Q1 2022 Lennar Corp Earnings Call
Windows and the countless other stumbling blocks and obstacles that have presented intermittently to insured chaos in a production cycle that is difficult even when everything is going right.
The supply chain effects, both land and construction and that will continue into the first quarter of 2022 and beyond.
But as we enter the second half of the year. We expect this that the supply chain disruption will be stabilized and mitigated by the greater number of starts that we have started by the lessons learned and incorporated in our builder of choice relationships and by the simplicity embedded in our everything's included.
<unk> offerings.
And let me say that can give us in his extraordinary purchasing team have done an amazing job of navigating this difficult landscape.
I also want to warmly acknowledge Jon and Rick are co Ceos, who have chosen not to sit on high perch in difficult times, but instead went to the problem and solve for themselves. So they could be part of the solution.
Together as partners they visited each of our 38 divisions over a six week period met with our production and purchasing teams in the field got a tangible feel for the most significant issues and translated their visits into solutions.
<unk> focus and attention problems are being solved and that is simply the lenoir way.
Even with the challenges in the market.
And our fourth quarter, we delivered just under 18000 homes, which is every single home that could be delivered as our customers expected and wanted their home for the holidays.
We grew our deliveries of 11% year over year, while our revenue from home sales grew 24% to almost $8 5 billion.
And by remaining laser focused on orderly targeted growth with our sales pace tightly matched with our <unk>.
Pace of production, we drove a 300 basis point gross margin improvement to 28%.
Alongside gross margin, we recorded a significant improvement in operating efficiency as our SG&A decreased 150 basis points to 6%.
We continue to limit our land, we excuse me, we continue to limit our sales pace, especially as cycle times expand in favor of us significantly benefited bottom line.
Accordingly, our net new orders grew 2% and theyre expected to contract slightly slightly in the first quarter.
With our sales discipline, our net margin increased 460 basis points to a company all time high of over 22% in our fourth quarter.
This drove a 50% after tax and before mark to market items bottom line improvement in net earnings to over $1 $3 billion. This year.
So with our focus on bottom line over topline improvement, 24% revenue growth drove 50% bottom line growth.
Additionally, our financial services group continued to perform exceptionally adding $111 million of earnings while supporting the closing of every possible home and making the closing process as joyful as possible in the current environment.
With the strong performance of our core operating divisions, our balance sheet and returns continued to improve as well.
Even after the repurchase of 10 million shares of stock and the reduction of $850 million of debt in the quarter, we reported a cash balance of over $2 7 billion.
And an 18, 3% debt to total cap ratio, while our return on equity grew almost 800 basis points year over year to 22, 6%.
All in all our core operating numbers are very strong in the fourth quarter, and we expect that strength to continue into 2022 and beyond.
From a macro perspective, the housing market remains strong across the country.
Demand has been consistently strong while the supply of new and existing homes remains limited.
Since new home construction cannot ramp quickly enough to fill the demand short supply is likely to remain for some time to come.
Even though home prices have moved much higher overall affordability remains strong.
Interest rates are still very attractive and personal savings for deposits are strong way.
Wages for the average family seem to be rising faster than monthly payments and those higher wages are starting to be reflected in government numbers, and unfortunately and inflation as well.
The upward spiral of housing purchase is accelerated purchases is accelerating millennials are forming families apartment dwellers are purchasing first time homes first time homes are selling at higher prices and appreciate appreciated equity, it's enabling first time move ups the move.
<unk> home is selling its strong pricing with increased equity, enabling customers to purchase an even larger home.
All of this while supply is limited for everyone and the buyer in single family for rent participants are providing additional liquidity to the marketplace.
Against this backdrop and although there has been some turbulence through the year 2021 has been an extraordinary strategic year for our company.
We established a strategic plan that included cash flow generation and debt reduction in order to improve returns on capital and equity.
We also articulated a drive and desire to have a strong focus on new technology, driven efficiencies in our core business, while we spin ancillary businesses and become a pure play homebuilding company.
Our 2021 performance reflects focus on these strategies and 2022 will be extension and extension of the same focus in.
In 2021, we generated almost $3 billion of homebuilding cash flow to enable a reduction of debt by $1 3 billion and a purchase of 14 million shares of stock for a four 5% reduction in share count.
Accordingly, our debt to total cap is below 20% and we haven't and we have $2 7 billion of cash on hand.
Our total debt is $4 7 billion and we will continue to be reduced we also reduced our land holdings to three years as promise and increased our land controlled versus 1% to 59% exceeding our goal at the beginning of the year.
We have almost certainly established <unk> as a technology enabled and engaged company.
We invested in numerous new technologies, while eight prior investments were either sold or went public which resulted in significant extraordinary profit for the company. This year.
Perhaps more importantly, we have invested in companies that have enabled improvement in our core business. While we have benefited both through the investment and through incorporation in our core.
But this is just the beginning.
We are working with numerous additional technology companies that are working to solve some of the most difficult problems facing our industry.
As a case in point, we are working to solve the issues in supply chain labor shortages and production using innovative technology and innovative ways.
Many of you have read and commented on.
Our investment in icon, the three D printing building company in Austin, Texas.
We expect to start our first three D printed community in Austin sometime in 2022, and hope to reduce labor material and time as we help refine this structural production process.
Alongside icon, we have invested into additional innovative production companies called Vive and cover and they're engaged and innovative factory based manufactured solutions to production.
Both <unk> and cover are focused on a more comprehensive solution beyond just the structural components and encompass mechanical electrical and plumbing solutions in the factory as well.
