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:
- 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.
- 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.
- 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.
- 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.
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.
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
Photo - http://photos.prnewswire.com/prnh/20160420/358019
PulteGroup Performance vs. Peers Since
July 2003
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)
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
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
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
Board
|
|
Homebuilding
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
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SOURCE William J. Pulte