PULTEGROUP, INC. NAPLES, Fla., April 20, 2016 /PRNewswire/ --
Dear Fellow PulteGroup Shareholders:
As the largest shareholder and founder of PulteGroup Inc. (NYSE:PHM) ("PulteGroup" or the "Company"), I have grave concerns with PulteGroup's massive shareholder value destruction and inability to reverse the Company's chronic underperformance relative to peers and the broader market. CEO Richard Dugas has lost credibility with shareholders, and the Board of Directors of PulteGroup (the "Board") must replace him NOW. Even without adjusting for inflation, PulteGroup's revenue over the last 12 years has decreased from approximately $11.7 billion in 2004 to $5.98 billion in 2015 and PulteGroup lost over $530 million cumulatively in this period.
It is incumbent upon this Board, consistent with its responsibility to shareholders, to act immediately to put a world-class experienced CEO at the helm of OUR Company. Shareholders can no longer entrust the future of PulteGroup to the failed status quo. We cannot wait for another year to go by before effective, proven leader is in place. Despite my efforts, the Board has not accepted my attempt to professionally and privately resolve this significant issue in the best interests of all shareholders.
It is my strong conviction that Richard Dugas and Jim Postl must resign immediately from all their positions with the Company. Richard Dugas and Jim Postl worked together on the failed Centex deal where our shareholders lost over $1.46 billion. Messrs. Dugas and Postl have lost credibility with shareholders and cannot continue to serve in their positions as Chairman/CEO and Lead Director, respectively. They must be immediately replaced by direct shareholder representatives on the Board. To the extent Messrs. Dugas and Postl refuse to immediately resign from the Board and are not replaced by shareholder representatives, I will be voting AGAINST the entire Board at this year's upcoming annual meeting of shareholders.
My main concerns include, but are not limited to, the following:
1. Lackluster Total Shareholder Return & Value Destruction: PulteGroup's
Total Shareholder Return (TSR) has materially underperformed the S&P 500,
S&P 500 Homebuilder Index, and Global Industry Classification Standard's
(GICS) 2520 over the past three years. Under Richard Dugas' leadership
over the last 12 full years, the Company has lost $530 million
cumulatively on a pretax earnings basis. Since 2009 under his
leadership, PulteGroup has lost more than an astonishing $1.3 billion
cumulatively. And since 2011, the Company continues to significantly
underperform its peers - Lennar, D.R. Horton and NVR - in profitability,
annual housing deliveries, and revenue growth.
2. Poor Operating Results & Failed Acquisition Integration: While
PulteGroup's number of home closings have decreased in the last 2 years,
the Company has added a whopping 699 employees from 2013 to 2015. The
Company continues to overpay for land when it already has a large land
position of over 90,000 owned lots. Most recently, the Company paid a
significant premium to acquire John Weiland, a luxury brand, which cost
shareholders approximately $430 million to $450 million or 9% of
shareholders' equity. Instead of making risky land bets at this time in
the cycle, PulteGroup should be focused on greater organic delivery of
homes on existing land owned, not on further increasing the Company's
exposure to land. It is particularly concerning that current acquisition
integration efforts are led by CEO Richard Dugas who oversaw the failed
$1.5 billion Centex integration.
3. Continued Loss of Valuable Talent: In addition to the recent departures
of PulteGroup Division President for Dominion Homes, Keith Tomlinson (who
left to join NVR) and Division President, Curt VanHyfte (joined MI
Homes), the Company has lost more than 20 valuable employees under CEO
Richard Dugas. This massive outflow of top talent from PulteGroup to its
competitors is seriously undermining the Company's competitive position
and prospects for the future.
4. Poor Board Oversight & Corporate Governance Concerns: PulteGroup's
independent directors have no experience in single family homebuilding
and therefore lack the experience, expertise and capability to provide
strategic guidance to management on how to address the Company's chronic
underperformance. Despite deep and chronic losses over the years, the
Board has failed to hold management accountable. Only after significant
pressure from its largest shareholder did CEO Dugas finally agree to step
down and even then he is refusing to do so until May 2017, more than a
year away, which I believe will be a further deterrent to morale as the
Company is being led by a "lame duck" CEO. I wonder why the Board waited
for shareholders to force its hand rather than prioritize our best
interests over management and reverse the mounting losses by replacing
management right away. It is also troubling that the Board does not
appear to have a viable CEO succession plan in place or is otherwise
using it as an excuse to allow CEO Dugas to linger for another year at
the helm despite his horrible track record and loss of credibility with
shareholders.
