Lennar Corp Q2 2024 Earnings Call Transcript

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

Question: Stephen Kim - Evercore ISI Institutional Equities - Analyst : Thanks very much, guys. I appreciate all the color and solid results in the quarter. I wanted to first start with the land asset structures that you're envisioning, particularly the spin. I know you said that there was going to be more information provided at a later date, but you did offer that it would have about $6 billion to $8 billion of land. That's higher than, I think, that you previously envisioned. I think you said it would have no debt. The team would be led by Fred Rothman. And so just taking some of those, I'm curious what additional land assets are now being included versus what you previously thought? When you say the spin will have no debt, you mean on a stand-alone basis, it will operate with no debt? And if so, are you going to seed the entity with cash, you think? And then lastly, is the entity going to be staffed by current Lennar our employees or primarily industry external personnel? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JUNE 18, 2024 / 3:00PM, LEN.N - Q2 2024 Lennar Corp Earnings Call

Question: Stephen Kim - Evercore ISI Institutional Equities - Analyst : Okay. So I guess we're going to -- that's fine. I guess we're just going to have to wait for more info. That's fine.

Question: Stephen Kim - Evercore ISI Institutional Equities - Analyst : Second question I have relates to your gross margin. I mean, I think you alluded to the curiosity that people have about the guide seeming to imply something around 25% or something in 4Q. And I'm hoping you can talk about what kind of gives you confidence that the 4Q gross margin will rise? And in particular, I know that you have talked about your even flow production schedule, perhaps affecting the seasonal cadence of gross margin. So maybe I can ask the question this way. If, hypothetically, market conditions were to be stable for like a whole year, how much seasonal variance would you generally expect by quarter? Would it be that your fourth quarter would generally have the highest margin, you know, with a consistent set of market conditions? And help us think through the quarterly cadence, if you could?

Question: Stephen Kim - Evercore ISI Institutional Equities - Analyst : Okay, great. That's helpful. So just to make sure I understand, it sounds like the seasonal aspects, which might be the field expenses, is fairly minor benefit to your 4Q. And so it sounds like you're attributing more of the stronger 4Q gross margin to actually your scale advantages that you've been building up. That sounds like something that's more persistent and not necessarily something that is particular to a fourth quarter per se, right? And so this gives us a thought process that your margins are generally improving as you've been improving your scale. And that's the message that we should take back for this 4Q lifting gross margin.

Question: Carl Reichardt - BTIG, LLC - Analyst : Thanks. Morning, everyone. Thanks for taking my questions. Jon, you mentioned differentiating among markets that pricing power versus the need to increase incentives. Can you talk a bit about what those markets are or were in second quarter? And then, in particular, I'm interested in Florida with the existing home inventory higher, some evidence of vacant capacity from the rental market coming back to for sale, second homes. Can you talk maybe specifically about those [metros] too? Thanks.

Question: Carl Reichardt - BTIG, LLC - Analyst : Thank you for that, Jon. And then I have a broader question. As you at Lennar and some others have kind of transitioned away from, I guess, what you could call, land speculation type of business model years ago to more of a vertically integrated manufacturer or a retailer, building more spec, pricing more aggressively. Stuart, do you think the consumer is becoming conditioned to expect discounts in the market, especially seasonal ones, the same way we've seen it in other sort of big ticket retail businesses? And I ask in part because pricing and changing in base pricing has been a bit of an issue in this business, given that homes are also investments as opposed to simply consumer products and so stability in prices have value to some degree. So maybe you can talk about how the consumer's responding or might respond in the long run, if their views are changing on when they buy, how they buy, and what they ask for (inaudible)? Thanks.

Question: Susan Maklari - Goldman Sachs & Company, Inc. - Analyst : Thank you. Good morning, everyone. I wanted to focus a bit on the cash flows and thinking about the capital allocation. You know, Stuart, in the past, you've mentioned getting net income and free cash flow closer to being in line together. As you think about a lot of the initiatives that you're putting in place and the progress you're making there, can you talk about how far out you think you are from achieving that and what are the roadblocks that perhaps still exist to getting there?

Question: Susan Maklari - Goldman Sachs & Company, Inc. - Analyst : Okay. That's helpful. And then as you do think about the business further out, and, you know, as I said, the initiatives that you're going through, what's the level of cash balance that you will eventually feel comfortable holding on the balance sheet? How much will you need to maintain the business? And how do you think about the allocation of the amount that comes in above that level?

Question: Susan Maklari - Goldman Sachs & Company, Inc. - Analyst : Yeah. Okay. Thank you for the thoughts. I appreciate it. Good luck with everything.

Question: Alan Ratner - Zelman & Associates - Analyst : Hey, guys, nice quarter and congrats on all the behind-the-scenes work on pivoting towards just-in-time. I think, it's going to be exciting to see it all done in the quarters and years ahead. Stuart, first question, last quarter, you guys referenced a little bit of a weakening in the overall quality -- the credit quality of the consumers. You were seeing potential buyers in your community, maybe some higher credit card debt, lower credit scores. I think at the time, you were the first to address that. And we've since heard some more anecdotes about that, those from homebuilders as well as other industries. So just curious, my first question, what you are seeing from the consumer today? Are you seeing more yellow flags or red flags unfolding? Or have things been pretty stable since then?

