The operator of the Lennar's Second Quarter Earnings Conference Call welcomed all participants and informed them that the call was being recorded. The operator then turned the call over to David Collins for the reading of forward-looking statements, which are subject to risks and uncertainties. Finally, the operator introduced Stuart Miller, the Executive Chairman, to begin the conference.

Lennar's Co-CEO and President, Jon Jaffe, and other members of the company's executive team have gathered in Dallas to discuss the company's second quarter results. They are pleased to report that the team has remained focused on production, cash flow, inventory turns, and return on capital, and they have produced strong and consistent results. The economic environment has stabilized as customers have adjusted to higher-for-longer interest rates, and the supply chain chaos has normalized. The Federal Reserve's aggressive interest rate hikes have created a new normal in the housing market.

The housing market has adjusted prices, incentives, and production costs to make homes more affordable for customers. Net average sales prices have dropped 10-11% from the peak of $500,000 in 2022 to approximately $450,000 now. The multifamily apartment market is becoming overbuilt, which is causing downward pressure on rents, though they will not likely drop significantly.

Lennar has maintained their commitment to strategies that focus on production, inventory turn, cash flow, and return on assets in the face of a volatile housing market. They believe that pent-up demand will continue to consume affordable offerings, and that the supply shortage will remain in the near term. As such, they are managing their business with certainty, keeping production constant while rationalizing costs, in order to maintain volume and margin.

In the second quarter, Lennar implemented their "Lennar machine" configuration which drove new order volume up 1% and enabled deliveries to exceed expectation. This was achieved by engaging their digital marketing platform and dynamic pricing model to sell homes at market clearing prices, reducing margin when conditions weaken and improving margin when conditions level and improve. As a result, margins improved from 21.2% to 22.5% and are expected to reach 23.5-24% in the next quarter. They have also welcomed a new Chief Technology Officer, Scott Spradley, to help further improve productivity through the use of AI.

Lennar has been working to increase volume to 70,000 deliveries with strong margins and cash flow. They have been working with trade partners to reduce cost structure and cycle time to pre-supply chain crisis levels. Lennar has also been focused on land and land acquisitions, as well as land and land bank strategy, to reduce inventory turn.

The three executives have focused on reducing land exposure and becoming increasingly asset light, resulting in 70% of land being controlled and only 30% owned. To manage operating costs, SG&A has been reduced quarter by quarter, although some components have grown due to difficult market conditions. Despite this, a respectable 6.7% SG&A and 15.8% net margin were achieved. To drive volume and purchasers, sales and marketing costs may have to increase, but the executives believe they can be managed to a very attractive cost level.

Lennar has implemented a number of strategies to improve their inventory control, balance sheet, and cash flow. These strategies include digital marketing, sales management, dynamic pricing, focusing on selling homes in inventory, and bringing attention to product plans that are not selling. The company has also repurchased stock and debt to protect and enhance their balance sheet. These strategies have resulted in an excellent second quarter of 2023 for Lennar.

Lennar associates have been executing a consistent strategy to navigate the uncertainties of the market, focusing on maintaining volume while pricing homes to drive a consistent pace, managing land and production inventories to drive cash flow and returns on investment, and fortifying the balance sheet for liquidity and flexibility. This strategy has been successful and will continue to guide the company into the future. Buyers have become more comfortable with higher mortgage rates, creating demand for available new homes which Lennar has addressed with attractive pricing and mortgage rate programs. Prices and incentives are regularly adjusted to maintain targeted sales pace.

Lennar successfully executed their price to market strategy in the second quarter, with new sales orders increasing 1% from the prior year and 26% from the first quarter. Their sales pace for community averaged 4.8% in the second quarter, with a slight 1% increase from the first quarter, and their cancellation rate was 13.5%, a significant improvement from the first quarter. These results compare favorably to nationally reported results and show an increase in market share across their footprint. The sales activity and cancellation rates in the first few weeks of June have been consistent with the second quarter results.

In the second quarter, 14 markets performed well and required only minor pricing adjustments and incentives to maintain sales momentum. 26 markets required higher pricing adjustments and incentives, including mortgage rate buy-downs, base price reductions, closing costs, and other incentives. These markets are limited in inventory and require more aggressive pricing adjustments and incentives to maintain momentum.