SETTING THE RECORD STRAIGHT
To date, rather than provide viable solutions, Richard Dugas, Jim Postl and the other members of the Board have instead chosen to try to defend their poor track record by omitting key facts and making misleading statements:
-- Current leadership claims that PulteGroup's pretax earnings were $2.2
billion since 2011. In fact, the Company only made $1.9 billion over the
last 5-year period. The Company either conveniently excluded the $310
million loss incurred in 2011, or failed to apply the proper arithmetic.
Further, current leadership claims they lowered the Company's debt to
capital ratio from 60% to 30%, but they fail to note that the Company
had a massive $2.1 billion tax asset reversal in 2013 which dramatically
altered this calculation.
-- From 2011 to 2015, Lennar and D.R. Horton had pretax profits of
approximately $3.2 billion and $2.9 billion, respectively, while
PulteGroup lagged with only $1.9 billion of pretax profit.
-- The Company issued a press release boasting that Institutional
Shareholder Services ("ISS") supports its director nominees. However, it
is easy to receive support when you are running unopposed. The Board
omitted the fact that ISS gave the Company a Corporate Governance Risk
QuickScore of 9 on a scale of 1 to 10 where 1 indicates lower governance
risk and 10 indicates higher governance risk. ISS specifically
highlighted high concerns with the lack of shareholder rights at the
Company.
LACKLUSTER TOTAL SHAREHOLDER RETURNS & VALUE DESTRUCTION
Under the leadership of CEO Richard Dugas, our Company lost its leading market position and sustained massive losses of shareholder value.
PulteGroup has sustained more than $1.3 billion in cumulative pretax losses from 2009 to 2015 while competitors generated significant pretax earnings.
https://photos.prnewswire.com/prnvar/20160420/358017
Photo - http://photos.prnewswire.com/prnh/20160420/358017
Source: Annual reports
PulteGroup has sustained $530 million of losses under the leadership of CEO Richard Dugas since 2004 on a pretax basis, while competitors earned significant dollars.
https://photos.prnewswire.com/prnvar/20160420/358018
Photo - http://photos.prnewswire.com/prnh/20160420/358018
Source: Annual reports
From 2011 to December 31, 2015, PulteGroup's cumulative pretax profit margins are dead last amongst large cap homebuilding peers. During this period, PulteGroup delivered a cumulative 7.2% pretax margin, which trails Lennar at 10.5%, NVR at 10.1% and D.R. Horton at 8.6%.
PulteGroup's Total Shareholder Return over the past few years and since Richard Dugas became CEO in July 2003 have woefully underperformed peer large cap homebuilders and the market. Interestingly, this is during an economic period that housing was recovering.
PulteGroup Performance vs. Peers 2014 to Present
https://photos.prnewswire.com/prnvar/20160420/358019
Photo - http://photos.prnewswire.com/prnh/20160420/358019
PulteGroup Performance vs. Peers Since July 2003
https://photos.prnewswire.com/prnvar/20160420/358020
Photo - http://photos.prnewswire.com/prnh/20160420/358020
PulteGroup's Subpar Valuation Evidences its Chronic Underperformance
The market currently values PulteGroup far below its large-cap homebuilding peers - Lennar Corp, D.R. Horton and NVR - as shown below.
PulteGroup Valuation vs. Peers (LEN, DHI, NVR)
https://photos.prnewswire.com/prnvar/20160420/358021
Photo - http://photos.prnewswire.com/prnh/20160420/358021
POOR OPERATING RESULTS & FAILED ACQUISITION INTEGRATION
PulteGroup's land position is deep, but CEO Dugas has not been able to figure out how to best utilize this asset, as evidenced by the small amount of annual closings (17,127 closings for 2015) relative to PulteGroup's total lot inventory (95,919 lots owned plus 42,160 optioned for 2015).
