Lennar Corporation LEN CEO Rick Beckwitt on Q4 2019 Results

Great, good morning everyone and thank you. This morning I'm here in Miami with Rick Beckwitt, our Chief Executive Officer; John Jaffe, our President; Diane Bessey, our Chief Financial Officer; and Dave Collins, our Controller. Of course you've just heard from Alex. I'm going to start, as I always do, with a brief overview. John and Rick are going to give some additional operational remarks and Diane will deliver further detail on our fourth quarter and year-end numbers as well as some guidance for our first quarter and full year 2020. As always, when we get to our Q&A, we'd like to ask that you limit your questions to just one question and one follow-up so that we can accommodate as many participants as possible. So let me go ahead and begin by saying that this is another excellent quarter and year-end for the company as we continue to focus on performance, cash flow and total shareholder returns. We're very pleased to report record quarterly performance together with a record strong finish to 2019 that started off paused and sluggish and ended the year with a rather robust housing market. Our results reflect both the continued strength in the housing market as well as our continued focus on leveraging size and scale to drive greater cash flow and higher returns on equity and on capital. On the macro front, the housing market continued to strengthen throughout the fourth quarter, confirming the continuing trend that we reported in our last two quarterly earnings calls. The market for new homes has continued a steady improvement from last year's pause as lower interest rates stimulated demand while the overall fundamentals of the economy have remained strong. We clearly saw traffic and sales continue to strengthen in the fourth quarter as a combination of lower interest rates and slower price appreciation have positively impacted affordability. Greater affordability, together with low unemployment, wage growth, consumer confidence and economic growth, drove home purchases, especially at the entry level, to return to a more affordable housing market. Even with the constant noise from the current election cycle and from the ebb and flow of global tensions which we're seeing play out in real time, the indicators that we see and hear from our customers gives us confidence in the stability of the economy and in the job market. As of now and through today, the housing market is strong. On the company front, Lennar achieved record results as we posted net earnings of over $674 million, or $2.13 per share for the quarter, and approximately $1.85 billion, or $5.74 per share for the year. These results derived primarily from solid operating results from both home building and financial services as our ancillary businesses have become less of a factor. In home building, improvement in new orders and deliveries produced a gross margin of 21.5% for the quarter, which was at the high end of our guidance last quarter, while deliveries jumped 16% over last year and new orders improved 23% over last year's rather tepid fourth quarter. Our size and scale in most of the best markets in the country enabled us to offset rising land costs with production cost savings, while overhead leverage has driven our SG&A to an all-time fourth quarter low of 7.6% and a full year low of 8.3%, which has enabled net margins of 13.9% and 12.3% respectively. We're confident that these trends are going to continue into 2020. Our financial services performance also continued to contribute to our earnings beat. I want to focus on this segment for a minute, as I did last quarter. Our financial services performance and improvement continues to be a proxy for many of the important initiatives driving our company into next year and beyond. Our financial services division earned $244 million versus $200 million last year, a 22% improvement. That performance improved through the year and in the current quarter, our financial services segment generated a record quarterly profit of $81.2 million compared to $57.6 million last year, for a 41% improvement. This record profit comes after selling substantially all of the company's retail operations in both mortgage and title in the first quarter earlier this year. These sales enabled our company to focus on the core home buying business and to implement technology initiatives that are streamlining the remaining business. This focus on the core business drove significant operational improvement in the second half of the year. First, we increased the company's combined mortgage capture rate from 74% to 78% by focusing on simplifying our customers' engagement and providing excellent customer service. Second, we reduced the cost to originate a loan by 11%, from $6,300 per loan last year to $6,000 per loan in the third quarter to $5,600 per loan this quarter. That's steady improvement and it's down by one third from $8,400 per loan in 2017. These cost reductions were driven by management's focus on technology initiatives, which include our Blend front-end technology for loan application, along with robotic processes that automate repetitive processes to reduce paper flow and streamline the closing process. These improvements all lead to not only lower cost to the company but to a friendlier and frictionless customer experience with the company. Finally, we have reduced total financial services headcount by about 50%. At the same time, technology together with management focus has enabled efficiency, a better customer experience, and a much better bottom line in our financial services division. Our management team and the entire group have made technology initiatives a core mission and are showing leadership for the entire company in that regard. Accordingly, we're gaining ever more confidence that we will continue to improve our entire end-to-end process to get to a one-tap closing, create a customer satisfaction process that is simple, frictionless and has never been seen before. As we're building these improvements, we're also seeing the fruits of our focus and investment at the bottom line. These improvements specifically and these types of improvements generally are sustainable and they will continue to drive bottom line improvement in our financial services segment and across our entire company in the future. Over the next two years, we expect to see some of the same technology-based improvements affecting our core home building operations, specifically in areas of customer acquisition costs and even flow production and inventory management. Stay tuned. Moving on, while our strong operating results drove the bottom line, we are simultaneously focused on any and all ways to improve total shareholder return by reducing our asset base. Our fourth quarter results reflect our overall focus on land spend and inventory control that has enhanced our strong and improving cash flow picture as well. We've maintained a relentless focus on our pivot to a land lighter strategy, from the timing of land purchases to the duration of each land asset that we buy to the percentage of option versus owned land. We are and will continue migrating towards a significantly smaller land owned inventory, driving our business and our cash flow forward while we're also driving our asset base lower by continuing to focus on monetizing non-core assets and business segments. Our most immediately impactful focus remains on our land spend and our inventory. With that said, strong operating results and our focus on asset base has increased cash flow for this year to $1.6 billion and projected annual cash flow expectations for 2020 are continuing to head towards the $2 billion mark. In the fourth quarter, we used excess cash to repay an additional $600 million of debt while we also repurchased another 1.7 million shares of stock at an average price of just under $59 per share. For the year, we retired $1.1 billion of senior debt while repurchasing almost 10 million shares of stock. We ended the year with $1.2 billion of cash and our revolver paid to zero. We improved our balance sheet with a debt to total cap ratio of approximately 33%, which is a 410 basis point improvement over last year. As we look to 2020, we expect to continue to generate strong cash flow and we'll use cash to pay down debt and to return capital to shareholders while improving our balance sheet as we continue to improve total shareholder returns. In conclusion, let me end where I began: we had another excellent quarter and year. Our management team is laser focused on deriving returns with excellent operational execution and careful land and inventory management. This focus is not just demonstrated by our words but also by last year's results. While 2019 is in the books, 2020 seems even brighter to us. We remain encouraged by both market conditions for the remainder of the year and Lennar's position in it. Our size and scale continues to facilitate the management of cost and production in a land and labor constrained market. In addition to carrying forward the successes of last year, we have the additional opportunities of our growing single family for rent initiative and our technology-based improvements to the way our customers purchase a home and the way our customers live in a home. These strategies, along with our "sustainable Lennar" sub-theme, will continue to drive operational innovation and excellence and enhanced total shareholder returns. With that, let me turn it over to the rest of the team.

