging our purchasing scale advantage • Divisions operated floor plans with an average throughput independently of under 4 Industry leader had Consumer research is plan catalog of critical as it allows approximately 250 PulteGroup
Slide 55: What is Common Plan Management?
What is Common Plan Management? Supports Value Creation efforts 9 Focuses on how we design in the Homebuilding Operation and purchase our homes Product and Purchasing Zones 9 Incorporates manufacturing create a “virtual plant” thought process in the organization 9 Enables leverage of national plan D
Slide 56: Driving Plan Throughput
Attacking the Income Statement: Home Building Driving Plan Throughput What the 2010 Data Analysis Revealed 2010 Gross margin contribution (% of total gross margin) 100 80 1,084 plans = 60 80% of margin (63% of closings) 519 plans = 40 60% of margin (41% of closings) 20 0 0 500 1,000 1,500 2,000 2,50
Slide 57: Established Product and Purchasing Zones
Attacking the Income Statement: Home Building Established Product and Purchasing Zones Zone manages product development and design freeing Division managers to focus on land acquisition and operations Zones organized around Sequenced rollout of Optimized floor plans how people live and zones: Texas
Slide 58: What Should Construction Activities Cost?
Attacking the Income Statement: What Should Construction Activities Cost? Actual Floor Plan Example (Texas) Texas Texas Texas Texas Market 1 Market 2 Market 3 Market 4 Lumber, Components Labor $10,375 $9,975 $9,250 $7,530 and Framing Material $22,160 $18,250 $21,450 $22,775 Labor $3,990 $4,480 $3,97
Slide 59: Attacking the Income Statement: Product Development
Attacking the Income Statement: Product Development Home • Consumer Validated Building Operations, Designs Marketing & Sales • Life Tested Features 58
Slide 60: Enhancing Capabilities: Product Development
Enhancing Capabilities: Product Development 1 2 3 4 Define Ideation Pattern Gather Inputs Opportunity Workshop Book 5 6 7 8 Design Consumer Design Prototype Charrette Validation Development 9 10 11 12 Consumer Rollout First Build Pilot Validation and Manage • Over 290 plans have been launched throug
Slide 61: Getting Consumer Input and Validation Upfront
Attacking the Income Statement: Product Development Getting Consumer Input and Validation Upfront 60
Slide 62: Attacking the Income Statement: Product Development
Attacking the Income Statement: Product Development • Accelerating the speed of process • Establishing two prototype locations 9 East Coast and West Coast 9 Prototype phase completed in advance of need 9 Removes 3-4 months from the process • Plan portfolio refresh as our common plan portfolio grows
Slide 63: Pulte Life Tested Features Add Value
His & Hers Spaces Oversized Pantry Pulte Life Tested® Features Add Value 62 Super Laundry
Slide 64: Del Webb Inspired Designs Offer Added Convenience
Curved Countertops Lowered Microwaves Del Webb Inspired Designs Offer Added Convenience 63 Raised Dishwashers
Slide 65: Exterior Elevation: Providing Choice and Curb Appeal
Exterior Elevation: Providing Choice and Curb Appeal Good Better Best • Multiple styles provide great neighborhood curb appeal • Multiple price point offerings • Priced to market demand 64
Slide 66: Exterior Elevation: Value in Curb Appeal
Exterior Elevation: before Value in Curb Appeal after 65
Slide 67: Exterior Elevation: Value in Curb Appeal
Exterior Elevation: Value in Curb Appeal • Improved curb appeal of elevation through design process • Full review of all costs • Small increase in cost enables ability to sell for higher price and $988 more margin 66