Specifically, PulteGroup has a higher lot inventory (in years) than its competitors, D.R. Horton, Lennar and NVR. The ability to deliver more homes on existing owned lots is untapped potential with the right leader at PulteGroup. The last thing that PulteGroup shareholders need is to miss the opportunity to sell land inventory in the current strong market, and therefore to ultimately head into another potential recession with significant dead land inventory that cannot be moved. Along the lines of underutilizing its land positions, PulteGroup's annual rate of home closings has dramatically lagged competitors since 2011. While the peer average of annual home closing growth between 2011 and 2015 stands at ~20% CAGR, PulteGroup has only grown home closings by ~3% per year.
Despite PulteGroup's decreasing home closings over the last 2 years, PulteGroup has added nearly 700 employees, and its average revenue per employee has decreased - this is the opposite of operating leverage and value creation. Competitors of PulteGroup have increased their revenue per employee as they rebounded from the housing crisis and have become more efficient in their operations with economies of scale.
Decreasing Revenue per Employee
https://photos.prnewswire.com/prnvar/20160420/358022
Photo - http://photos.prnewswire.com/prnh/20160420/358022
Despite having significant land inventory, PulteGroup makes risky and expensive land investments. Most recently, the Company purchased John Weiland for approximately $430 million to $450 million, or approximately 9% of shareholders' equity in an apparently desperate and expensive maneuver to compensate for the absence of organic growth during CEO Dugas' more than decade-long tenure. This on the heels of another expensive and failed acquisition -- the Centex acquisition -- which has proven a failure and resulted in over $1.46 billion of goodwill write-offs in just over 2 years, combined with materially decreasing community counts. Jim Postl was a director of Centex and despite the massive losses of shareholder capital from the Centex acquisition, Jim Postl has risen to Lead Director at PulteGroup.
Centex Community Counts
https://photos.prnewswire.com/prnvar/20160420/358023
Photo - http://photos.prnewswire.com/prnh/20160420/358023
CONTINUED LOSS OF VALUABLE TALENT
An enterprise is only as good as the people who stand behind it. Unfortunately, Mr. Dugas' inability or unwillingness to work constructively with colleagues and effectively lead the organization appears to have led to an exodus of highly valued talent to our competitors. In addition to the recent departures of PulteGroup Division President for Dominion Homes, Keith Tomlinson and Division President, Curt VanHyfte, both who joined competitors, the Company has lost more than 20 top employees under CEO Richard Dugas.
Meanwhile, the incumbent directors, who have no relevant homebuilding experience and collectively own less than 1% of the Company, remain in place. The high-profile operations departures at PulteGroup highlight a consistent weakness in CEO Dugas' leadership capabilities, integration expertise, and fundamental management skills.
Departed Pulte Group
Person Position of:
------ ------------
Roger Cregg Executive Vice President & Chief
Financial Officer
Steve Petruska Chief Operating Officer
Deborah Wahl Senior Vice President & Chief
Marketing Officer
Tony Koblinski National Vice President of
Homebuilding Operations
Mike Wyatt Senior Vice President of
Homebuilding
Greg Nelson Vice President of Tax & Corporate
Real Estate
Tim Stewart Vice President of Finance
Operations
Jim Petersen Director of R&D / Quality
Kemp Gillis National Director of Purchasing
Andy Morgillo National Director of Purchasing
Sean Degen National Vice President of
Product Development
Keith Tomlinson Division President -Columbus &
Kentucky
Pat Beirne Regional President & Area
President
Rick Dibella East Region President
Joe Ball Vice President of Construction;
Division President
Curt VanHyfte Division President
Jim Rorison Division President
Greg Wolpert Division President
Andrew Hill Division President
Louis Birnbaum Division President
Alan Laing Area President
Matt Koart Area President
---------- --------------
Source: LinkedIn
POOR BOARD OVERSIGHT & CORPORATE GOVERNANCE CONCERNS
None of the outside directors appear to have any meaningful experience operating a single family homebuilding business. The Board, with an average tenure of over 7 years, has seemingly become insular and unable to rectify concerns with its largest shareholder.