These companies are working on each of the major components of the home and building better and more precise delivery systems that will reduce the need for labor and enhanced precision and cycle time.
All of these companies are focused on the most frictional and problematic elements of the production process and driving towards solutions for the industry.
Given today's supply chain and workforce constraints, we should all be interested if not laser focused on the success of these critical solutions Lenore most certainly is.
And finally 2021 has in fact been a year of focus on the strategy of becoming a pure play homebuilding company.
We have been hard at work refining our spin co that I've described in the past.
As you can see from our balance sheet and cash flow. The case for spin co has become more compelling with each quarter's successes.
We have excess capacity and balance sheet to spin our well established ancillary businesses and we expect to complete a tax free spin by the second or third quarter of 2022.
To that end in November we took our first significant adapt to complete the spin by formally filing a request for a private letter ruling from the IRS.
We are getting very close to being prepared with defined business lines, a refined business plan and our balance sheet.
We expect to file.
We expect to file our first confidential.
Form 10 by the end of January or beginning of February at which time, we expect to have a name other than spin co and the management team in place.
Some have asked about the time, we have taken to disclose greater detail. The fact is we're building a durable and sustainable public company that has to hit the ground running on day one.
To that end, Matt Zama as senior adviser to the company has been focusing on the configuration and execution of our spin co strategy.
In addition to and supporting that Jeff Mccall.
Questor team of senior internal leaders have modeled various configuration with different asset composition that are focused on getting both the program and the story right for the public markets.
We have concluded that the spin company will be an asset light asset management business.
That will have a limited balance sheet.
Many of the assets that we targeted for spin originally will be either part of the limited balance sheet of spin co or will be monetized in the form of assets under management housed within the private equity verticals of spin co or have been or will be resolved or monetize in other ways, but.
Monetization has been and will be completed completed over the next year or so and the cash proceeds will be deployed in lenore to fortify our balance sheet or to continue to buy back stock on an opportunistic basis.
In winter and when our stock is on sale like today, we'll be purchasing.
Three core verticals have been identified and business plan for the spin and they are multifamily single family for rent and land strategies.
Each of these verticals already have raise third party capital and our active asset managers.
<unk>, our multifamily platform has approximately $9 billion of gross capital under management and is raising its third fund.
<unk> are our growing single family for rent platform. Currently manages approximately $1 5 billion of equity already raised and our land strategies platform is still being refined for spin co and we will provide more detail in the near future.
The remaining <unk> Corporation will drive higher returns on our assets and equity base and the spin will not result in a material reduction of either our bottom line or our earnings per share as we project them.
Bottom line. This was a year of hard work it was more in the face of many issues and there were no feet up on the desk during the year.
So let me wrap up and conclude by saying that we have simply never been better positioned financially organizationally and technologically to thrive and grow in this evolving housing market the.
The market in general remained strong while difficulties in the supply chain presents challenges for Lamar and the industry. The housing market remains strong and supply of new and existing homes is very limited.
We remain focused on an orderly targeted growth strategy with our sales pace tightly matched with our pace of production, we focus on gross margin by selling in step with production, while controlling costs and reducing our SG&A SG&A and therefore driving.
Our net margin.
As we look to 2022, we see continued strength in the market and double digit growth for Illinois.
As we noted in our press release, we're projecting 12500 deliveries at a 26, 75% margin in the first quarter and 67000 deliveries at a 27% to 27, 5% margin for the year.
At this pace, we will have a strong bottom line with a projected spin off in the second or third quarter 2022 will be another record year for Lamar and with that let me turn it over to Ray.
Thanks sure as you can tell from Stuart's opening comments the housing market is very strong our team is extremely well coordinated in our financial results continued to benefit from a solid execution of our core operating strategies key to that has been running a fine tuned homebuilding machine.
We carefully match.
Homebuilding production with sales on a community by community basis.
It continued to strategically sell our homes later in the construction cycle.
<unk> sales prices and to offset potential cost increases to that end, we have slowed sales to generate higher profits.
Our fourth quarter results prove out the success of this strategy as we achieved gross margin increases of 300 basis points year over year.
70 basis points sequentially.
During the fourth quarter, we started four five homes per community sold four three homes per community and we ended the quarter with less than 160 completed unsold homes across our entire footprint.
This production margin driven and sales focused program, we will continue to improve margins and lead to increased deliveries in profits in fiscal 2022.
In the fourth quarter, new orders deliveries gross margins were solid.
Each of our operating regions.
We continue to achieve price increases and saw strength in all product cost categories from entry level to move up and in our active adult communities.
Here's some color on some of our stronger markets across the country.
Florida continues to benefit from core local demand as well as in migration from the northeast and Midwest and the West Coast, which is driving both sales pace and price inventory is extremely limited.
Hottest markets in Florida continue to be Naples, and Sarasota in the southwest Miami Dade and Broward and the South East and Tampa Orlando has also been sustaining a strong recovery with a significant rebound in tourism.
These are all markets, where we are the leading builder.
With the best land position.
In the Carolinas Raleigh, Charlotte Charleston are extremely strong markets.
Inventory is very limited and the combination of core local demand and in migration continues to push both sales pace and price.
We are also the top builder in each of these markets.
Indianapolis continues to see strong and steady growth.
The combination of in migration from the northern markets in the West coast as well as affordable housing and quality of living is driving sales pace and pricing.
We're the largest builder in this market.
Texas continues to be the strongest state in the country with in migration from East and West.