Slide 68: Reducing the Number of Plans in the System
Reducing the Number of Plans in the System and Building a Greater % of More Profitable, Commonly Managed Plans PLAN COUNT % OF CLOSING CMP 4,000 70% 3,500 60% 3,000 50% 2,500 40% 2,000 30% 1,500 20% 1,000 500 10% 0 0% 2010 2011 2012 2013 2014 2015 2016 Target 2017 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14
Slide 69: Common Plans Offer Multiple Benefits
Attacking the Income Statement: Common Plans Offer Multiple Benefits Sales pace common vs. non-common plans (Results from single community over 5 months) 8.3 • Commonly managed plans typically sell better than older product • Margins in this particular community 400 bps higher 4.1 9 Efficient design
Slide 70: Built to Honor
Built to Honor Bruttecroup
Slide 71: Today's Agenda
Today’s Agenda • The History of PulteGroup’s Value Creation Strategy R. Dugas • Capital Discipline – Supporting Value Creation B. O’Shaughnessy • Building Capability – Next Steps R. Marshall / M. Wyatt • Mortgage Update D. Still • Field Operations: Aligned with Our Vision H. Smith • Financial Policy
Slide 72: Debra Still: The Mortgage Landscape
Debra Still President and CEO Pulte Financial Services The Mortgage Landscape 71
Slide 73: The Mortgage Landscape
The Mortgage Landscape • Getting Housing Back on Track • Regulatory Complexity • Government’s Role in Housing • Tight Credit • The Cost of Credit • Key Business Drivers 9 Volume/Productivity/Profitability/Ability to Compete • Why Won’t Lenders Lend? 72 72
Slide 74: Washington's View of Real Estate Finance
Washington’s View of Real Estate Finance Access to credit for qualified borrowers A vibrant and competitive marketplace The housing recovery 73 73
Slide 75: Getting Housing Back on Track
Getting Housing Back on Track The Fundamentals Recovering Economy Employment Historic Low Rates Rent vs. Buy Desire to Own The Big Questions The Disincentives Access to Credit? Litigation Avoiding Bubbles? Fees and Penalties Private Capital? Put Backs Future Role of Headline Risk GSEs? Regulatory Co
Slide 76: New Dodd/Frank and Other Rules
New Dodd/Frank and Other Rules Rule Release Date Implementation Ability to Repay/QM Final Rule January 10, 2013 January 10, 2014 HOEPA High-Cost Mortgage Rule (Reg Z) January 10, 2013 January 10, 2014 LO Compensation & Qualifications Rule (Reg Z) January 20, 2013 January 10, 2014 National Servicing
Slide 77: A Big Industry Change
RESPA/TILA A Integrated Big Industry Change Mortgage Disclosures 1888 Pages of New Regulation • New definition of loan application • “Intent to Proceed” signed before processing • Changes to over 1000 forms • 500 new calculations/data elements • Lender now responsible for settlement statement • 3/6
Slide 78: A Backdrop of Complexity
A Backdrop of Complexity Origination Servicing LO Comp Appraisals Servicing Standards CFPB HMDA ATR/QM HUD/FHEO Disparate RESPA/TILA Impact Escrow Fair Lending QC HPML Policy SAFE MIP Policy Risk Retention The Fed Indemnification QRM Basel HUD/FHA LLPAs Loan Limits Minimum Servicing Fees Volcker G F
Slide 79: Supervision By a New Regulator
Supervision By a New Regulator 2014 Educate Enforce Study • 8.3% budget increase • 1,624 FTEs • 46% for supervision/enforcement/fair lending • Consumer response operations up 85% • Enforcement and fair lending up 66% 78 78
Slide 80: The Government's Role in Housing
