Q4 2020 Lennar Corp Earnings Call
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Okay.
Fourth quarter earnings conference call.
All participants are in a list.
After the presentation, we will conduct a question and answer session.
The conference is being recorded if you have any objections you may disconnect at this time I will.
Now I'll turn the call over to Alexandra Lumpkin, where the reading of the forward looking statement.
Thank you and good morning, Today's conference call May include forward looking statements, including statements regarding <unk> business financial condition results of operations cash flows strategies and prospects, but we looking statements represent only <unk> estimates on the day to this conference call and are not intended to give any assurance as to actual from.
From a result, because forward looking statements relate to matters that have not yet occurred. These statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause <unk> actual activities or result to differ materially from the activities and results anticipated in forward looking statements.
These factors include those described in Yesterdays press release, and our SEC filings, including those under the caption risk factors contained in our annual report on form 10-K, most recently filed with the FCC. Please note that when our assumes no obligation to update any forward looking statements.
I would like to introduce your host Mr. Stuart Miller Executive Chairman, Sir you may begin.
Great. Good morning. Thank you every one for.
The here.
This morning, I'm here in Miami once again, a scaled down socially distance crude that include sales.
I am to set our Chief Financial Officer, David Collins, Our controller, Bruce gross <unk>, Chief Executive officer of within our financial services and of course, Alex who you just heard from.
Rick Beckwitt.
And Jon Jaffe, our co chief Executive officers and co president.
Or joining us from Oh from.
Colorado, and California, respectively.
They are on the line and will participate as well.
We're going to attempt to keep our remarks brief in order to have plenty of time for your questions I'll give a brief macro overview on perspective, Rick will talk about land and community Count John will talk about sales production and construction costs and Diane will give a more detailed financial overview.
Lets highlight and with guidance.
Then we'll attempt to answer as many questions and as usual please limit questions to one question per person and one follow up.
So with that today I'd like to start by thanking the coast to coast associates of Lennar.
Extraordinary work in an extraordinarily challenging year.
We started 2020 with great expectations in an expanding market, which came to an abrupt stop with the unexpected arrival cobot and then left back into high gear to address the market with unusually strong demand that was desperate for a home a refuge in a brand new.
[music] concept the hub of everyone's life.
The associates of one our adopted an adjusted learn new ways to interact and to transact work from home and put people force.
Cared for our communities across the country with acts of kindness, an exome charity and on top of all of this turn been pristine fourth quarter and full year 2020 results that are perfectly aligned with our company strategy and once again positioned one more as America's most profitable.
Homebuilder.
Diane Rick John and myself have the privilege to prevent the per to present their results and Additionally to guide with great confidence the expectation for its not an excellent year in 2021.
That's a macro overview, let me say that the housing market is simply very strong and demand for home, new and existing is greater than the limited supply.
It is simply never been this easy to sell as many homes as we would like in every market and every price range across the country.
The American Dream of home ownership is once again and essential aspiration of the American population and the resolution of the current pandemic will not slow the growing demand.
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Low mortgage rates and ample deposit money from savings from vacations, not taken movies not seen restaurants, not visited and of course stimulus dollars from the government are driving customers to purchase a home a larger home a home with the yard and office a nice.
Her kitchen, and a place to call their own.
Apartment dwellers can afford to first time home and demand is strong and growing the I buy or participants led by open door and early with our strategic investments are providing illiquid marketplace to sell and purchase entry level home with clean and safe digital engagement as they.
Evolve and provide frictionless transactions.
With constrained supply entry level and workforce homes are trading faster and prices are moving higher.
This enables yesterday's first time buyers to sell for higher prices and more accumulated equity than expected, enabling them to see and ultimately purchase larger more spacious homes for the growing families and pushing demand and prices higher in those ranges as well, thus, enabling second time.
I am home buyers to do the same.
The positive demand said pricing cycle with far less friction has been activated throughout the housing market.
The underproduction of homes for the past 10 years has created a housing shortage and with strong demand. The home price is home prices are moving higher.
Demand is growing as the millennial generation, which postponed family formation over the past 10 years has pivoted quickly and is making up ground towards traditional family formation trends.
Concurrently the proposition of home as more than shelter is becoming a hard wired way of life, rather than the Cobra driven reaction.
While these trends are exacerbating the well documented affordability crisis across the country as workforce housing is limited and getting more expensive. This solution that seems well being growing supply by building more housing.
We are starting to see exactly that trend in this mornings and to see that in to this morning's ramp up.
In the ramp up with today's starts and permits numbers, but.
But we still have a lot to make up.
These conditions have given rise to strong, though controlled sales pace pricing power very strong gross margin, even stronger net margin managed costs.
And the challenge of land scarcity.
As it relates to one our strategy in the current environment, we have controlled sales.
While we continue to refine and grow our excellent are excellent ancillary business divisions.
They are becoming a decidedly smaller part of the overall company picture.
Retrospectively, we are very pleased that we sold our realtor subsidiary some two years ago.
Four we navigated the turbulence of this past year and enabling us to focus on our core business units.
As noted in past conference calls and calls we've been working on strategies to better position, our blue chip multifamily platform called LMC, along with our emerging SFR or single family.