The state's pro business employer friendly economy is driving corporate relocations and tremendous job growth, especially in the technology sector.
The state is also benefiting from a recovery in the oil and gas sector.
<unk> market in the country continues to be Austin with recent announcements by Samsung electronics to invest $17 billion in a new chip manufacturing plant.
And capital is announcement to relocate their corporate headquarters to Austin. In addition to finishing construction. This month on a $1 1 billion Giga factory.
These two companies alone will create thousands of new jobs in Austin.
The Colorado market picked up momentum in the fourth quarter, and we saw strength in both sales pace and price.
With over one sale per community matching our start space.
Phoenix and Las Vegas continue to be strong markets, both benefiting from business friendly environments real job growth and in migration from California.
Casinos in Vegas are full and the city is benefiting from increased tourist.
Phoenix is thriving because its incredibly affordable.
We entered the Boise market with two communities during the quarter.
And anticipate having eight active communities by the end of 2022.
This market.
<unk> to have strength driven by tremendous population growth and we're excited about our land position and our Mannar Boise team.
The Pacific Northwest continues to be a strong market as.
As natural supply constraints and constraints by urban growth boundaries limit production.
In spite of being land constrained we.
We are seeing solid year over year growth in these markets as we expand our geographic footprint.
The California markets remained strong.
Driven by the states severe housing shortage, there was more demand than supply.
As reported last quarter, the inland Empire, Sacramento and East Bay area have remained at some of the strongest markets with homebuyers looking for square footage and affordability.
During the quarter, we saw a resurgence in the core markets of the Bay area as more employees are returning to their offices or anticipate returning in the near future as such both core and inland markets are firing on all cylinders.
As I said these are some of the strongest markets.
There is strength and depth of market across the country.
Now I'd like to spend a few minutes talking about growth in community count.
During the fourth quarter, our community count increased 7% year over year, and 6% sequentially as we continued to focus on growth in our existing and new markets.
We expect our Q1 community count to be about 5% lower than year end 2021.
However, our community count will start to increase in the second quarter and we should end 2022 with a low double digit increase in community count year over year.
While supply chain issues and inspection delays are impacting the timing of some community openings.
We're in an excellent position for strong growth in 2022.
Our land pipeline remains robust with plenty of land in the queue to meet our goals over the next several years, we continue to see good buying opportunities in all of our markets and are confident this pipeline will produce strong community count growth for the next several years as we pursue deals to backfill.
The near term deals that are already under control.
We're also pleased with the excellent progress we made.
On our land light strategy as evidenced by our years owned supply of Homesites improving through our previously stated goal of three years at the end of the fourth quarter from $3 five years last year.
And our controlled Homesites percentage, increasing 59% from 39% for the same period equally.
Importantly, these improvements were achieved while growing our overall owned and controlled land position by 44% year over year with all of that increase in controlled home sites.
Given the progress we've made our new goal for 2022 is to end the year with $2 75 years of owned Homesites.
And with a 65% control position.
Our extreme focus on our land lighter model generated significant cash flow during the quarter. We ended the quarter as Stuart said with $2 7 billion of cash no borrowings on our $2 5 billion revolver and this was after repurchasing just under a $1 billion of our common stock and paying off $850 million in gap.
I'd like to thank our team of great associates across the country for their focus and solid execution can make all this happen now.
Now I'd like to turn it over to John .
Thanks, Rick.
I'll now give an update on how we manage through the impact of supply chain disruptions in the fourth quarter and how we have a plan for managing through them in 2022.
As Stuart noted, we have had to deal with our fair share of disruptions.
Similar to the third quarter. These disruptions are affecting different trades at different times and in different geographies. They are intermittent and they continue to.
It continues to be a game of whack, a mole that create stress and uncertainty can already strained labor base of materials, often do not show up when expected.
In the fourth quarter the supply categories that were most impacted on a national basis for garage doors windows paint HVAC condensers and flex up in cabinets.
<unk> there were a variety of disruptions in the delivery of materials <unk> availability of labor.
On average this increased our fourth quarter cycle time by an additional two weeks from the third quarter, bringing the year over year increase to a range of four to six weeks.
Despite these disruptions and the associated increase in cycle time achievement with our Soma should deliver approximately 18000 homes in the quarter as expected. This was a large part due to a record number of starts in our second quarter of 19500 homes to ensure we had enough inventory to meet our delivery goals.
Surely the extraordinary supply chain purchasing and construction teams that have never been better coordinated and are managing their scheduling a day by day basis in partnership with each of our trade partners we.
We continue to work with our partner to solve issues in real time.
As well as planning ahead for our future demand needs exam.
Examples of the strength of our strategic trade partnerships, when we had to take business away from our primary garage door manufacturer that constructively work with us to move the business over to another vendor.
When a major cabinet manufacturer fell behind due to labor and material shortages to open their factory for us on a weekend to manufacture 350 homes worth of cabinets in order to catch up.
These are just too many examples where we and our valued trade partners one solution to the challenges of the current environment.
Our decade long platform of Everything's included continues to be a strategic advantage and lessening the impact of the supply chain shortages with a simple program with fewer skus to manage allowing us to plan ahead and order a material needs far in advance.
As discussed in prior quarters, while our six year focusing on being the builder of choice for our trade partners.
This program has successfully created close knit relationships with our strategic building partners, allowing both parties to be nimble and adjusting to these disruptions.
We believe our strategic relationships have allowed us together with our partners to learn lessons from 2021, so we can be better prepared for 2022.