Outside Directors Experience Years on Homebuilding
Board Operational
Experience
--- ----------
Brian P. Anderson -Finance --Consumer Retail
(Former OfficeMax CFO) - 11 years NO
----------------- --------------------------- ---------- ---
Bryce Blair -Apartment Community Management
(Former AvalonBay Communities
CEO) - 5 years NO
----------- -------------------------------- --------- ---
Richard W. Dreiling -Operations --Consumer Retail
(Former Dollar General CEO) - 1 year NO
------------------- ------------------------------ -------- ---
Thomas J. Folliard -Operations --Consumer Retail
(CarMax CEO) - 4 years NO
------------------ ------------------------------ --------- ---
Cheryl W. Grise -Operations --Public Utilities
(Former Northeast Utilities
EVP) - 6 years NO
--------------- ------------------------------- --------- ---
Andre J. Hawaux -Finance & Operations --
Consumer Retail (Dick's
Sporting Goods COO) - 3 years NO
--------------- ------------------------- --------- ---
Debra J. Kelly-Ennis -Marketing & Distribution --
Consumer Goods (Former Diageo
Canada CEO) - 19 years NO
-------------------- ----------------------------- ---------- ---
Patrick J. O'Leary -Finance --Industrial Products
(Former SPX Corp. CFO) - 11 years NO
------------------ ------------------------------- ---------- ---
James J. Postl - Operations -- Consumer
Services (Former Pennzoil-
Quaker State CEO) - 7 years NO
-------------- --------------------------- --------- ---
The Board has only minimal ownership in PulteGroup leading to misalignment of interest with shareholders. Aggregate ownership by Board members and executive officers is significantly below that of any other peer board.
Ownership %
----------
PHM 0.9%
D.R. Horton 7.2%
NVR 10.2%
Toll Brothers 10.5%
Lennar 2.5%
------ ---
Peer Average 7.6%
============ ===
Note: Insiders include executives & directors
Source: Proxy Statements
Unsurprisingly, the Board has failed to prioritize shareholders' best interests over management. While management under the leadership of CEO Dugas has consistently destroyed shareholder value, the Board has failed to hold them accountable for their dismal record. In fact, to the contrary, the Board has awarded management generously and for all the wrong reasons.
According to a recent ISS report, PulteGroup's rating of pay-for-performance alignment for executive compensation is better than only 12% of other companies. I attribute the lack of value creation at PulteGroup in large part to the Board setting the wrong incentives for management in their compensation metrics.
FIXING PULTEGROUP NOW
In 2000, our Company was the top U.S. homebuilder, as measured by home closings. Today, PulteGroup's home closings have fallen to a distant third in the industry and are now less than half of the size of its largest competitor. In fact, PulteGroup's home closings growth has dramatically lagged peers since 2011. From that time to December 31, 2015, PulteGroup has achieved a meager 3% CAGR versus an average 20% CAGR for its peers.
It is evident that this Board has neglected its shareholders' best interests. Ineffective leadership is at the heart of PulteGroup's performance issues. PulteGroup, its employees, its customers, and its shareholders deserve immediate action. It is time for a seasoned homebuilding operator to lead the Company in order to reduce the significant loss of talent and to properly execute on a plan to drive shareholder value. Therefore, the Board must take steps to immediately find an experienced, veteran operator to replace Richard Dugas as CEO.
I stand ready to meet and seek common ground with the Board so we can together find a solution in the best interests of all shareholders. I am confident, however, that any solution must include the immediate replacement of Chairman/CEO Richard Dugas and Lead Director Jim Postl. In the absence of urgent and decisive action by the Board, I can only conclude that this Board is failing to prioritize the shareholders' best interests.
William J. Pulte
Founder and Largest Shareholder
PulteGroup
To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/pulte-calls-for-lead-director-jim-postl-and-ceo-richard-dugas-to-resign-from-board-immediately-300255058.html
SOURCE William J. Pulte