Platform.
As well as our strategic investments in five point, our California land development company, and our growing technology investments plus four platform, which we call Lennox.
As a heads up we are making progress on rationalization of these divisions and we'll give greater clarity on our specific strategy as it is refined and become certain over the next two quarters. This resolution is no longer a long term strategy, but is more immediate.
As we focus on driving higher returns with less noise in our numbers from lumpy profits and losses.
In that regard, we expect to open door to begin trading as a public company in the near future and we expect to record a cash was profit from appreciation in our investment in that platform. Although we will not have an estimate of that gain until trading begins.
We will be required to record a profit on the day trading begins but upward and downward movement from the stock will be recorded quarterly as quarterly marks and adjustments will flow through earnings. The company is not consolidated as we do not have a control position.
Open door pioneered the buyer space and jointly open door and Lennar developed a seamless move up program that today is becoming an industry standard.
By coordinating and redefining the move up buyer sale of their first home, while moving up to a larger home the customer expense experience is becoming a frictionless coordinated and joyful engagement and of course lets less friction means more transactions and more transactions at a.
Lower cost to all parties involved.
Needless to say, our well known technology initiatives have contributed meaningfully to our readiness for current economic and structural shifts while helping to improve our core business and drive our SDMA to an historic low of 8.1% for 2020.
Concurrently our meaningful investments in technology companies have no not only in form change within land are but are proving to be successful investments in their own rate once.
Once again, we congratulate open door on their successful migration from startup to maturity to public company.
And we welcome them into advance to the public markets.
In conclusion, let me say that our results and our expectations for next year are solid in all respects and they reflect our focused strategy to balance gross at gross margin cash flow and returns.
Today and for the foreseeable future the home is becoming more and more and essential way to live that we live and the quality of our lives.
The home used to be just shelter now it's the hub of our entire life.
It is our shelter and our multiple generation shelter. It is also our office our gem, our Recreation Center and our school. It is Wi Fi connected and it is automated it is sustainable.
And it is environmentally sensitive it is both a healthy home and the health system.
Home is worth families thrive in the best of times and a refuge for income and the toughest of times.
At Lennar, we've never been better position financially organizationally and technologically to thrive and grow in this evolving and exciting housing market with that let me turn it over to Rick.
Thanks, Stuart as you can tell from Stuart opening comments. The housing market is very strong our team is extremely well coordinated and our financial results continued to benefit from a solid execution of our core operating strategies.
Topping that list continues to be improving our returns on capital and generating increased cash flow.
With that in mind, we have been laser focused on increasing our percentage of option home sites and reducing our year supply of owned home sites.
During fiscal 2019, we set a goal to have 40% of our home sites controlled via option is very similar arrangements by the end of fiscal 2021.
At that time, our control position was about 25%.
We entered fiscal 2020 with 33% of our home sites controlled and ended this year at 39%.
A 600 basis point improvement.
On a nominal basis. This reflected an increase of over 15000 option home sites during the year.
This increase reflects the strength of our relationships with local developers and other strategic partners and their desire to work with us to increase our option position given our size and scale in our markets.
In fiscal 2021, we expect to continue to expand on our existing relationships and enter into a new regional and national land platforms to further enhance our land light strategy.
Based on this progress we are in an excellent position to achieve our revised goal of 50% controlled home sites by the end of fiscal 2021.
During 2020, we also made significant progress on reducing our years own supply of home sites by 4.1 years to 3.5 years. This represented a reduction of over 22000 home sites.
Based on this progress.
We are on target to achieve our previously announced goal of a three year supply by the end of fiscal 2021.
As expected the combined impact of increasing our controlled position, reducing our own position and our strong profitability drove significant homebuilding cash flow.
During 2020, we generated $3.8 billion of homebuilding cash flow, which enabled us to pay off $2.1 billion in debt, including prepaying all of our senior debt due in fiscal 2021 day.
This drove a meaningful improvement in our balance sheet as we ended the year with $2.7 billion in cash no borrowings under our 2.4 billion revolving credit facility and homebuilding debt to capital and net debt to capital of 24.9% and 15.3% respectively. Both all time low.
Yes.
As we continue to execute on our land light strategy.
And if we achieve our 2021 improved year end goals, we are positioned to continue to generate significant cash flow.
Now I'd like to spend a few moments talking about growth in community count.
In fiscal 2020, our community count declined by 8%.
This was driven by an accelerated pace of sales and deliveries in our active communities decision to get out of the lower absorption higher price point and lesser performing communities, we acquired from Cow Atlantic.
And a delay in opening new communities as we paused development activities during the initial stages the COVID-19 pandemic.
Notwithstanding the 8% decline in community Count, we achieved a 16% increase in new orders in the fourth quarter of 2020, driven by a 27% increase in sales per community while.
While part of that increase in absorption pace was driven by improved market conditions part of it was due to the fact that we targeted acquiring larger higher volume entry level communities that can deliver more homes per month in smaller communities.
As we continue into fiscal 2021.
Our growth will continue to come from a higher overall absorption pace as well as an increase in community count.
In 2021, our community count should increase by about 10%.
Most of which will happen in the middle part of the year, which should put us in great shape for the back half of 2021 and provide continued growth for fiscal 2022.