We've been meeting with our key partners along with additional new partners to allocate projected 2022 volume as opposed to just prioritizing available volume.
This way, we identify potential gaps and availability upfront, allowing for proactive versus reactive solutions. We've completed about half the categories. We will complete the remaining ones in the next few weeks.
We've added manufacturing and trade partners in key categories to ensure availability along with a continuous process of simplification to ongoing SKU reductions lastly, we have secured alternative distribution solutions to provide safety stock of certain commodities in short supply and materials.
We believe the combination of all these efforts will allow for the stabilization of the supply chain for <unk> in the back half of this year.
Turning to the construction cost impacts of our fourth quarter closings.
We're primarily from the lumber increases taken earlier in the year that are now impacting cost of homes closed in the fourth quarter costs were up $6 78 per square foot over the third quarter and lumber accounted for $4.18 of that increase.
We'll still see increased costs from lumber at our first quarter deliveries, but starting in Q2 and through Q3, we will benefit from lumber cost reductions.
We experienced cost pressures in Q4, and other material categories and our labor that will start to flow through closings in the second half of 2022.
On a final note as Stuart mentioned looking at recently spent six weeks on the road visiting communities and construction sites and each and every one of our markets. While we knew what to expect in terms of the supply disruptions and labor shortages, but we would see it was important for us to experienced this firsthand. So we can most effectively manage through this.
<unk>.
Importantly, this gave us the opportunity to meet with our teams and trade partners in the field listen to their ideas and shake their heads to thank them for their incredible dedication and effort, they give and delivering quality homes to our customers.
We can assure you that with our culture is alive and well and a stronger global would like to take this opportunity to again. Thank all of our one of our associates and trade partners for the incredible quarter, but they delivered thank you and I'll now turn it over to Diane.
Thank you John and good morning, everyone, Stuart and Rick and Jon has provided a great deal of color regarding our homebuilding performance. So therefore, I'm going to spend a few minutes on the results of our other business segments and our balance sheet and then provide detailed guidance for Q1, 2022 and high level guidance for FIS.
Full year 2022.
So starting with financial services in the fourth quarter, our financial services team produced $111 million of operating earnings mortgage operating earnings decreased to $77 million compared to $125 million in the prior year as we've indicated for several quarters the mortgage market.
It's become more competitive with purchase business as refinance volumes have declined as a result secondary margins has been decreasing this was the primary driver for our fourth quarter lower secondary margins as compared to the prior year.
Title operating earnings were $30 million compared to $28 million in the prior year title earnings increased due to growth in profit per transaction, partially offset by a decrease in volume driven by a reduction in refinance orders quarter after quarter. Our title team has been focused on automation.
And efficiency with the goal of driving higher productivity.
And then turning to manure either for the fourth quarter, Ireland in our other segment had an operating loss of 176 million. This loss was primarily the result of non cash mark to market losses on our strategic technology investments, which totaled $180 million.
As we have mentioned before we are required to mark to market. Many of our technology investments that are publicly traded and that valuation will fluctuate from quarter to quarter.
While the technology investments had downside with losses for this quarter overall for the fiscal year, our investments provided approximately $500 million of unrealized gains. In addition, and most important our investments continue to add value to our core homebuilding operation.
Turning to our balance sheet.
For the quarter and the year, we focused on becoming land later as a result at quarter end.
Owned a 182000 home sites and control 257000 homes.
A total of 439000 home sites.
Our year supply owned decreased two three years from three five years in the prior year and our Homesites controlled increased to 59% from 39% in the prior year.
Also laser focused on generating cash reducing debt and increasing returns is different.
Therefore, we ended the quarter with $2 7 billion of cash and no borrowings on our $2 5 billion revolving credit facility. We also retired $815 million of senior notes that were due in 2022.
Together with $300 million of senior notes paid in the third quarter. We retired a total of 115 billion of senior notes in 2021. Our next senior note maturity is $575 million, which is due in November 2022, and we have no maturity due in <unk>.
23.
Also during the quarter, we repurchased 10 million shares totaling $977 million, bringing the total repurchases for the full year to 14 million shares totaling almost $1 4 billion or four 5% of our outstanding shares at the beginning of the year. Additionally, we paid dividends.
<unk> totaling $76 million, which brings total cash returned to shareholders for dividends for the year to $310 million.
Result of all these transactions with a homebuilding debt to total capital of 18, 3%, which was down from 24, 9% in prior year.
As you can see our primary focus with cash generation and capital allocation during 2021, but it's the continuation of a multi year strategy.
During fiscal 2021, we generated almost $3 billion of homebuilding cash flow. However over the past three years 2019 through 2021, we generated about $8 billion of homebuilding cash flow and allocated approximately 5 billion to debt reduction as our first priority approximately $2 billion.
To share buybacks and approximately $600 million was returned to shareholders through dividend payments.
And this focus will of course continue in 2022.
And just a final 0.2 points on our balance sheet, our stockholders' equity increased to approximately 21 billion.
Book value per share increased to $69 52, a return on inventory was 27% excluding consolidated inventory not owned and a return on equity was 22, 6%.
So with that brief overview I'd like to provide some detailed guidance for the first quarter and then high level guidance for fiscal 2022, starting with the first quarter.
We expect our Q1, new orders to be in the range of 14800 to 15100 homes as you've heard US say as we continue to moderate sales pace to match production cycle change and this is consistent with the approach we have taken for quite a while.
