Lennar Corp Q4 2024 Earnings Call Transcript

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

Question: Alan Ratner - Zelman & Associates - Analyst : Hey, guys. Good morning. Thanks for all the detail, definitely a lot going on right now. So I appreciate that. Stuart, I guess I'd love to just hear your thoughts on kind of the consumer and the drivers that impacted the demand during the quarter. Obviously, rates moved in the wrong direction. And I think it certainly makes sense compared to where you guys were back in September, why things were a bit weaker than expected. But if we look at the absolute mortgage rate in the high 6s, maybe hitting 7% in the quarter, it's not too dissimilar to what you were selling at in spring of '24 and a year ago. Yet, it sounds like things were fairly meaningfully weaker from just an overall demand perspective. So what do you attribute that to? Is it seasonality? Is it the supply-demand picture, given how many specs have been put on the ground because it doesn't feel like things have changed that drastically in the economy to warrant a much softer picture at that type of rate environment.

Question: Alan Ratner - Zelman & Associates - Analyst : Got it. I appreciate the additional color there. And then second, just kind of on your overall pace versus price strategy. You've always kind of articulated margin and price being the lever to achieve the volume targets. I'm just curious, as you think about '25 and the targets you put out there for closings growth, not too dissimilar from where you were three months ago, even though the market seems to have shifted a bit lower. What are you thinking on the sensitivity there now that margins are kind of below, at least for the time being, below what you consider to be normalized? Is there a lower bound on margin or an upper bound on incentives that you're willing to go to achieve the volume targets that you've put out there right now? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 19, 2024 / 4:00PM, LEN.N - Q4 2024 Lennar Corp Earnings Call

Question: Alan Ratner - Zelman & Associates - Analyst : Understood. Thanks a lot. Appreciate it. Happy new year.

Question: Michael Rehaut - JPMorgan - Analyst : Hi. Good morning. Thanks for taking my questions. First -- a lot of questions, I'm sure that we're going to hear about Millrose shortly. But I'd love to just focus on the core business, which I think is really the focus on most of the clients that we speak to investors that you're speaking with today. Stuart, you mentioned a couple of times that you're positioning the company from -- in terms of keeping your finished spec kind of in line with historicals kind of continuing to move volume Trying to think about what a normalized gross margin might mean over the next 12, 24 months as for Lennar, let's say, once we get through this more bumpy period.

Question: Michael Rehaut - JPMorgan - Analyst : I appreciate that, both Stuart and Jon. I guess second question, I wanted to shift towards the top line. Last quarter, and I think you've reiterated this a few times, perhaps now you intend to grow volumes about [20%] annually and it's what you stated last quarter for fiscal '25 and beyond. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 19, 2024 / 4:00PM, LEN.N - Q4 2024 Lennar Corp Earnings Call Your guidance now is 8% to 10% that does though include the contribution of Rausch Coleman, which I think you said was about a 5% contribution to growth, 4,000 units if you close in the first quarter. So obviously implies organic growth kind of in that 3% to 5% range. I'm just wondering, going forward, you had -- the only other competitor of yours of similar volume size. D.R. Horton talk about flat to up slight volume growth in fiscal '25. And a big part of that just due to the challenges of getting communities online. How should we think about organic growth from Lennar going forward? Is that still do you kind of view that 10% goal that you stated as an all-in number? Is there variability there? Is the organic growth perhaps a little bit less because it certainly seems like fiscal '25 might be below a normal or aspire to growth year, at least on an organic basis for some builders.

Question: Michael Rehaut - JPMorgan - Analyst : Yes. I appreciate that, Diane. And just to clarify, for the first quarter gross margins, that does not then as a result, include any purchase accounting impact for Rausch Coleman. I guess not expect it to be in the first quarter, but let's say, in the second quarter, third quarter, is there any purchase accounting impact expected?

Question: Michael Rehaut - JPMorgan - Analyst : Great. Thanks. Happy holidays, everyone.

Question: Stephen Kim - Evercore ISI - Analyst : Thanks very much, guys. I want to try to clean up a little bit, if I can, on the gross margin. Stuart, I think you indicated that the backlog has gross margins that are kind of running closer to 20%. And I think I heard you say that you sort of thought that the number of -- or the percentage of closings that you would get in 1Q that you have not yet sold or had not yet sold. at the end of November was about half, right? So then that makes it easy. That sort of implies that your 19% gross margin in the first quarter, that implies that the stuff you're going to be selling here over the coming weeks, you're sort of thinking it may be an 18% gross margin. I think you also indicated, though, that 1Q has sort of a catch-up in sales going on because you missed your 4Q sales. So that might sort of suggest that if you're trying to figure out what a steady state gross margin is that 18% is probably a little lower because you're actually sort of overselling, if you will, a little bit to make up for 4Q. Just want to make sure I'm thinking about that right. or if there's some other adjustment that we need to be thinking about?