While we continue to be focused on increasing and increasing our community count we are intensely focused on replacing our existing communities with larger higher volume communities. As this allows us to better leverage our overhead improve our bottom line and increase our returns and our cash flow.
Before I turn it over to John.
I want to Echo Stuart's comments and thank all of our associates and our trade partners for an excellent year.
For your hard work and collaboration we accomplished many great things in 2020, and we are in excellent shape to execute on our core operating strategies in 2021.
Like to turn it over to John now.
Thank you Rick and good morning, everyone.
Matching sales pace with our production pace has been a key strategic focus has enabled us to drive excellent performance.
Our current production and sales, we have maximized margins and driven bottom line profitability from.
In the current environment, we've been able to maximize gross margin by systemically containing construction costs, even while there is upward pressure. Additionally, we've been able to manage our SGN, a lower thereby increasing our net margin and overall profitability I.
I would like to briefly describe our strategy performance and expectations for sales production and construction cost in order to shed some light on how the strategy has been central to our accomplishments this quarter and in fiscal 2020.
It begins with our time tested Everything's included program, so trades and construction associates know exactly what they will be building our customers know exactly what their volume.
We work with our strategic trade partners to value engineer value engineer, our plans and rationalize Blanco and skews to continuously simplifies the supply chain and construction process.
This proved to be extremely valuable in the current Cobra disrupted supply chain environment.
Virtually every manufacturer and our industry has had some level of disruption of the manufacturing facilities through to coated.
Next we focus on being disciplined and consistent about executing the most efficient production oriented machine in the homebuilding industry.
Execution begins with setting even flow production rates at each community determined by a specific store pace and a product based cycle time template, which we call level scheduling.
This pace can be adjusted upward or downward as the market requires.
They start in production plan for forward planning has been communicated to every one of our trade partners. So they can plan for labor and material needs and efficiently deploy people and provide materials from products as needed.
This bold communication and coordination drives efficiencies that do not exist anymore radek from less predictable sales driven model.
By leading with a production first process, we were able to quickly increase our store pace. After a pause in production in March and April to understand the impact of the pandemic from Q2.
We were able to evaluate the improving market conditions and quickly increase our even flow production to achieve an average start pace of 4.3 homes per month per community in Q4, which was up from 3.4 in Q4 19, a 41% increase in pace.
We expect to increase that pace to 4.5 homes per month per community in the first quarter and to maintain that pace throughout the year.
We then much sales up its new new levels, which movies production pace or using pricing and incentives to determine the exact market pricing for that pace and efficiently mat sales to the pace of production.
In other words, when our sales pace as defined by our desired maximum efficiency production pace not by momentary changes in market conditions.
The sales process is also disciplined and simple from his best described as FIFO or first in first out.
The first home started in each community is the first home sold we move right down the line land type by planned type of.
Avoiding selling too fast for our production pace by restricting what is available for sale to the management of our FIFO approach.
By selling homes in the same order of our starts we manage the business to have our home sold entire into two.
Through our cut for our customers to receive their mortgage approvals prior to the home being completed.
Additionally, today's robust selling environment. This disciplined approach allows us to maximize our pricing power to increase both margins and cash flow. We end up carrying very few completed homes on our balance sheet.
In Q4. This approach this approach to over 25% gross margin and we ended the quarter with 0.7 completed inventory homes per community or just 776 homes for the entire company assets.
Compared to 1.6 homes per community or 2086 homes in the prior year.
Balancing our sales pace with our production pace also helps reduce as DNA as fewer inventory homes helps lower our broker spend while creating greater efficiencies in our divisions to the even flow of sales starts and deliveries.
More importantly, this balanced and predictable program is key to being builder of choice for the trades into very effectively managing costs in a market defined by labor shortages and cost pressures.
In conclusion, when our strategy of a man its approach to production and sales pace certainly prove its value in the back half of 2020 as we look to next year. We're certain that we will continue to drive higher gross margins lower SGN, a higher net margins from a stronger bottom line as a direct result of this carefully managed strategy.
I also want to add my thanks to all of our associates and trade partners for all of their great focus and hard work from the year like no other.
I'll now turn it over to Diane.
Thank you John and good morning, everyone.
I Wonder if you've heard some of our financial results from Stuart Rick and Jon I'll begin by recapping certain of our Q4 2020 highlights and then provide guidance for 2021 so.
Let's start with the balance sheet.
Our three areas that I want to touch on inventory cash flow and debt so starting with inventory.
We executed on our strategy to become land lighter improve returns and generate increased cash flow at quarter end, we owned a 187000 home sites and controlled 119000 home sites.
This resulted in our year supply earned decreasing to 3.5 years from 4.1 in the prior year and our home sites controlled increasing to 39% from 33% in the prior year.
We continue to we continue to make progress in reaching our goal of three years supply owned and 50% home price controls by the end of fiscal 21.
And then turning to cash flow, we generated $2 billion of homebuilding cash flow through the quarter and 3.8 billion for the year, our content confidence in our operating platform and ongoing cash flow generation enabled us to increase our annual dividend payments during the quarter to $1 per share.