The Government’s Role in Housing VA USDA 8.0% 4.2% FHA 20.7% Conv/Conf Fan/Fred 62.9% Jumbo Purchase/2013 4.3% HMDA Data Source: FFIEC, MBA – Residential Retail/Broker, Home Purchase, First Lien 79 79
Slide 81: Credit Is Tight
Credit Is Tight Source: Core Logic, Prime Servicing, Urban Institute 80 80
Slide 82: A Ways To Go Before Normal
A Ways To Go Before “Normal” Expanded Historical Series: Mortgage Credit Availability Index March 2012 100.0 October 2014 113.2 Source: MBA, Powered by AllRegs *Market Clarity* 81 81
Slide 83: Credit Is Tight: Weakness at Entry Level
Credit Is Tight: Weakness at Entry Level Source: MBA, NAR 82 82
Slide 84: Credit Is Tight: Weakness at Entry Level
Credit Is Tight: Weakness at Entry Level Source: MBA Monthly Profile of Mortgage Activity 83 83
Slide 85: The Cost of Credit
The Cost of Credit GFees Have Risen 30 Basis Points in Three Years Source: JP Morgan, Freddie Mac (1)MI coverage protects against loss, but higher LTV loans would be expected to have a higher incidence of default 84 84
Slide 86: The Cost of Credit
The Cost of Credit +0.25% 75-80% +1.00% 700-719 640-659 +3.00% Source: Fannie Mae LLPA Matrix 85 85
Slide 87: Estimated Mortgage Originations: 1990-2016
Volume Estimated Mortgage Originations: 1990-2016 $4,500 $4,000 $1.8T to $1.12T to $1.18T Refi Purchase $3,500 $3,000 Billions of dollars $2,500 -39% +6% $2,000 $1,500 $1,000 $500 $0 Source: November 2014 Forecast 86 86
Slide 88: Productivity
Productivity Non-Sales as percent of Total Production Employees 58% 44% Source: MBA’s Quarterly Mortgage Bankers Performance Report 87 878 7
Slide 89: Productivity
Productivity Applications Per Underwriter Per Month Source: MBA’s Quarterly Mortgage Bankers Performance Report 88 88 8 8
Slide 90: Production Expense
Production Expense $6932 $5837 Source: MBA’s Quarterly Mortgage Bankers Performance Report 89 89 8 9
Slide 91: Profitability
Profitability Margins Compressing Origination Volume ($M) 120 bps 46 bps 90 Source: MBA’s Quarterly Mortgage Bankers Performance Report 90 909 0
Slide 92: Competition Exiting / Barriers to Entry
Competition Exiting / Barriers to Entry Lenders A Net Exit From the Business 9,000 7,109 Source: 2013 Number of Institutions Reporting HMDA Data 91 91
Slide 93: Competition Exiting / Barriers to Entry
Competition Exiting / Barriers to Entry Who’s Reporting… 2008 (n=8,388) 2013 (n=7,109) Credit Unions Credit Unions Credit Union Credit24% Union 28% 28% 24% Independents Independents Banks BanksBanks Banks 12% 12% Independents 60% 60% 64% 64% 12% Independents 12% Source: HMDA, MBA 92 92
Slide 94: Market Share is Changing
Market Share is Changing Home Purchase Dollar Volume 2008 2013 Credit Unions Credit Unions Credit Credit4% Union 4% Union 4% 4% Independents Independents 25% 25% Independents Independents 40% 40% BanksBanks 56% 56% Banks Banks 71% 71% Source: HMDA, MBA 93 93
Slide 95: Why Won't Lenders Lend?
Why Won’t Lenders Lend? “The most painful business ever" ~Jamie Dimon, Chairman/CEO, JPMorgan Chase, April 2014 94 94
Slide 96: Managing Mortgage Risk
Managing Mortgage Risk Protecting the Franchise Credit Market Liquidity Operational/Transaction Legal/Compliance/Regulatory Strategic Reputational 95 95
Slide 97: CFPB/Other Rules Impact On Underwriting
CFPB/Other Rules Impact On Underwriting Impact to Credit • Ability to Repay – QM Modest • HOEPA High-Cost Mortgage Rule None • Loan Officer Compensation Rule None • National Servicing Standards Modest • ECOA Appraisal Disclosure Rule None • Appraisals for High-Priced Mortgage Rule None • HUD Dispara
Slide 98: If Not Regulation…Why is Credit Still Tight?