Rick discussed Lennar's landline strategy and community count in the second quarter. He mentioned that Lennar Mortgage has been proactive in creating cost-efficient and timely financing packages that have enabled them to offer attractive purchase prices for their customers. He also mentioned that they have worked with strategic land partners and land banks to purchase land on their behalf and deliver just-in-time finished home sites to their home building machine on a monthly and quarterly basis. The community count at the end of the second quarter was 1,263 and they expect to increase the count in the highest single digits by the end of fiscal 2023.

Lennar has maintained its starts and sales pace, pricing homes to market and reducing direct construction costs in the process. This strategy has enabled them to avoid building up finished inventory and to gain access to the labor they need, allowing them to lower construction costs, reduce cycle time, and achieve even and flow production. Despite industry-wide start levels decreasing by 30%, Lennar's were down by only 100%, making them the builder of choice for trades. Going forward, Lennar expects Q3 and Q4 starts to be higher than 2022 levels.

In the second quarter, construction costs decreased from the first quarter by 3%, and were 8% higher year-over-year, which was a significant improvement from the 13% year-over-year increase in Q1. A dedicated team was created to focus on value engineering and cost reductions to offset sales price reductions. There was less supply chain disruption in the second quarter due to a decline in industry-wide starts, higher manufacturer capacities, and Lennar's supply chain strategies and communication, which helped reduce cycle time.

In the second quarter, Lennar saw modest improvements in cycle time and started 3,500 homes. This allowed them to have the appropriate inventory levels and free up cash that was otherwise tied up in inventory. The company also made progress in achieving even flow production from start to finish, and thanked their construction and purchasing associates for delivering one of the smoothest quarters of closings. Financial services teams had operating earnings of $112 million.

Lennar's mortgage and title operating earnings increased from the prior year due to higher volume and cost efficiency. The company also focused on cash flow and returns on invested capital, which resulted in $4 billion of cash and no borrowing on their credit facility. This provided a total of $6.6 billion of home building liquidity. Additionally, their homes improved to 1.7 years from 2.4 years in the prior year and their home sites controlled increased to 70% from 68%. The success of these strategies was due to the great synergy between the home building and financial services teams.

In the quarter, the company owned 117,000 home sites and controlled 207,000 home sites, starting 19,700 homes and ending with 37,300 total homes in inventory. They repurchased two million shares and paid dividends of $110 million, and also repurchased senior notes due in fiscal 2024. This resulted in a holding debt to total capital ratio of 13.3%, their lowest ever, as well as a shareholders' equity increase to $25 billion and a book value per share increase to $87. For the third quarter, they expect new orders to be in the range of 18,000 to 19,000 homes.

Lennar expects their Q3 ending community count to remain flat compared to Q2, with deliveries in the range of 17,750 to 18,250 and an average sales price consistent with Q2. They are raising their delivery expectations for the full year to 68,000 to 70,000 homes. Q3 gross margin is expected to be in the range of 23.5% to 24%, with a higher margin in Q4. SG&A should be 6.7% to 6.8%, and they expect earnings of about $25 million from their home building, joint venture, land sales, and other categories. Financial services earnings should be in the range of $100 to $105 million, with a loss of $10 million from their multifamily business and a loss of $20 million from their Lennar Other category. Corporate G&A should be 1.4% to 1.5%, and their tax rate is expected to be 24.7%. The weighted average share count should be 284 million shares.

Stuart Miller and Jon Jaffe discuss the even flow process and how it is used to create efficiency by going asset light and building partner relationships. They explain that the start pace is not a set number, but instead is dependent on the community and market specifics. They use data feedback loops to come to the best pace that works for multiple divisions and geographies.

Kenneth Zener and Stuart Miller are discussing the balance of sales and start pace in the market according to demand, land availability, and labor availability. Rick Beckwitt and Diane Bessette then discuss their goal of becoming more asset-light by 2024, and having their net income equal their cash flow.

Stuart Miller and Jon Jaffe discuss how Lennar has been working to improve their supply chain and create a more asset-light model. They have been working on structural programs to manage the model better and continuously improve it. Jon Jaffe notes that the supply chain disruptions are mostly behind them and they have learned how to work differently with manufacturers to reduce lead times.