50 cents per share. This increase is one component of our overall strategy of focusing on total shareholder return.
And then looking at debt.
We continue to make progress with our strategy of reducing our debt balances and leverage ratio our strong cash flow generation enabled us to pay off 1.2 billion of debt during the quarter and $2.1 billion. During the year. The fourth quarter included the early redemption of all senior note, which was approximately.
$900 million that were due in fiscal 21.
With that payoff, we now have no senior note maturities until fiscal 20 turning to.
These actions combined with our increased equity base, resulting in a year end debt to total capital ratio of 24.9%. This is the lowest debt to total capital ratio we has ever achieved.
Just a few final points on our balance sheet, our stockholders' equity increased to $18 billion from 16 billion in the prior year.
And our book value per share increased to 50 755 from 50 49 in the prior year.
Finally during the quarter, we were pleased to be upgraded by Moody's to an investment grade rating. This rating joins the investment grade rating previously received by Fitch selling.
So in summary, our balance sheet is very strong and we will continue to remain focused on generating long term returns for our shareholders.
And so with those balance sheet highlights let me now briefly review our operating performance starting with home building for new orders. We ended the quarter with new orders of 15214, a 16% year over year increase and as we focus on matching sales and production and.
New orders or dollar volume was $6.3 billion up 22% from the prior year. Our sales pace was 4.3 for the quarter compared to 3.4 in the prior year. We ended the quarter with 1177 active communities and our cancellation rate was 12%.
For the quarter deliveries totaled 16090 down 2% year over year.
This was largely a result of the production loss to COVID-19 earlier new year.
Our gross margin was 25% up 350 basis points from the prior year. This was the result of stronger pricing power, which allowed us to increase sales prices and our continued intense focus in construction costs.
Our assets DNA with 7.5% as a result of creating an efficient operating platform and continuing benefits from technology. This is the lowest quarter SGN a percent we have ever reached.
This resulted in a net margin of 17.4% for the quarter, which is the highest quarter percentage ever achieved.
And our financial services team also executed at high levels reporting $151 million of operating earnings mortgage operating earnings increased to $125 million compared to $57 million in the prior year mortgage earnings benefited primarily from an increase in volume through.
Higher capture rate of increase deliveries, 81% versus 78% last year and a lower percentage of cash buyers combined with an increase in secondary margin.
Total operating earnings were $28 million compared to 23 million in the prior year title earnings.
Primarily due to an increase in closed orders and a reduction in cost per transaction.
LMS commercial had operating earnings of $1 million compared to $3 million in the prior year due to lower securitization volume.
And with that brief overview now, let's turn to guidance on price.
As I provided I'll first provide detailed guidance for the first quarter and then some high level guidance for the fiscal year, starting with home building, we expect Q1, new orders to be in the range of 14500, 14800 home and our Q1 deliveries to be in the range of two.
12200 to 12500 home.
Our Q1 average sales price should be around 390000 flow.
We expect our Q1 gross margin to be in the range of 23.5% to 23.75% note. This margin is lower than Q4 2020 due to the normal seasonable seasonal pattern as a reminder, we expense field costs in the current period.
So there is typically a headwind to Q1 gross margin as compared to Q4 gross margin due to the lower homebuilding revenues in Q1.
We expect our Q1 as DNA to be in the range of 8.9% to 9%.
For the combined homebuilding joint venture land sale and other categories. We expect Q1 earnings of approximately $5 million we.
We believe our financial services earnings from Q1 will be in the range of $110 million to $115 million and for our multifamily operations. We expect a loss of approximately 2 million to $4 million.
For the other category related to the legacy rate Alto assets and our strategic investments, we expect Q1 earnings of approximately $5 million.
We expect our Q1 corporate DNA to be about 2.1% to 2.2% of total revenues for first quarter contains certain front loaded expenses that will not occur in the remainder of the year. Our corp. DNA expense for the year should be consistent with fiscal 2020.
We expect our tax rate to be approximately 25.3% and the weighted average share count for the quarter should be approximately 310 million shares and so when you pull all this together this guidance should produce an EPS range of $1.64 to $1.74 per share for the cash.
Better.
And now turning to flow to the full year fiscal 2021 here are a few high level guidance points. Please.
Expect to deliver between 62060 4000 homes with an average sales price for the year of approximately 386 to 388000.
Our fiscal 21 gross margin is expected to be in the range of 23.75% to 24%. We expect continued price appreciation and leverage from field expenses throughout the year somewhat offset by higher lumber and other anticipated cost increases.
Our fiscal 20, Onest junaid should be in the range of 7.8% to 8% and we expect our community count to grow 10% by the end of the year financial services earnings should be in the range of 400 to 425 million and we expect our tax rate to be approximately 25.3%.
And finally before I turn it over to the operator I'd like to say, thank you to the accounting and planning team.
His hard work and focus enabled us to hold our year end conference call today December 17th two and a half weeks after year end. Thanks to all of you. It is very much appreciated and with that let me turn it over to the operator for questions.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on mute your phone had record your name clearly if you need to withdraw your question press Star two weeks.
That you limit yourself to one question and one follow up question until everyone has had the opportunity to have their questions answered.
First question comes from Stephen Kim with Evercore ISI. Your line is open.