Question: Stephen Kim - Evercore ISI - Analyst : Yes, that's helpful. And I think I should also have mentioned that you also indicated that 1Q has lower margins than sort of a full year. So that's also -- so 18 isn't exactly like sort of an annualized number anyway on top of being conservative.

Question: Stephen Kim - Evercore ISI - Analyst : Got you. Okay. Switching gears to volume. Your closings guide is 86 to 88, up about 10%. I guess my question is, does that assume orders the year noticeably above the closings range? Or does it assume a meaningfully higher backlog turnover ratio for the year? Because I think in order to hit that closing guide, you're going to need one or the other. You're going to need to have orders either higher than that number or you're going to have to have backlog turnover ratio higher than it was last year. And -- so I'm kind of curious, which is it? And if you tell me if it's orders that orders are going to be higher. I just want to make sure that we're thinking, right, because my model is sort of telling me, it's got to be like north of 20% order growth in 2Q and 3Q, including Rausch. And if you're telling me no, no, it's probably a higher backlog turnover ratio. I'm going to ask, well then, well -- are you contemplating cycle time impacts from maybe a crackdown on undocumented workers.

Question: Stephen Kim - Evercore ISI - Analyst : So just so I'm clear, are you assuming any cycle time? It sounds like you're not assuming any cycle time impacts because if you do have it affecting the market, it's going to affect other people, but not you. Just so I'm clear, is that what you're sort of saying?

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

Question: Trevor Allinson - Wolfe Research - Analyst : Hi. Good morning. Thank you for taking my questions. Stuart, I first wanted to follow up on some comments you just made talking about conversations with your suppliers and with the trades given 1Q gross margins are back to pre-pandemic levels. With your focus on growing volumes here, are you expecting to see some cost concessions maybe excluding any impacts from changes in policy but are you expecting to see some cost concessions here in 2025 from both your trades and your suppliers?

Question: Trevor Allinson - Wolfe Research - Analyst : Okay. Got you. That makes a lot of sense. And then second, there's been a lot of talk in the industry about elevated completed inventory levels. It sounds like your completed inventory levels remain relatively normal. Can you just talk about your comfort levels with where your completed inventory levels are at in the current demand environment and then perhaps expand that commentary to the completed inventory levels overall in your markets and if you feel in any of your markets, they've got more extended. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 19, 2024 / 4:00PM, LEN.N - Q4 2024 Lennar Corp Earnings Call

Question: Trevor Allinson - Wolfe Research - Analyst : Thank you. Appreciate all that color. Good luck with moving forward.

Question: Susan Maklari - Goldman Sachs - Analyst : Good morning, everyone. Thanks for taking the question. My first question is going back to some of the focus on rationalizing the cost structure in there. Can you talk about where you are in terms of standardizing those product offerings? How much more you can get over the next several quarters in there and how that will benefit both the margin structure over time, but then also just the cash generation of the business?

Question: Susan Maklari - Goldman Sachs - Analyst : Okay. That's helpful. And then, Stuart, one of the comments that you made was that you're going to continue to focus on repurchasing the stock and shareholder returns, and that will obviously evolve as Millrose moves through the process. understanding there's a lot that can change in there, but can you talk to some of the key factors that you're watching for? And how that could perhaps evolve as we do get no roads out and we move into a newer model of the business.

Question: Susan Maklari - Goldman Sachs - Analyst : Okay. That's really helpful color. Thank you. Good luck with everything.

Question: John Lovallo - UBS Equities - Analyst : Thank you for taking my questions as well. Maybe the first one on the spin. I'm just curious why you decided to partner with an external manager in the Millrose deal. And then along the same lines, what do you sort of think of as the right comps? I mean should we be looking at mortgage age REITs. I mean they do tend to trade at, call it, a 20% discount to book value. So I'm just curious what you would consider to be good comps and why is an external manager.

Question: John Lovallo - UBS Equities - Analyst : That's really helpful. And then just as a follow-up, I just wanted to go back to an earlier question just to make sure I understand the strategy here. The 10% growth in delivery target was out there pre-Rausch. You guys have maintained that at the high end, including Rausch. So I guess the question is if it were not for Rausch, would you have lowered that target? Or conversely, is Rausch just giving you sort of the opportunity to not push pace quite as hard in the existing communities and still get that same volume at perhaps a higher margin?

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