Lennar Corp Q1 2025 Earnings Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Stephen Kim - Evercore ISI - Analyst : Yes. Thanks a lot, guys. Appreciate all the color. And I guess my first question relates the long term, whatever the normalized margin that you referred to. I think you -- Stuart, you're referring to the gross margin of kind of the mid-20s. And I was wondering if you could give us a sense for what the operating margin might be after corporate expense. I assume corporate expense, you're thinking maybe longer term like 1.5% or something like that, but it would be helpful to understand what you think the normalized operating margin would be? And what do you think the path looks like to get your SG&A and corporate combined down from its current elevated level?

Question: Stephen Kim - Evercore ISI - Analyst : Okay. But it's fair to say though, you don't think that a 10% to 11% combined SG&A and corporate rate is sort of the normalized level going forward, right?

Question: Stephen Kim - Evercore ISI - Analyst : Yes. No, that's encouraging. I guess my second question is a broader one. And it relates to how you've determined what the sales pace is that you wanted to -- you want to build your platform to deliver Obviously, demand has been running below that pace, hence, the incentives and all. But you've expressed the view that demand is ultimately going to normalize higher and that your margins will normalize once that happens. But an alternative you might be that this is the normal level of demand. It's been kind of a while now that the demand has been a little disappointing. And so I'm curious as how long is Lennar going to tolerate subpar margins before you begin to question if maybe the machine is built to maybe it ought to be built to a lower level of volume than what you chose to build it, let's say, a year or two ago?

Question: Stephen Kim - Evercore ISI - Analyst : Okay. So you actually -- if you do change your mind, it's something you're saying you could do relatively quickly, Jon, okay? So that's encouraging. Would you put that in like within a few quarters that you could adjust? Or is it something that you could do even quicker than that, just to clarify?

Question: Stephen Kim - Evercore ISI - Analyst : Okay. Great. Thank you very much, guys.

Question: Alan Ratner - Zelman & Associates - Analyst : Hey, guys. Good morning. Thanks for all the details so far. And congrats on all the exciting moves during the quarter. I know it was a busy time for you guys. So nice job getting all of it to the finish line. So Stuart, I think you walked through the normalized margin conversation well. I'd like to drill in a little bit more there. So obviously, if incentives go back to normal tomorrow, yes, your margins are going back to the mid-20s. But I think one of the advantages of your strategy and your model today is you are turning through your inventory a lot quicker than other builders and a lot of that inventory was underwritten in a different environment when incentives were much lower. So I guess my question is, you guys are out there buying land every day, you're buying a lot of land or tying up a lot of land the land you're tying up today, is it being underwritten to an incentive level closer to today's level? And if so, can you get back to a gross margin north of 20%, even if incentives don't necessarily get back down to that 5%, 6% level over the next few years? Or is it really going to require that type of return to normal to get that margin lift back up?

Question: Alan Ratner - Zelman & Associates - Analyst : Got it. Okay. That's encouraging to hear because it's obviously a big part of the strategy to be able to constantly refresh that cost basis. So I appreciate the thoughts there. Second question, also on margin, but more near term. I know you're not guiding for the remainder of the year. But if you -- it looks like you're closing guidance, which you're maintaining, implies a pretty solid ramp in revenue in the back half of the year. Typically, there is decent seasonality in your gross margin. You have about 150 basis points lift in margins over time in the back half of the year just on a higher revenue number, recognizing all the moving pieces here, you've got purchase accounting you've got mill rose, the cost -- the higher costs going through there, although that's probably more a '26 and beyond story. You've got the Rausch Coleman just mix issue. Should we expect all else equal, a similar seasonal trend in your margin this year? Or are those headwinds going to offset the typical seasonality.

Question: Alan Ratner - Zelman & Associates - Analyst : Appreciate it. Thanks a lot.

Question: John Lovallo - UBS Equities - Analyst : Good morning, guys. Thank you for taking my questions as well. Maybe just to parse out the second quarter gross margin or the walk from the [18.7] to the 18. It sounds like that's excluding the purchase accounting. So Diane, I guess I'm curious what is the expected purchase accounting agreement. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 21, 2025 / 3:00PM, LEN.N - Q1 2025 Lennar Corp Earnings Call And then maybe to Alan's question, I mean, Millrose impact from that seems like it might be more longer dated, but there's probably some impact, maybe 10 bps to 30 bps from that. And then along the same lines, are you guys currently selling homes at sub-18% margins right now?

Question: John Lovallo - UBS Equities - Analyst : The second part was Mill Rose and sorry, then what are you currently selling at now, yes?