Thanks, very much guys and congratulations to everyone.
For your strong performance.
And your guidance was also extremely interesting for us.
Many aspects of the guidance you know were very very positive and the one the one area that I was curious about trying to gauge the level of conservatism that you've incorporated isn't your ASP guide for closings.
I observed that Youre order price ASP rose almost 3% sequentially from the third quarter GAAP.
That would seem to suggest that because I assume there was some mix shift in that negative mix shift I assume that that means that like for like pricing is up.
About at least one per cent per month in the quarter and I was curious if this level of like for like pricing.
Accelerated throughout the quarter.
Or not and if so if you could provide a little bit of color on the closings ASP guidance, which I think is looking for a decline I assume that's mix, but just wanted to ask the question.
Yes, Steve I'll I'll answer that so couple of points. If you look at the ASP in new orders from the third quarter remember some of those that did close in Q4, so that was part of the.
ASP in Q4.
Additionally, if you look at the ASP and backlog, which is around that same range note that the number of homes in backlog is about 30% of the midpoint of our guidance. So the point there is that while some of that will bleed through there are other communities.
Coming on and quite a few during the year or are those that have not started producing new orders yet that are lower down the price point as we continue to really focus on affordability and so what you're seeing is a small snapshot of what you'll see in the quarter. There are other pieces from China.
Small snapshot of the year there are other pieces that will migrate that price down.
Got it great. Okay. So many comment on the like for like pricing, though that we saw in the quarter. It but I would assume that you probably saw at least one per cent per month can you give us some color around that.
Yes, I'm not sure we're going to give a percent Steve, but we did see like for like pricing throughout the quarter.
And David accelerate at all Rick.
Yes, it was it a gradual increase through the quarters day.
But but let's let's just say, Steve you're you're clearly.
Clearly seen pricing power. So when you look at like from like you're you're you're definitely seeing.
Acceleration as we went through the quarter.
Just remember that we are.
We have been focusing on entry level, a little bit more.
Although that upward spiral and demand entry level, giving rise to move up and move up the second move up is taking place at the same kind of simple balancing our product offering.
So everything that you are seeing is part of the averaging including the like for like increases that were clearly seeing through the quarters as well and as we go forward.
Great Thats. Thanks, Stuart that's that's kind of what I was looking for the second question relates to capital allocation. It seems clear from your opening remarks, and just a result of the companies moving to a higher level of profitability here for the <unk> for the foreseeable future, but controlled land spend and an already pretty under Levered balance sheet. Meanwhile, you got the multifamily and.
The other ancillary business platforms that seem to be if anything nearing a harvesting stage. So bottom line. The question of what you're going to do with all this cash flow and the cash that you are going to be having is a is a is becoming very relevant you already retired a lot of the debt that we had coming up so how should we be thinking about.
Your plans for capital allocation and specifically I'm curious as to how you think about the appropriateness of a stock buyback an increase from an acceleration in your stock buyback program.
So let me let me start by by saying, Thank you from pointing that out.
Because that's a that's exactly what we're focused on I hope you're hearing a great deal of confidence in our operating platform and what we think is going to happen with our cross.
Profitability and our cash flows.
And on migration and land position through 2021, because it does suggest an indicator.
That our cash position will continue to accelerate.
So the starting point in our office here is to focus on total shareholder returns.
And I think that we're.
We are laser focused on thinking about new you've seen the beginnings of that with the increase of our dividend.
We weren't shy about that we recognize the cash flow that we were seeing and its direction.
And we've made a migration and dividend last quarter, you've seen that we have accelerated some of our debt reduction, which only tends to de lever the company and some might say that were under levered.
We're not apologetic about that.
But at the same time the cash flow that we are witnessing gives us a myriad of opportunities together with our ancillary businesses to think about how we generate higher returns as I said in my comments youre going to hear more about this over the next couple of quarters.
A a stock buyback is clearly not off the table.
And it is something that we're looking at as we look at how we generate higher returns as we move forward.
But I hope you're hearing that there is a great deal of confidence and our earnings and cash flow picture right now.
Great. Thanks, very much Stuart and good luck okay.
Okay. Thank you.
Thank you.
Next question comes from Alan Ratner with Zelman and associates.
Proceed.
Hey, guys. Good morning, Congrats on a day, a really strong results im glad to hear everyone's doing well on the line there.
Thank you.
Stuart I apologize my audio cut out for a minute or two during your comments. So if you addressed this I apologize, but a few years ago, you kind of threw out a.
Longer term gross target of I think was about 5% to 7% and part of that I think was which were you maybe saw the market going but I think more of that was just where you felt the business with the most efficient in terms of gross over a over a longer time period.
And I'm curious based on kind of your some of the guidance you've given for next year sounds like you're ramping your production to four and a half starts per month, which would imply something well in excess of that type of gross level and I'm. Just curious based on whats transpired this year with Kobe, it and some of the demographic tailwinds that you're seeing whether.
That target range has shifted higher and you think that perhaps the business can grow efficiently add perhaps a little bit of a stronger growth rate than that.
Hi, Good fair question Alan.
The reality is that in an orderly and.
An order lead growth market.
As we were witnessing going into 2020.