If Not Regulation…Why is Credit Still Tight? Operational Risk – Loan Manufacturing/Risk Transfer • “Guidelines” have become “rules” • Documentation is extraordinary • Lack of clarity of reps and warrants • GSE “Zero Defect” QA programs • FHA new QA/QC initiative Financial Risk • Repurchases • Indemn
Slide 99: Getting Housing Back on Track
Getting Housing Back on Track • Reps and Warrants/Risk Transfer 1 9 LOL exclusions, alternative remedies, IDR 9 FHA Defect Taxonomy 9 GSE/FHA: Reasonable foreclosure timelines/penalties 9 FHA certification process • Enforcement 2 9 Calibrate penalties to the infractions • Pricing and Affordability 3
Slide 100: Today's Agenda
Today’s Agenda • The History of PulteGroup’s Value Creation Strategy R. Dugas • Capital Discipline – Supporting Value Creation B. O’Shaughnessy • Building Capability – Next Steps R. Marshall / M. Wyatt • Mortgage Update D. Still • Field Operations: Aligned with Our Vision H. Smith • Financial Policy
Slide 101: Harmon Smith: Field Ops – Aligned with the Vision
Harmon Smith Executive Vice President Field Operations Field Ops – Aligned with the Vision 100
Slide 102: Overview of Field Operations
Overview of Field Operations • Experienced leadership team • Implementing corporate initiatives at a field level • Assessing the Valuation Creation opportunities that remain • Further leveraging the power of PulteGroup’s unique multi-brand approach to consumers 101
Slide 103: Experienced Operating Team
Experienced Operating Team John Chadwick West Area (23 Years) Tony Barbee Midwest Area (16 Years) Harmon Smith Peter Keane Executive Vice President Southeast Area (25 Years) (21 Years) Steve Teodecki Texas Area (12 Years) Steve Schlageter East Area (12 Years) 102
Slide 104: Experienced Operating Team
Experienced Operating Team • Profile of Area President: • Focus areas 9 Strong business and financial 9 Market strategies acumen with extensive operational 9 Land investment experience 9 Organizational development 9 Has held multiple roles within the • Ongoing implementation of Value organization Cr
Slide 105: Achieve 70% Common Plan Target Within 24 Months
Achieve 70% Common Plan Target Within 24 Months Commonly Managed Plans as a Percentage of Closings (9 months through Sept 2014) 100% 90% 80% 70% 60% 50% PHM Avg 40% 30% 20% 10% 0% 104
Slide 106: Common Plans and Other Tactics Can Further Accelerate House Turns
Common Plans and Other Tactics Can Further Accelerate House Turns House Turns 8 7 6 PHM Avg 5 4 3 2 1 0 Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div 105
Slide 107: Better Balancing Land Turns with Land Investment
Better Balancing Land Turns with Land Investment Land Turns 0.90 0.80 0.70 0.60 0.50 PHM Avg 0.40 0.30 0.20 0.10 0.00 Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div 106
Slide 108: Expanded Data Analysis Can Help Raise Option Profits
Expanded Data Analysis Can Help Raise Option Profits Option Margin 60% 50% PHM Avg 40% 30% 20% 10% 0% Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div 107
Slide 109: Divisions Still Scratching the Surface on Lot Premiums
Divisions Are Still Just Scratching the Surface on Lot Premiums Lot Premiums 6% 5% 4% PHM Avg 3% 2% 1% 0% Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div Div 108
Slide 110: Opportunities to Drive Further Gains
Opportunities to Drive Further Gains •Significant gains realized • Disciplined land investment across operations: 9 Locate new investments within 9 Gross margins raised to among targeted submarkets which can the industry leaders generate appropriate returns 9 Implemented Common Plan 9 Manage through
Slide 111: Leveraging Our Unique Brand Opportunities
Leveraging Our Unique Brand Opportunities 110
Slide 112: Current Composition of Our Business
Current Composition of Our Business 25% 44% 31% Sept YTD 2014 Closings 111
Slide 113: Shift in Business Consistent with Demand Environment
Shift in Business Consistent with Demand Environment Community Count by Brand • Initial phase of the housing 1,000 Centex Pulte Homes Del Webb recovery built on move-up demand 900 9 Buyer had the life stage need and financial capacity 800 152 9 Higher margins drive superior relative returns even at
Slide 114: Rebound in Entry Level Demand is Expected
Rebound in Entry Level Demand is Expected • First-time buyers below 30% of Population Age 25 – 34 (millions) 40 total housing demand; normal range is 40% to 45% 39 • Home ownership increases with 38 age*: 9 Age 25 to 29 – 36.8% 37 9 Age 30 to 34 – 51.6% 36 • Expectations about this buyer: 35 9They a
Slide 115: Business Strategy