Question: Alan Ratner - Zelman & Associates - Analyst : Right. I appreciate that update on that and encouraging to hear at least it's not accelerating or the deterioration is not getting worse. Second, I'd love to spend a minute just talking about the SG&A and the corporate expense line, because I think that was the one area on the model that maybe was a little bit worse than guided for. And I think in general, it's been trending higher than a year ago. And I know there's a lot that could potentially be driving that. Obviously, broker commissions and things like that could be a function of where demand is. But I know you've got a lot of stuff going on behind the scenes as well with spin co and apartments. And I was hoping you could just spend a minute or two talking about what's going on with the SG&A, where you see that going forward beyond the third quarter and pick apart the pluses and minuses there?

Question: Michael Rehaut - J.P. Morgan Securities LLC - Analyst : Good afternoon. Thanks for taking my questions. Wanted to just circle back to -- covered a lot of ground, and obviously, appreciate all the detail. Just wanted to circle back, if I could, trying to get a little more clarity on the 4Q gross margins. And appreciate your comments earlier, Diane, around the 40 or 50 bps of operational leverage. Just wanted to make sure I'm understanding it correctly. I believe, earlier, Stuart, you said that it was in part based on backlog, part based on what you expect to do, market conditions, et cetera. On the point of backlog versus market conditions, just curious on if that 25%-ish type gross margin, if that is in fact what you're seeing in a part of your backlog today? Because obviously, part of that backlog would be delivered in the upcoming quarter at 23% gross margins. How much of the 25% is based off of the backlog versus perhaps as rates have come down over the last month, we're also thinking that maybe there's little less incentives out there today. And wondering about permanent orders, if that's also a better margin today. And I don't know if mix is a part of it as well. But just trying to get a little more granular on the drivers of that 4Q improvement versus 3Q.

Question: Michael Rehaut - J.P. Morgan Securities LLC - Analyst : Yes, no, no.

Question: Michael Rehaut - J.P. Morgan Securities LLC - Analyst : Right. No, no, thank you for that, Diane. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JUNE 18, 2024 / 3:00PM, LEN.N - Q2 2024 Lennar Corp Earnings Call Maybe my second question -- I just wanted to focus on more maybe month-to-month trends and you kind of alluded to this earlier that earlier in the quarter, you were dealing with a little bit of higher rates, perhaps using more incentives. Just wanted to get a sense. And then obviously more recently, rates coming in a little bit. Just wanted to try to get a sense, if possible, around how that impacted incentives as a percent of sales throughout the quarter and if there was a high watermark perhaps earlier in the quarter. And I'm just trying to get a sense of where you might be relative to that higher watermark. Let's say a couple of months ago, in terms of trying to gauge, pricing power and level of incentives in the marketplace today versus -- and rates were 30, 40 bps higher, let's say.

Question: Michael Rehaut - J.P. Morgan Securities LLC - Analyst : Great. Thanks so much.

Question: Kenneth Zener - Seaport Global Securities LLC - Analyst : Hello, everybody. Well, I think we could avoid a lot of the gross margin comments, if 1Q perhaps is just the bottom in gross margin versus flat the math we're doing. But I want to focus on gross margin seasonality separate from the fixed field costs because that's kind of straightforward to model. Now, your incentives in 1Q are like 10.4%, great disclosure in your Q. What was it in 2Q versus the kind of five to six level in 18, 19. And I'm asking because it seems even flow your model, which helps obviously costs, creates a little incentive seasonality, which I think separate from the macro and the rates. Because we're just trying to -- when you build a house first half plus sales demand, so it's kind of like selling ice in the winter versus the second half, I believe, is your thinking based on past trends. And if you can kind of talk about that, at least, if I think that's what's missing in the even-flow discussion a little bit, if you would. That was my first question.

Question: Kenneth Zener - Seaport Global Securities LLC - Analyst : Yeah.

Question: Kenneth Zener - Seaport Global Securities LLC - Analyst : Good. Second question. I guess, Stuart, this is a little more for you in the sense you're -- it's comparing ROI have your core homebuilding which you're directionally going towards. Timing is as much tied to unknown things, right? No need to get into that. But your choice to have so many other assets which are third or 40% of your total asset base. How do you think your ROI goes from 30% down to ROA in the low teens there. But how is multi-family? I know that land will improve your homebuilding returns. But do you really need the multifamily? Is technology part of that core homebuilding, in your opinion? I'm just trying to see how philosophically you think about these other assets. I realize you can't address the timing, but that's like the biggest drag and merging your ROI and your ROA. And I'm just seeing if we really need these other parts in your longer-term philosophy as it's not clear to me yet. Thank you. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JUNE 18, 2024 / 3:00PM, LEN.N - Q2 2024 Lennar Corp Earnings Call

Question: Kenneth Zener - Seaport Global Securities LLC - Analyst : Thank you very much.