We felt that the appropriate growth level and given our cash flow and returns focus.
It was in that it was actually 4% to 7% range.
But as.
As co that came into the market pause.
Pause.
And then accelerated the housing market.
Production levels and the needs of the of the homebuilding business in general have accelerated rather dramatically and we've clearly adjusted our growth targets.
So what you're seeing for next year is between 15 and 20% growth rate.
We've embraced and we are focused on going forward.
We are continuing to new to use.
You know market driven.
Indicators to define our growth rate as we go and.
Work towards 2022.
If you look at the indicators right now, we're probably on target to be growing at a similar rate for 2022, so you'd have to put aside that 4% to 7% range because we're going to have to find a way and the industry is going to have to find a way to.
To grow at an accelerated pace as we are supply constrained and the market is just calling on the home builders to produce more.
And to produce more affordable housing.
So we are part of that picture you saw it in starts and permits this morning.
The surprise to the upside, we're starting to get to that million and a half level production.
It's probably weighted a little bit more towards multifamily right now but single family.
Seems like its going to follow suit.
And we're just going to need more dwellings in the country the appetite for housing.
This is accelerating.
I will share Sean I'd also would add to Steve's comments.
As we focused on simplifying our product offering and our production machine. It's also enabled us to really keep what we view as a maximum efficiency level at a higher pace. We're doing this with smaller product lower price point and just an overall more efficient production operations.
Great.
I appreciate both of that but from your comments, there and I think it it dovetails a little bit into my follow up which is your strategy. This year I think has certainly been extremely prudent and you are seeing the benefits of that on your gross margin.
And John I appreciate all your comments about the kind of digging into the weeds a little bit on on the the other moving pieces there on on maintaining that Keith.
Consistent production level.
On the other side you know some of your competitors have have been much lumpier in terms of their growth rate and I think as we look at.
The backlog is across the industry for example, and you know what is poised to be a huge step up in production in order to satisfy that demand. It kind of feels like there is going to be some stress on the supply chain as we roll into 21, and while you're managing your business effectively do you anticipate any repercussions from that you know what I'm really thinking about is labor inflation.
Yes, potentially the dynamic we saw a few years ago, where builders were kind of stealing trades off of each other's job sites to get home built and delivered on time.
Do you think there's any risk to your business as a result of what you're seeing from from other builders right now.
Oh I think there's there's no question as I mentioned my comments that the environment. We're in good today is defined by labor shortage and pricing pressure, but we've heard consistently from us for many many quarters not only the Neos you got to focus on our builder of choice strategy and Thats holding us from it.
Really good stead and be able to coordinate.
Forward plan with our strategic trade partners and to really manage.
An offset the cost increases that are out there in the environment and more importantly, the predictability of our labor needs and be able to think way ahead with our trades as to those new so they can properly plan and be ready for us.
Let me add and say that what you've seen from US is a very steady hand.
Steady through the noise other builders have produced higher.
Growth rates and sales paces.
We've stayed focused on our business plan, our strategy and I think it's it's a it's a steady program that enables us to maximize the engagement with the supply chain and to remain consistent and I think you know that it John.
Jon and Rick have been a steady rather through those waters and.
And I think it's going to continue to reflect on strong bottom line strong cash flow from a lot of predictability.
Great. Good luck, guys and happy holidays.
Thank you you too.
Our next question will come from Carl Reichardt with BTG. Your line is open. Thanks morning, everybody. Thanks for all the color today.
Dan It's nice that you get your first I think January 1st off ever.
Stuart I had a sort of bigger picture question for you is as the vaccine because it vaccine is distribute out.
Through the country hopefully quickly I.
I think we might anticipate some shifting consumer expenditures back to all the things. So many consumers have not been able to buy and do for the last year or so are you anticipating if that happens for there to be had a negative impact on on expenditures on housing and and if so how did you recognize in react to that.
No well first of all I do hope that there is going to be a shift back to the restaurants in the movie theaters in the vacations I think that.
A robust economic recovery.
Requires some of that reversion to normal lifestyle. So I.
I am optimistic that.
There will be.
A book.
Kick back to normalcy, but.
But I don't think that that's going to have a negative impact I think it's going to have more of a positive impact on.
The housing market I think that yes.
Interest rates are low when they're going to remain low stimulus.
Stimulus money will come to the government.
I believe that it will I can't prove it but I think so.
And I think that.
A stronger economy in a broader based strong economy is going to be better for housing I think that.
I think that.
The current strength in the housing market the rise from both the millennial.
Generation really kicking into high gear and family formation.
Frankly.
In an awkward way covance has facilitated.
That accelerating.
And then of course the big.
Cobra driven recalibration for how people are using their own I think there will be some sticky miss to some of the habits change so.
I think overall, we've we've all learned some new habits, and some new customs and tricks, but I think a lot of it revolves around having the home of your choice and having your home be the hub of your life and.
And so I'm pretty optimistic about where the housing market is over the next years remember called that debt over the past 10 years, we have been under producing housing.
And and we're going to have to make up ground. There. So for the foreseeable future I think we're going to see strength in the housing market.
Great. Thank you for that Stuart and then.
John or for Rick can.