We expect our Q1 inventory I'm, sorry, Q1, ending community count to be about 5% lower than the end of the year 2021. However community Count will then increase in the second quarter and we should end 2022 with low double digit year over year growth.
We believe our Q1 deliveries will be around 12500, but similar to last quarter. This estimate has been plus or minus to it because the supply chain challenges continue to bring a great deal of uncertainty.
Final number of homes delivered will be dependent on the outcome to the supply chain challenges, which of course, we are navigating each and every day.
Our Q1 average sales price should be about 460000, and we expect our gross margin to be around 26, 75%, which reflects the impact of peak lumber prices from last year.
And left field expense leverage.
We expect our SG&A to be between seven 8% and seven 9% as we can.
Continue to focus on simplification and efficiencies.
Now I will note again that gross margin and SG&A estimates will move us up or down a bit depending on the number of homes delivered for the combined category of homebuilding joint venture land sales and other categories. We expect a loss of approximately $5 million.
Looking at our other business segments and other additional items, we believe our financial services earnings for Q1 will be in the range of $85 million to $90 million as market competition for purchase business continues.
We expect a loss of about $10 million for our multifamily business.
So that will in our other category we expect.
To be about breakeven, but remember this guidance does not include any potential mark to market adjustments to our technology investments.
This will be determined by their stock prices at the end of a quarter.
We expect our Q1 corporate G&A to be about 2% of total revenue our charitable foundation will be based on $1000 per home and we expect our tax rate to be approximately 25%.
The weighted average share count for the quarter should be approximately 297 million shares and so when you pull all this together this guidance should produce an EPS range of $2 54 to $2 57.
Sure for the first quarter.
And then turning to the full year 2022, and expect to deliver approximately 60 67000 homes with an average sales price of about 400 for 460000.
This would result in about $31 billion of homebuilding revenue, which should be an increase of approximately 20% in fiscal 2021.
Our full year gross margin to be in the range of 27% to 27, 5%.
With our continued focus on technology and efficiencies, we expect our fiscal year SG&A to decrease to the range of six 8% to six 9%.
We believe our financial services earnings will be in the range of $400 million to $450 million as market competition continues and finally, our tax rate should be approximately 25%.
And so as we continue to execute on our core operating strategy maintain a strong balance sheet and we remain focused on cash flow generation and return we are well positioned to have a strong fiscal year 2022.
Before I turn it over to the operator, let me take a moment to thank our finance team accounting planning and all others involved.
Increased release went out yesterday 15 days after year end and we are hosting our earnings call. Today 16 days after year end, we have been holding our quarterly call within this general timeframe for over a year, although the timeframes have been consistent make no mistake. The work has continued a goal.
As to not be satisfied with what has been accomplished but rather to make incremental progress through automation and efficiency each and every quarter.
While we compile and reporting our actual and forecasted results the incremental progress as a result of a lot of hard work. So congratulations team and sincere. Thank you for what you've accomplished this year and with that let me turn it over to the operator.
Thank you we will now begin the question and answer session of today's conference call. We ask that you limit. Your question to one question and one follow up question until all questions have been answered if you would like to ask a question. Please on mute your phones star one and record your name clearly when prompted if you need to withdraw. Your question you may you start to again that starwood.
Wanted to ask a question. Our first question comes from Susan Mcclary from Goldman Sachs. Please go ahead.
Thank you good morning, everyone and congrats on a great quarter.
Thanks.
My first question is really what you.
What about where.
Positive setup that you described stewart against supply relative to demand that our guests will guide that you've given us for 2022.
Walk us through that.
Maybe talk through where you see the potential for upside and downside within that and especially maybe as we think about the upcoming selling season, and how youre thinking about some of those pieces coming together.
Sure.
Let me before answering the question I just want a second.
Congratulations to the finance team with David Collins for the year.
A lot of hard work goes into getting the year in the quarter closed they are doing great job, but let me let me given let me answer that Susan.
The reality that we're seeing in the field.
As we have come to the to our year end, even as we go into December is the market remained strong.
Traditional seasonality is coming back.
But still relative to that seasonality, we're seeing basic strength in the marketplace. The constraining factor right now is the production cycle.
And we have been decidedly focused on matching our sales pace with that production cycle, recognizing that we're going to maximize <unk>.
Execution and Bottomline by keeping those two pieces in parity.
So as we think about the upcoming.
Selling season, it is feeling to us as we look at the market as we look at week by week sales traffic demand.
It is feeling to us that this is going to be a very very strong selling season.
It is going to be more of a traditional selling season traditional.
Traditional selling season in that as we get to the end of February March.
Expect to see even more of a pickup but make no mistake. It's strong out there right now with that said the production cycle as I've noted.
The cycle times have been extending through the quarters.
We're cognizant of that.
We recognize that it's a bit of as John said whack a mole out there.
One day, it's garage doors, another day as windows of paint.
And that that kind of configuration.
Is at least in our world starting to feel like we're stabilizing it.
I noted our purchasing team and the work that they have done.
Around our builder of choice programs, our everything's included programs working to really stabilize the purchasing side on the logistics side of our business.
And as we go forward I think youre going to see that parity that pairing of.
<unk> cycles stabilizing and high demand in the marketplace start to move things.
Towards what I think is going to be more of an upside in 2022.
And we'll just have to wait and see if it plays out that way.
Clearly conservative some of our numbers to recognize the landscape that exists today and we'll see how the market plays out as we go forward.
Okay. That's very helpful color. Thank you and my follow up is you know shifting to capital allocation.