Question: John Lovallo - UBS Equities - Analyst : Okay. Understood. And then curious to get just how you guys would respond to sort of the bear argument that we hear quite often. Look, I mean I personally understand the benefits of the even flow strategy over time. But I think there is a perception out there that you've sort of increased the cyclicality in the results, most prominently the margin. And that there's been -- this is sort of a divergence in the discipline that the industry has worked so hard to get credit for over the past decade. How do you guys kind of respond to that?

Question: John Lovallo - UBS Equities - Analyst : Okay. Thank you, guys.

Question: Michael Rehaut - JPMorgan - Analyst : Thanks. Good morning, everyone. Thanks for all the details always. First, I wanted to 0 in a little bit on some of the mechanics and how to think about the interactivity with Millrose going forward from two aspects. One, Obviously, you've already had a significant portion of your land under option to begin with, but now you're taking it up by about another 20 points or so. So I was just wondering, relative to perhaps let's say, fiscal '24, what the full or annualized gross margin impact might be from pushing that additional 20% of your land base through options where theoretically, it might be a little bit of a lower gross margin all else equal. And secondly, on the Millrose side, with tougher sales backdrop, I was wondering if there's any element of walk you away from some options that I'm sure with the 18% average, there's something at one of the tail ends of that curve. And if there would be any kind of option walkaways or things that we should anticipate over the next couple of quarters?

Question: Michael Rehaut - JPMorgan - Analyst : Great. Thank you for that, Stuart. Secondly, I'd love to just shift the second to the balance sheet and cash flows and now with obviously the Millrose transaction, still pretty close in the rearview mirror, but nonetheless, if you have any updated thoughts around leverage free cash flow. And I believe earlier, there had been talk perhaps of trying to use just net income being more or less equivalent to free cash flow and presumably a significant, if not large portion of that would be towards share repurchase. So any updated thoughts around there? And maybe even what any guardrails around share repurchase for 2025?

Question: Michael Rehaut - JPMorgan - Analyst : Perfect. Thanks so much, guys.

Question: Susan Maklari - Goldman Sachs Group, Inc. - Analyst : Thank you. Good morning, everyone. My first question is just sticking with thoughts on the cash generation of the business. One of the things that you mentioned is that now that then is done, you can accelerate the progress in terms of the even flow production side and standardizing your product and those efforts in there. Can you talk about where you are within that? And how we should think about the progress that can come through over the next quarters and what that will mean to your ability to sustain cash generation even in a more volatile or weaker demand environment?

Question: Susan Maklari - Goldman Sachs Group, Inc. - Analyst : Okay. That's helpful color. And then thinking about the forward growth of the business, post the spin, does that change how you consider acquisitions. And can you talk about the kinds of deals that you might be interested? And what you're seeing in terms of the M&A pipeline and perhaps the health of some of these smaller private builders given what's going on in the market?

Question: Susan Maklari - Goldman Sachs Group, Inc. - Analyst : Okay. Thank you all for the color. Good luck with everything.

Question: Ken Zener - Seaport Research Partners - Analyst : Good afternoon, all. If you could expand because I think this -- I know you guys are saying again, but it's being missed by investors. Could you expand on your decision to start a home -- on an incremental cash flow basis, where land is increasingly, if not a variable cost. And what you think that means for your cash flow per unit -- because I think that's what is the disconnect between where your model is going and the kind of the focus on a more margin-centric response because that's how the industry traditionally looks at it.

Question: Ken Zener - Seaport Research Partners - Analyst : Yes. Because what people think, if you have a 10% -- let's call it a 10% EBIT margin, right? People think could that be a 10% cash flow? No, it's not because traditional model each unit you sell, you need to go out and right, acquire a raw lot that you need to develop where that's turned into a variable cost, i.e., cash flow is your earnings? I think people are still kind of missing that because it seems to me that's how you're making your choices absent the need to buy land, which outside the margin side is your cash flow drag historically. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 21, 2025 / 3:00PM, LEN.N - Q1 2025 Lennar Corp Earnings Call

Question: Ken Zener - Seaport Research Partners - Analyst : Right. Very good. I guess my second question would simply be, if you guys can quantify the spread between what you saw in backlog and what became intra-quarter order closings in 1Q comment on the 2Q spread, if it exists or not. And if you're share count guidance, Diane for 2Q, what that effect would be if your exchange was fully executed. Thank you very much.

Question: Ken Zener - Seaport Research Partners - Analyst : Excellent. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 21, 2025 / 3:00PM, LEN.N - Q1 2025 Lennar Corp Earnings Call