Can you talk a little bit about the evolution of the FIFO. The FIFO inventory release matched to sales and I'm kind of curious if if that's becoming more of a of a help to the governing you or your sales rate than just raising price is to try to slow sales down it was an interesting Uh huh.
Through John I'm, just kind of curious, how it's evolved and and and if it's company wide.
And how it's it's it's working to to to maximize margin and pace at the same time, thanks very much home.
Sure I'm Happy Day Trust, so our FIFO pricing and sales strategy is not something new or close it related.
We established this process.
In one of our divisions out west in Reno, and really fine tune that and saw its effectiveness and not just maximizing pricing power, but really creating efficiencies throughout the process that affects every part of what we do.
We actually rolled it out other division President Presidents' meeting about two years ago.
And started with some pilots divisions.
Well its effectiveness in all different types of markets and have rolled out throughout the entire company. So this this exists in every one of our divisions and to to your point. It isn't just about maximizing pricing power by having a limited number homes available that really allows us to very carefully manage.
Match that sales pace to production pace and so to be very forward looking about any adjustments that we need to make in pricing and incentives up or down as the case might be to very.
Very meticulously manage that pace and it just creates consistency and even flow that affects really your DNA levels to be level, instead of having to be positioned for peaks and valleys.
Great. Thank you John and thanks, everybody happy holidays.
Thanks, Paul.
Thank you. Our next question comes from Truman Patterson with Wells Fargo. Your line is open.
Hi, Good morning, everyone. Let me add a nice results as well. So question on cash flow. You know you will generated 3.8 billion and build or cash flow on net income of only you know I think 2.4 billion. This year when we're looking out to 2021 or how should we think about that.
Free cash flow conversion from net income and clearly there you know likely a handful of moving parts between continuing continuing to bring down your owned lots supply.
Reinvesting in option land et cetera, and possibly you know rebuilding some of that spec pipeline I'm, hoping you can walk us through some of the moving parts there.
Yeah. So.
I'm going to ask Rick to weigh in on this but before he does let me just say that.
But you know we.
We learned that there are some tricky parts of the calculation than the guidance that we can give them. We recognize the cash flow is one of those you know.
Gross.
At a higher level as a headwind to cash flow.
The migration of land from a from a day.
Owned two controlled a greater percentage and a lower.
Your account is a tailwind to cash flow. So weve been careful not to want to lay out is because the parts will move around to layout specificity, but go ahead.
So I'm not going to answer that Stuart [laughter], that's a mouse trap.
[laughter] I guess I guess, all I would say is.
As as we continue to more and and execute on reducing the new year's alone and that gets into option. There is no doubt that that is a significant generator of cash and you know the unknowns as Stuart has identified and as you I have a.
Appropriately pointed out is as we build the level of inventory to ramp up to that 62 to 64000 home delivery pace.
Thats a reinvestment in cash and so there's a lot of moving pieces in here and I'm sure Diane will give you more color on this in in in and follow up call.
But but let me let me say that as we look ahead to 2021.
We have a great deal of confidence that our cash flow is going to be very strong you're absolutely right. This past year. We earned just under two and a half billion dollars net income and drove $3.8 billion in cash flow.
Some of that is migration of our land strategy that land strategy is going to continue through 2021. So we're fully expecting that we're going to have very strong cash flow through the year, but we're not guiding it specificity.
Okay, Okay, and just real quickly on that owned land supply do you think you can bring it down below three three years eventually.
I think that debt.
If you look at where we started at over four and the transformation that we've had in a very short period of time.
We're really enthusiastic about getting interest rate and we're just going to have to see how low we can get it theres definitely a possibility to get it below three definitely a possibility we.
There is a balance because we have some markets, particularly the western markets that.
That yet in order to be a big large player in those markets you have to self develop so John has done a great job John and the team has done a great job it and working through and creating some very unique structures to to help us get there and so I would just day stage.
And I think that the laser focus of the of the management team is to think about land and the system around land as adjusted in time delivery system, and we are going to get closer and closer to that aspiration.
Okay, that's very helpful.
Second question on gross margins you know you all focused on driving pricing to kind of cap absorptions and you know cover the FIFO cost if you will more than the other builders and clearly based on your gross margin guidance. It appears your homes are selling at a premium.
In the market you know this might be hard to quantify or a bit of an unfair question, but is there any way you could possibly quantify what magnitude you are homes might be selling at a premium and as we move forward as kind of market conditions potentially normalize where there is a bit more balance between supply and demand do you think that premium.
Potentially shrinks overtime.
I don't think it's so much a premium as I think it's an orderly process that is driving the average higher.
And so I think we're competing in a market where customers understand what the value proposition is I think it's just process driven.
But we are just driving a higher sales price by an orderly process of production and sales.
And so I wouldn't think of it as a like kind premium if you go out to the market and look at our 15 or two that are 2000 square foot home.
Store to someone else's I think it's just a matter of process.
And I think our product strategy. Our everything's included program makes it much easier for our customers to make a buy decision because they don't have to make any choice.
And that's a big differentiator.
I would just briefly I bet, you think about our FIFO strategy, we price to market and what the market will bear not to what our competitors are pricing.
Okay.