Business Strategy • Long-term opportunity, but near-term headwinds: 9Lack of jobs/higher wage jobs 9Increased student loan debt 9Constrained mortgage availability • Sustained buyer demand focused on closer-in communities • Centex ASP of $204,000 targets the higher end of the category • Absorption pa
Slide 116: Business Strategy
Business Strategy • Investing in projects that can generate acceptable returns 9 Approximately $150 million of 2014 land spend expected to be in Centex branded communities 9 Focus on closer-in communities; not betting on outlying, albeit lower cost, land positions • Areas of investment focus: Texas,
Slide 117: Sustained Strength of the Move-Up Buyer
Sustained Strength of the Move-Up Buyer • Buyer group has driven the first leg % of Total Land Spend Allocated to Pulte Branded Communities of the housing recovery and currently 90% accounts for majority of housing 80% demand 70% 9 Higher likelihood of children and need for more space 60% 9 Financia
Slide 118: Business Strategy
Business Strategy • Experienced multiyear strength as buyer group has realized better wage growth and credit availability • Over past 3 years majority of land investment allocated to Pulte Homes 9 Prior period investment will result in ongoing mix shift toward the move-up buyer in future quarters •
Slide 119: Continued Growth of the Active Adult Market
Continued Growth of the Active Adult Market U.S. Population Age 55 to 74 (in millions) • 76 million baby boomers; 50% 80,000 between the ages of 50 to 58 78,000 • Considered the wealthiest 76,000 generation in the country 74,000 9 Financially the most capable home buyers with 43% of Del Webb 72,000
Slide 120: Business Strategy
Carolina Arbors in North Carolina Business Strategy • Legacy investment in large, highly amenitized Del Webb communities 9 Continue to work down investment and redeploy capital to other opportunities 9 Owned Webb lots total 35,000, down from 47,000 as of 12/31/11 • Company’s highest gross margins, s
Slide 121: Newest Del Webb Project
Newest Del Webb Project • Del Webb Mirehaven in Albuquerque 9 Located just 6 miles from downtown with direct access to adjacent national park • Large central amenity but hiking and other outdoor activities replace need for golf courses 9 550 Webb homes with outstanding amenity package • An adjoining
Slide 122: Expanding Penetration of Active Adult Market
Expanding Penetration of Active Adult Market Interest in Age Restricted Lifestyle Communities • Assessing opportunities to extend our penetration of active adult New market Opportunity 9 Potential to offer smaller, non-age restricted communities 33% 37% 9 Focus on product with “lite” or no amenity p
Slide 123: PulteGroup Investor Day December 9, 2014
PulteGroup Investor Day December 9, 2014 Part 2 122
Slide 124: Today's Agenda
Today’s Agenda • The History of PulteGroup’s Value Creation Strategy R. Dugas • Capital Discipline – Supporting Value Creation B. O’Shaughnessy • Building Capability – Next Steps R. Marshall / M. Wyatt • Mortgage Update D. Still • Field Operations: Aligned with Our Vision H. Smith • Financial Policy
Slide 125: Bob O'Shaughnessy: Capital Allocation Policies to Match Operating Philosophy
Bob O’Shaughnessy Executive Vice President & Chief Financial Officer Capital Allocation Policies to Match Operating Philosophy 124
Slide 126: Recall this slide – Successful Turnarounds Start with Fixing the Core
Recall this slide – Successful Turnarounds Start with Fixing the Core and Earning Your Cost of Capital Successful turnarounds: "C" curve profile of Unsuccessful turnarounds: Reinvest for improving profits then reinvesting for growth growth before successfully raising profitability ROIC ROIC 15 Year
Slide 127: We have delivered operational improvement
We have delivered operational improvement Meaningfully enhancing ROIC and substantially outperforming on TSR PHM improved capital returns ... driving substantial total relative to peers... shareholder return outperformance ROIC % (LTM)1 2010-14 TSR (indexed to 1)2 20 2.5 Implementation PHM Implement
Slide 128: Recall: Deliver Consistent, Above-Average Returns Over the Long-term
And Recall This Slide: We Will Operate to Deliver Consistent, Above- Average Returns Over the Long-term and Avoiding “Big Bets" High Big bets with Long-term big bets, near-term realization high volatility likely With this position, we must: • Recognize the industry is cyclical Risk • Maintain or gro
Slide 129: Long-Term Housing Market Mechanics Look Like This