And appreciating all the detail that Diane gave in her commentary around that as we sort of look out and we think about the community count growth and obviously the overall growth that you are sort of building and ramping the business. Tim can you talk about how you think about all.
Balancing that with the shareholder returns and improving the overall return profile, but then even as you kind of aim for a faster growth pace.
What is it that you wanted me to compare two I missed that part first of all just it's just sort of thinking about as you are obviously investing for growth going forward right, but at the same time, you're it seems like you're a lot more focus on shareholder returns as well and thinking about you know the container robot buyback.
Did this quarter, how should we think about that going forward and your continued diligence and dedication to the shareholder return piece.
Okay. So look I think.
We've made it clear in the past and we are.
Our fourth quarter performance relative to share buyback made it even more clear.
In our cash generation mode.
We are clearly generating a lot of excess cash and we are not shy about opportunistically.
Jumping into the market and making strategic purchases I think that you can expect that to continue as we go forward, we're laser focused on returns.
We're very focused on bringing our asset base down as we amped up our bottom line returns and I think that we've heard that as a strategic message youre going to see it over and over again and execution and I think that there is a balance we're going to pay down debt, we're going to limber up the balance sheet you can expect that we're going.
Pay down the debt that's coming due over the summer was at 575, five $575 million, we're going to pay that out of cash flow, but we're going to continue a stock buyback program.
<unk>.
Focus on those bottom line returns.
Gotcha. Okay. Thank you that's very helpful and good luck okay. Thank you.
Thank you. Our next question comes from Truman Patterson from Wolfe Research. Please go ahead.
Good morning, David Good morning, everyone and thanks for taking my questions I appreciate it.
Stuart in your prepared remarks, I believe you were talking about the spin co.
Being somewhat asset light and I think you even mentioned.
Potentially liquidating.
<unk> of it is the asset spin still.
Going to be about 5% to $6 billion and then <unk>.
And I'm with you are targeting 65% option land by the end of this year.
Do you think this could go after the spin.
The 80% plus and with that I'm kind of thinking.
Longer term over the next two three years I mean is there any possibility maybe again, maybe 80 90 person option land.
So we're going to take that in stride and let the let's play that out over time I don't want to get out over my skis. Your first question relative to the spin co.
We have been look you have to.
As we've configured spin co we've gone back and forth on an asset heavier asset lighter approach, we think that in terms of defining the company going forward. Our best program going forward as an asset light approach to spin co that means that many of the assets that we've targeted at the outset will end up either.
AUM or we will liquidate in orderly course on the Illinois books, it's still the same basic configuration of asset base. We've just been it's all been about turning.
Turning assets into cash and deploying the cash or deploying the assets. So that we lighten up our inventory and we ended up with a sponge ancillary business program that enables our.
The pure play focus on homebuilding and financial services. So it's kind of a zero sum game. The asset base is still the same it's just where the asset is going to fall is going to fault balance sheet.
AUM.
Or liquidation and all of Thats going to basically solve to the same equation.
Okay.
Okay. Okay.
<unk>.
And for my follow up question you all I believe regarding the low double digit community count growth in 'twenty two.
Over the past four quarters <unk> been starting about four five to five homes per community per month.
Are you pretty comfortable with this range going forward as you open more communities just.
Given all the constraints in the market and.
Hypothetical internally do you have the active land and labor available to possibly move above that range, if the material supply chain begins.
Improving throughout 2022.
Let me invite Rick and John to weigh in on those yeah. So on the community Count I think as I said in my remarks, we're really well positioned right now as well.
I will dip a little bit in Q1, it's really just a timing issue.
To match some of these things out over a 12 or 24 month timeframe, but we will see solid growth in the back half of this year, starting in Q2 and based on our land pipeline.
We're pretty comfortable that we'll see continued growth in 2003.
As I said, we increased our our overall owned and controlled pipeline.
Our land position by 44% year over year.
That's a lot of work from our teams and all of that came from all of that real increase came from option contracts. So it's a remarkable repositioning and change in direction of the ship.
All during a time period, where we're really driving growth I'll, let John talk about the <unk> space.
Yes, I think we're pretty comfortable.
Yes, we're very comfortable that we'll be able to look at 'twenty two as an increase in starts over over 21.
Some of that typical seasonality with Q2 being our strongest start quarter.
But I think as.
As we look across our platform.
Well positioned with our relationship with our trade partners to be able to manage.
A very healthy start pace.
And to the extent that we do see more stabilization relative to the supply chain I think what youll see is a tightening of the cycle times more than the increase in store pace.
Already planning on maintaining a very disciplined approach to our store pace.
What will pull in as the cycle time from the extended periods that were seeing now.
Okay. Thanks for that and good luck on the upcoming year.
Thanks.
Thank you. Our next question comes from Mike Rehaut from Jpmorgan. Please go ahead.
Thanks.
Morning, everyone and thanks for taking my question.
Our questions.
Just.
On the gross margins I think.
The guidance initially last night, maybe earlier this morning quite a little people some people off guard.
With the first quarter down sequentially certainly it is consistent though with your before 'twenty one.
Our consistent sequential decline, but I was hoping to delve into number one.
If you could kind of break out.
<unk> what was the.
Incremental negative headwind in terms of lumber I believe you mentioned that you expect peak lumber costs in the first quarter.
Versus just the.
Reduced overhead leverage and as you think about the full year guidance I think more importantly, even.
What are the summary, what are the some of the drivers there in terms of upside or downside.
And.