Okay. Thank you all and good luck on the upcoming quarter. Thanks.
Thank you very much.
Let's take one more question.
Our question comes from Michael Rehaut with JP Morgan you May proceed.
I think it's thanks for sneaking me in congrats everyone index glad to hear everyone's doing well and.
And congrats to Allison as well Allison Vogel, great to hear the news there.
The first question just around gross margin you know great success, there and are real realization of of the price over pace strategy or steady pace and driving price.
I wanted to delve in a little bit too if you can kind of break down the upside.
In the Fourq results, where that came from that move is more just better than expected pricing power during the quarter or mix.
And then as you look into 21.
It seems like your guidance would imply you know fourq margins down year over year, you know as we get towards the end of the year and I just didn't know if there was any conservatism there and you had mentioned Oh, you know lumber in maybe labor inflation.
But historically you know when you're in an inflationary cost inflation environment, you're able to at least offset that with future pricing power oftentimes as we've seen in the past so kind of a two parter. There again first drivers of the Fourq you upside and then how to think about margins in particularly the book.
Cash at 21.
Right.
So I guess I'd say with regard to the overall gross margin guidance for the year and the trajectory through the through the year I I'd really like to start off by pointing out that there's a huge over 100 basis point year over year increase.
The increase in the gross margin guidance and.
Net there there are certainly arsone sales.
From things that are impacting.
The margin as we work through it one is lumber did increase pretty dramatically and we're now in the throes of dealing with that although we've done a great job in offsetting price it raising prices.
The other driver is the overall increase in our option.
Deliveries by increasing the share of option versus controlled.
We have a tendency to have a little bit lower margin gross margin on that because someone else is taking the risk of owning that land.
And so I don't think you'll see quite as much.
Dr. throughout the year as we've seen in the past because of those two cents.
And then on the thank you for that Rick and then on the Fourq you upside.
Yes, I think yes, I think I think theres, an adequate amount of conservatism as we look out four quarters, we're going to have to wait and see how the pricing power plays through.
And so you know I think we tried to give a lot of detailed guidance and some directional guidance for the detailed guidance for the Corp, first quarter and directional guidance for the year and as Rick notes.
No.
Our average is.
For the average for the year of 100 basis points improvement.
Which is sizable we'll have to see how pricing power meshes with production costs and.
And Mike and I, probably would just not in Q4 2020. It was if you look on a per square foot basis. It was equally split with an increase in the ASP per square foot.
With combined with equal decrease in construction costs per square foot, so pretty balanced between developed with them.
Okay.
Appreciate it and secondly, Stuart I heard Andy is paying attention here in one of your answers.
Addressing new closings gross for 21 and.
A blues talking around you know prior kind of gross outlooks in maybe mid single digit area and now we're looking at 21 and 15% to 20% I believe you had said that you could do a similar gross rate in 2022, which is you know.
This point also you know solidly above you know consensus estimates and where the street is new probably most investors.
I I just wanted to revisit that comment and if that was you know talking.
Talking more just to you.
You know your production potential and what you think you can you know kind of further drives through your infrastructure.
Or you know based on you know community count Grace and your shift to higher turning or I'm, sorry high volume communities.
From that this is more of a.
15% to 20% growth rate based on you know again your community count pipeline and obviously, assuming you know a continued steady or improving market.
You Indeed are looking at.
Something in the hire of this higher gross rate.
Continuing into 22, I just wanted to get a little more definition on that comment.
Well listen Mike, Let me start by saying Thank you for listening carefully to the things that I say not not everybody does that.
And and.
And I just want to appreciate the fact that you were listening carefully.
So yeah.
Exactly right I said, what I said and I said, what I meant if.
If you think about.
What we have day lighted in the entirety of the call today.
We have a day later than expectation that our community count will be growing through 2021.
We have delighted that we are focused on more productive larger communities producing higher volume.
Rather than smaller incremental communities.
We have day lighted the sum of our community count has dissipated as we have.
Worked through some of the smaller less productive cash Atlantic communities.
And and and close them out.
We have day lighted our matching of production together with our sales pace and migrating our production pace upward.
Over the course of this year over the next quarter either.
We are we are ramping up not just our productivity per community, but the style of communities that were tending to purchase.
And if you kind of bring that forward through 2021 and into 2022.
You can't help but unless the market tells us and data tells us to home down or turn down the spigot.
You can't help but start to think and project forward. The 22 will continue a growth trajectory that is somewhat similar and we're building a greater confidence in our ability to look ahead and to do that assuming market conditions remain strong.
Then going back to my comments in the opening.
I think that if you think about the confidence that we are projecting about market condition thinking about a 10 year hiatus or production deficit.
That underlies the current market conditions and the general rate.
Growing demand with limited supply for the foreseeable future. The market is asking us to grow at a greater growth rate and we're building confidence that we're going to be able to meet that challenge. So you heard me right. Thank you for listening and Thats exactly what we intended to say.
Great. Thanks, so much Stuart and and good to talk to everyone have a great holiday season.
Great and I guess in closing, we'll say happy holidays to everybody. Thanks for joining our year end call and we look forward to up the updating in the future. Thank you.
Thank you that does conclude today's conference. Thank you for participating you make it.
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