Long-Term Housing Market Mechanics Look Like This… 0.15 (70%) ~2-2.1 M jobs/yr supports Multi Family ~350K/yr population growth 0.07 (30%) Single Family 0. 22 (35%) ~150K/yr Renters ~0.5M/yr 0.12 (29%) 1 0.63 Owner Built Job Households ~300K/yr 1.2M–1.3M HH/yr 0.29 (71%) 0. 41 (65%) Owners Built for
Slide 130: Varied Expectations on the Rate of Recovery for Housing
However, There are Varied Expectations on the Rate of Recovery for Housing Single Family New Home Sales (000s) Expectation Range New Home Sales Analyst 1 Analyst 2 Analyst 3 "Normal" Analyst 4 800 "Normal” ~650K 600 400 200 2009 2010 2011 2012 2013 2014 2015 2016 2017 129
Slide 131: In Light of These Expectations, What's Next?
In Light of These Expectations, What’s Next? • We will more directly match our capital allocation priorities to our operating philosophy • As we’ve indicated, our first priority is to invest responsibly in the business, after which we will seek to distribute excess cash to shareholders on a routine
Slide 132: Targeted Leverage is a Determining Element
Targeted Leverage is a Determining Element • Our leverage is a critical component of returns and TSR • Our target leverage will be between 30% - 40% 9 Supportive of returns and TSR without outsized risk Optimal Range Above ~40%: heightened 20 risk more than offsets the benefit of higher return on ov
Slide 133: Priority #1: Invest in Core Business to Maintain or Grow Relative Market Share
Priority #1: Invest in Core Business to Maintain or Grow Relative Market Share Amount will fluctuate with market Reinvest a percentage of net income assuming • Through cycle average investment should target long-term long-term market growth (population growth plus housing inflation) growth • Going i
Slide 134: But…We Will be Disciplined
But…We Will be Disciplined History is our guide • Recall: “Big Bet” land investment and aggressive revenue growth don’t necessarily translate into high returns or TSR 9 Builders have not been great market timers and have been too optimistic with investments 9 Pulte wrote off over 30% of 2004 land in
Slide 135: Priority #1: Invest to Maintain or Grow Relative Share
Priority #1: Invest to Maintain or Grow Relative Share Land Acquisition and Development Spend ($ millions) $2,500 * 2015 authorized spend is $2.4 billion $2,000 2014 authorization was $2.0 billion, expect spend of $1.7 to $1.8 billion $1,500 ROIC moved above cost of capital in 2013 $1,000 $500 $0 20
Slide 136: Operational Improvement Can Have a Larger Impact on TSR Than Revenue Growth
Because Operational Improvement (Increasing Turns & Margins) Can Have a Larger Impact on TSR Than Revenue Growth $600 15% Pretax Income ROIC 12% PRETAX INCOME $400 9% ($ millions) $200 6% ROIC $0 3% 0% -$200 -3% -$400 -6% 3 Year 2011 2012 2013 Change Closings 15,275 16,505 17,766 16% Gross Margin 12
Slide 137: Priority #2: Our Dividend Policy
Priority #2: Our Dividend Policy • The Company has historically paid a modest dividend • Research indicates companies paying a larger dividend realize higher P/E multiples as long as the dividend is deemed sustainable • We ultimately target a dividend equivalent to ~2.0% to 3.0% yield 9 Endeavor to
Slide 138: Priority #3: Opportunistic M&A
Priority #3: Opportunistic M&A • We have excellent visibility to assets in market • Continue to evaluate available opportunities as land transactions – we will not chase growth for growth’s sake • Interested in transactions that: 9 Provide depth/fill a production gap in markets where we operate toda
Slide 139: Priority #4: Return Excess Capital via Share Buybacks
Priority #4: Return Excess Capital to Shareholders Routinely via Share Buybacks Share Repurchase ($ millions) • Continually evaluate capital needs of the $90 business, including: investment in the business; $80 $70 dividends; and acquisition opportunities $60 9Consider macro market conditions, proje
Slide 140: Demonstrated Commitment to Returning Funds to Shareholders
Demonstrated Commitment to Returning Funds to Shareholders in Support of Higher TSR Quarterly Dividend & Stock Repurchase Activities ($ millions) $120 Repurchases Dividends $100 $80 $60 $40 $20 $0 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14* *Q4 2014 share repurchase activity through November 139
Slide 141: In Summary: How We Plan to Manage Capital in the Future
In Summary: How We Plan to Manage Capital in the Future… Balance sheet targets Debt / Cap Target a balance sheet with 30% - 40% debt-to-cap Liquidity for working Maintain sufficient liquidity, including availability under credit facilities, to capital and potential meet working capital needs based o
Slide 142: What Will our Cash Distribution Look like with these Priorities?