The lumber cost assumption for the back half of the year.
So let me start by saying.
Let me start by saying that.
Our.
Our margins are very strong.
When you look at the first quarter Youre basically looking at peak lumber.
And youre getting to the edge of peak lumber.
As we fall into the second quarter, where it really starts to moderate and number two you're really looking at leverage relative to field.
Expenses.
So you see a little bit of a minor down in the first quarter.
But our margins are still.
Coming in at a very strong level and you'll see that in our.
Look forward to 2022, and I would just say.
That.
Mike relative to looking ahead, it's always difficult to look out numerous quarters, particularly in a market where.
Labor and materials and logistics of moving around.
I think that we feel pretty optimistic about our margins as we go forward and I think youll see the beginnings of that reflected in our year end or our total year 2022 projections or forecast John you want to weigh in.
But I think you've pretty much covered it it's the peak.
Peak pricing of lumber will hit us in Q1.
And then we will start benefiting from significantly lower prices.
And if you follow the topic of lumber now, we'll probably see some uptick as we look at lumber purchases.
First and second quarters.
Some of the back half of the year, but likely offset by what we spoke about in terms of a very strong spring selling season, which should increase our ASP to offset that.
Right. Okay. No. That's helpful. Thank you for that.
Secondly, if I could just a couple of clarifications on earlier questions number one around the share repurchase.
It seems like you have a lot less.
Wood to chop in terms of debt Paydown.
This upcoming year at the same time, presumably you would have a higher amount equal to a higher amount of cash flow everything else equal that that would point to potentially a greater amount of share repurchase in 'twenty. Two just want to make sure I'm thinking about that right and just lastly on the spin.
That it did sound like you know an answer to <unk> question.
Still expecting to offload about $5 billion to $6 billion of assets, one way or another.
If I'm if I heard you right.
Okay. So.
The answer to question one is as I noted, we will continue to buy back stock on an opportunistic basis.
I don't think Theres any flaw in your thinking as to order of magnitude of cash flow and how we're situated to be able to do that.
I don't want to speak specifically about stock buybacks I don't want to.
Kind of lay out a roadmap, but we're going to do that opportunistically and we have significant cash flow as we look forward.
<unk>.
As it relates to the number two the answer is yes, that's the answer.
That we gave are basically laid out three buckets.
They're going to be balance sheet.
For Cinco AUN within spin co or liquidation with cash flow, enabling greater stock buyback and that's how we're focusing on it.
Great. Thanks, so much.
Bye.
Thank you. Our next question comes from Stephen Kim from Evercore ISI. Please go ahead.
Yes, Thanks, a lot guys lots of good info here I wanted to start by talking about the the.
Our supply chain and your cycle times, so if we just.
Ratio, we compared your fiscal 'twenty two closings guide full year closings guide to what you actually did in this past fourth quarter and we looked at that through.
Time, and what we see is that your guidance is assuming a ratio or a multiple of <unk> 21 closings, that's pretty pretty consistent with previous years.
But given how unusual and crazy, but the supply chain was in <unk> and your earlier comments that you think thats going to start to get better.
Curious why youre not expecting that you could close more homes.
Relative to what you just did in the <unk> than in prior years.
And then at a higher level.
Once your cycle times, do stabilize or even contract.
I'm curious, how you're going to balance orders relative to your production like should we expect to see order growth reaccelerate. While your backlog turnover today is kind of low or should we expect to see your turnover rates increase and your order growth continued to remain constrained for a while.
John Rex.
So I think Steve we've just taken a straight shot and look at.
What we know today about our cycle times and projected production.
As I said in my response to a prior question. If we do see the stabilization I think what Youll see is a reduction in our cycle time versus.
Raw material pickup in our start pace.
If that does happen.
Should lead to a pickup in <unk>.
Relative to the sale of a sort of color there as Rick commented, we see a very strong sales environment.
To the extent that we change our start pace and other closing phase of our start pace, we would adjust our sales pace to match that.
As I said I don't see a lot of upside in terms of increasing start pace.
So I would think our sales would remain pretty consistent with the way that we planned them.
Mhm, and then price will just be the thing that sort of equalize.
Equalizes it right.
Kind of like what happened last year, and just don't see any reason to sell ahead of of how we're starting homes.
Correct.
We can sell another thousand homes in the quarter. If we wanted to without too much effort just doesn't make sense to do that Jon Stewart exactly right.
It doesn't make sense to get over our skis or good skiers the market starts to improve a little bit in the supply chain normalizes itself out we'll close more homes.
Yeah, that's just the reality of the situation.
So Steve Let me just let me just add to this and say at the end of the day the math would indicate.
Simple math would indicate that you're right.
We've pushed some closings from 2021 into 'twenty two we've.
We've increased starts through the year.
And there should be higher.
Closings and opportunity to sell kind of as we go forward the choppiness of the supply chain.
Really tells us to stay on the conservative side until we see what the market actually does and how things actually play out.
So if you just sit down and look at the math I understand your question. That's an excellent question, but if you look at the way the market is playing out and how cycle times are moving and the whack a mole kind of environment that we're in we're just going to let it play out not.
Get over our skis as Rick says.
Yes. It makes it makes perfect sense and I believe you actually used a derivative of conservatism in your opening remarks, I think you said you conserve a tie with some assumptions in your guidance and so I wanted to pull on that thread a little bit that conservatism threat.
Last year your gross margin ultimately exceeded your initial guide by about 300 basis points and despite the fact that there was this massive unforeseen spike in lumber costs and scrambling costs from the supply chain and all of that and so.