Stuart Miller is discussing how the company is managing their cash flow and capital allocation. He explains that they are seeing increased cash flow and that Diane won't let him disclose the extent of it. He states that they are taking an opportunistic view of stock buyback and are looking at other strategic possibilities. He also mentions that debt retirement and stock buyback are both considered when it comes to capital allocation.

Stephen Kim is asking Stuart Miller about the possibility of Lennar taking advantage of the window of opportunity to acquire lots or operations from smaller, less well-capitalized builders, while maintaining their asset-light program. Miller is aware of this opportunity and is considering the questions and considerations, but is still in the early stages. He believes that the questions are more applicable to the land development side of the business, where land developers not part of Lennar are feeling some stress.

The speaker discusses the capital accumulation that is available, and how the company has the opportunity to participate in capital flow through partnerships and other structures. They have been working on off-balance sheet structures to address market dysfunction, and are uniquely positioned to participate in building production trajectory and consistency. The speaker also mentions that the 3Q order guide suggests an absorption rate that is higher than what was achieved in the post-pandemic period, and inquires if this is due to a shift in community types.

Stuart Miller, Rick Beckwitt, and Jon Jaffe discussed their strategy for starts in the third quarter, which involves running a production machine and developing a community-by-community start base. They are also taking advantage of lower entry-level communities in some markets and implementing a disciplined and carefully managed stretch program. This strategy is intended to match sales to their start pace and allow them to increase their sales pace quarter-by-quarter by going down the price curve in all markets.

Stuart Miller and Jon Jaffe discussed accelerating their starts in the second quarter due to the lack of resale and new sale inventory in the market. They believe they will be able to sell at an accelerated pace and achieve cost savings, resulting in further improvement in gross margin beyond the third quarter, depending on market conditions.

Stuart Miller of the company discussed their guidance for the third quarter and their expectations for the fourth quarter, noting that they will wait and see how market conditions evolve before giving a boundary for their margins. Miller also mentioned that their commitment to consistent and predictable volume has been beneficial for them and their trade partners. Alan Ratner from Zelman & Associates congratulated the company on their quarter.

Stuart Miller explains that the company is using a data-driven approach to their business, which includes digital marketing and dynamic pricing. They have brought on a Chief Technology Officer to help with the ingestion of data and to use it more constructively. They are also looking into using large learning models to drive productivity gains. He invites people to come to Miami to see what they mean.

Alan Ratner asked Stuart Miller why they are not raising prices more aggressively, given the current housing shortage. Miller responded that they have been very thoughtful about this and view the need for workforce housing as a social imperative. They are focusing on filling the void in the market and are taking a conservative stance in order to take market share in the current choppy environment.

The focus of the company is to drive pace and hold price rather than driving price. This is in response to the constrained supply of homes in the national and local landscapes. Keeping products affordable is a careful and methodical approach, and prices may move but the number of homes targeted for each community will stay the same. The core strategy of the company is to be production-first and manage sales pace to start pace in order to maximize returns and cash flow. This strategic decision is reflected in the company's pricing.

Mike Rehaut is asking Stuart Miller if their approach to building for 3Q is resulting in market share gains. Miller responds that the market is favoring ready-to-go inventory and shorter cycle closings due to the existing home market being constrained and some builders pulling back due to the sharp increase in interest rates. He believes that there is an opportunity for them to fill a void in the market.

Stuart Miller asked Diane Bessette to provide information on incentives and discounts as a percent of sales. She explained that they have the ability to buy down mortgage rates which the resale market cannot do, and that this is a lever they can pull if they need to accelerate sales. She also mentioned that some customers may have stretched finances, and the rate buydowns could be a solution to this issue.

In the first quarter, incentives were at 10.2% and went down to 8.4% in the second quarter, a sign of progress in making homes more affordable for people. The company is continuing to adjust prices and use incentives to make homes more affordable and will report on their progress in the third quarter. Stuart Miller concluded the conference by expressing enthusiasm about how the business is navigating turbulent waters.

This summary was generated with AI and may contain some inaccuracies.