What Will our Cash Distribution Look like with these Priorities? Cash flow sources % of total Cash flow from operations ~70% Maintain debt-to-cap ~30% Total 100% Land reinvestment to Selected growth maintain competitive Dividend Buybacks investments position (20-30%) (0-30%) (0-30%) (40-50%) • Organ
Slide 143: Today's Agenda
Today’s Agenda • The History of PulteGroup’s Value Creation Strategy R. Dugas • Capital Discipline – Supporting Value Creation B. O’Shaughnessy • Building Capability – Next Steps R. Marshall / M. Wyatt • Mortgage Update D. Still • Field Operations: Aligned with Our Vision H. Smith • Financial Policy
Slide 144: Were We Going to Repeat Past Actions or Look For Better Answers?
Given the Data and Facts, Were We Going to Repeat Past Actions or Look For Better Answers? Einstein’s definition of insanity: doing the same thing over and over again and expecting different results. 143
Slide 145: We Needed to Get Returns Up Before Reinvesting – and We Have
We Needed to Get Returns Up Before Reinvesting – and We Have Successful turnarounds: "C" curve profile of Unsuccessful turnarounds: Reinvest for improving profits then reinvesting for growth growth before successfully raising profitability ROIC ROIC 15 Year 4 15 Year 3 Year 5 10 Cost of capital 10 C
Slide 146: Running PulteGroup for the Long Term
Running PulteGroup for the Long Term High Big bets with Long-term big bets, near-term realization high volatility likely With this position, we must: • Recognize the industry is cyclical Risk • Maintain or grow appetite competitive position • Focus on consistent, above-average through- Status quo Co
Slide 147: Our Strategy is Working
Our Strategy is Working Return on Invested Capital 30% NVR 25% PHM 20% RYL 15% LEN 10% DHI 5% TOL 0% KBH -5% 2011 2012 2013 2014 ROIC calculation: LTM EBIT divided by Average Debt and Equity (5 Quarter Average) 146
Slide 148: Now is the Right Time to Match Financial Policy to Operating Policies
Now is the Right Time to More Directly Match Our Financial Policy to Our Operating Policies of The Past Few Years Operating Policies Financial Policies • Focus on ROIC • Capital allocation priorities • Improve fundamental business 1) Invest in our core homebuilding business results to maintain or gr
Slide 149: Financial Goals & Objectives
Financial Goals & Objectives • ROIC remains the critical metric, supported by: 9 Gross margins at or near the top of the industry 9 SG&A leverage at or near the top of the industry 9 Inventory turns improving to eventually reach top quartile in several years • Ongoing reduction of existing long-live
Slide 150: Going Forward: What Can You Expect?
Going Forward: What Can You Expect? • Value Creation – opportunities remain to realize additional benefits • Capital Allocation – disciplined and focused • Consumer Focus – it is about costs and revenues • Long-Term View – running the business for success over the entire cycle 149
Slide 151: Thank You For Your Time
THANK YOU FOR YOUR TIME Peuttecroup 150