Truman, let me start at a macro level and say it's important for everyone to remember that the entry level part of the market has remained impaired for the longest period of time since the downturn and really had a very difficult time getting started. So that part of the market is probably the most supply constrained. You know that a number of participants are migrating towards that market. It has more recently become accessible. Demand is very strong in that part of the market and I think it's going to be some time before it gets saturated. Rick, John, maybe like to talk about margins?

As we noted in our comments, we expect to continue to pay down debt certainly as it comes due. I think we noted that over the next year, over 2020, we have about $600 million of longer-term debt coming due. You can expect that we'll pay that down out of cash flow. But additionally, returns to shareholders, focus on returning capital to shareholders, is something that will be continued and properly balanced. As we've looked at our business and looked at our growth expectations, normal operations today are cash flow positive. As we noted last year we produced $1.6 billion and we expect to continue that trend and more. And that excess capital is going to be balanced exactly as noted. We're very focused on our balance sheet, very focused on total shareholder return.

Thank you.

I'd say additionally that as part of our land and inventory management program looking internally, we have clearly focused on more of our higher paced communities and focusing on those communities with greater absorptions. And we've clearly been pruning some of the slower paced communities that might have come from a CalAtlantic legacy that are more of a drag on some of our returns. So this is all part of our inventory management program, and we've been looking community by community to enhance the absorption rate, thereby enhancing the trends.

Well, I think that's definitely the case. I mean if you just look at the guidance we gave with regard to deliveries, the delivery growth is higher than the increasing community count. So you'll get a natural increase in overall sales that is greater than the one to two percent growth in community count. And that's a more efficient, more effective business model.

And I think the thing to focus on: we will solve for price, whether that's a higher price or lower price, but we're very focused on net operating margin for each community.

Thank you for listening to the call carefully. Yes, that's exactly what I said. It starts with the fact that in our financial services group, which is where we really initiated many of our technology initiatives, we had a management team start to dip the toe, then a foot, then a leg into the technology stream. As they became more entrenched, there was kind of a feedback loop that began that said, 'Wow, this really does have impact.' The more we did, the more we explored, the more we found we could change the way that our business operates. If you think about the migration from $8,400 per loan in 2017 towards a $5,600 per loan cost of origination, that's a sizable step over a fairly short period of time. It comes from management focus and integration of new technologies, new ways of doing business that hadn't been done or tried before. The feedback from early successes leads to drilling deeper and trying more. We're starting to see many of those things happen in and around our dynamic pricing program. We've talked about it before. Early adoption starts to breed some early successes. It takes some time for those earlier successes to start to accelerate and translate into real cost reductions. But we're starting to see real efficiencies in the way that our inventory turns. If we look back from this year's year-end back to last year's year-end, the efficiency with which we're driving closings through the year is having real bottom line impact in the way that our business is configured. We think that that will accelerate. As it relates to customer acquisition, we've talked about a number of our initiatives. OpenDoor is one of them, but others are more internally focused about customer acquisition and lead scoring, developing a driven, focused internet sales consultant approach to the way that we handle our customers. We think that as it starts to drive adoption, it will drive costs down and efficiencies up. So there are a lot of initiatives going on behind the scenes. If you asked me this question at the beginning of the innovation cycle in financial services, it would have been hard to demonstrate the specific areas where costs would come from. But management focus, early successes, and adoption create a cycle that drives the cost structure down. I think the financial services group in that regard is a proxy for the way that we're seeing things starting to happen on the homebuilding side as well.

Listen, I can't really look at what the rest of the industry is doing at a micro level. But from what we understand at a macro level, the costs within the industry have been migrating higher, and we are an outlier in that regard.

You're welcome. How about one more question?

Alright, very good. Well thank everybody for joining us on our call. We look forward to reporting in 2020. As you can hear, we're pretty enthusiastic about the year to come and look forward to keeping you apprised. Thank you all for joining.