You've addressed the lumber a little bit and the fact that the first quarter is going to have a little bit of a headwind I assume you meant by that that the $4 18, an increase is going to be bigger year over year bigger than in the first quarter I just wanted to confirm that maybe Diane you can confirm that.
But then the other big part of it is home price right. So nationally home prices look like they are still rising at about 1%. A month you just mentioned that you think a strong selling season is going to drive your asps higher.
Your ASP guide for.
Full year 2022, it's actually below the order price that you booked this quarter and.
And I'm wondering if there's anything specific that is driving that Oregon, if it's just conservatism.
Incorporated in your outlook.
Yes.
Yes, let me let me just say.
And I'm, sorry, Rick for stepping on you but.
Let me just say that we.
We are a little bit shy about <unk>.
Projecting too much ASP growth.
And I think that.
It's going to be interesting also to see what happens with interest rates, which I don't know how to factor in either right now.
I kind of like.
What we're looking at and what we're projecting I feel pretty good about our ability.
The ability to accomplish.
Maybe exceed some of those metrics Rick I stepped on you I apologize yes.
Agree with exactly what Stuart said.
Okay.
There is a good feel in the market.
As I walk through the markets Theres, a market strength in all product categories.
Where we're seeing strength.
All about getting the homes built.
And reducing that cycle time.
Sales prices, we have good.
Room in sales prices some of the ASP is a higher percentage of deliveries in the Texas markets, which are a little bit lower priced markets.
But we will see how the year progresses.
You'll see the answer to first part of your question is yes, Q1 should be the peak lumber prices and by the end of the quarter, we will start to see them fall, but overall for the quarter it'll be up from the fourth quarter.
Okay. Thank you very much guys I appreciate it thank.
Thank you Sir.
Thank you. Our next question comes from Alan Ratner from Zelman <unk> Associates. Please go ahead.
Hey, guys. Good afternoon now.
And thank you for taking the questions first I'd love to expand a little bit on that pricing conversation I just had with Steve.
I totally understand the conservatism there are not wanting to get too too bullish, especially with the uncertainty around the rate environment, but if I look at your 'twenty one pricing a while you guys. Obviously grew prices at a very nice rate and certainly based on your margin. It looks like you took advantage of the strong pricing environment.
The growth was a little bit less than some of the other builders and I'm curious if there's any you know when you look at your business on the pricing side or are there any actions you guys are taking recognizing affordability constraints, where you're trying to offset maybe apples to apples price gains with either building a smaller square footage product may be moving out into.
Some more affordable submarkets as a way to keep your product more affordable or am I reading too much into that and Youll Youll tell me now, it's just a mix of deliveries from quarter to quarter.
Rick.
Well, it's a combination of all of those things as we move out to some other markets that are a little bit further out.
Those are generally the lower priced compared to.
So what are the more infill style.
We are adjusting and building a smaller footprint in many of our markets.
And John .
John and I constantly balanced with became pace and price.
You'll continue to see good ASP growth.
I think also as Rick mentioned earlier, I don't think it's a quarter to quarter mix as much as.
Rick and I and the division has been very focused on driving down the price curve.
As you deal with affordability, so we're consciously.
During two splitters product that is <unk>.
Waller more affordable as well as Ah.
A significant focus on picking up our market share in Texas, which does drive that ASP.
Perfect. Thanks for the color there guys.
Second question.
On the land strategy the lot count.
You guys highlighted the 40% plus growth and total lots controlled.
Youre not.
Necessarily unique in that standpoint, I think the public builders as a group are probably up 30, 40% year over year. So clearly theres been a huge push for tying up more land.
And on one hand, it's all tied up through option contracts, which is great because it's obviously a capital efficient but on the other hand.
It doesn't seem like the market is going to be capable of delivering that type of growth anytime soon so effectively the way I look at it the tail of your land supply as effectively continuing to grow unless we could just see these huge bottlenecks are resolved here over the next year or two and while it's off balance sheet.
You still do have a $1 billion more of capital tied up in option deposits today than you had five or six quarters ago. So it's not completely.
Asset free our capital free so.
I'm just curious.
Should we expect that growth to maybe start slowing here or are you comfortable effectively growing that tail. Because you want to have your kind of arms around all corners of the market for when the market does resolve itself from these are these constraints.
Yes.
Look I would say on that on a.
On an overall.
All homebuilders basis.
The math and your questions.
<unk> hold water.
And the positive side of that is.
This market is not going to enable there to be a sizable over building, which has been an overhanging in past cycles.
On the other side I think that if you look at our land strategy and programming I think that where it is.
The land market is definitely constrained.
And but I think that given our position in our strategic markets. We're just going to be able to outperform and I think that we're really positioned to be able to do that where do you want to weigh in on that.
I feel very comfortable with what we've done.
Incredibly.
Im comfortable and pleased with the relationships that we've established across the U S with just some incredible land folks.
Regional developers.
And Thats whats really propelling this.
It's given us an opportunity to get involved with.
Larger communities that are battleship communities that we will have multiple price points and products going out at various points in time.
Debt.
Have the ability to feed on themselves.
Really couldnt be more pleased with where we are right now.
Alright, Thanks, a lot guys I appreciate it.
Okay. Thank you and let's make the next one the last question. Please.
Absolutely. Our last question comes from Matthew Bouley from Barclays I totally didn't answer that.
Okay.
Sorry that wasn't base thanks for squeezing.
Squeezing me in here.
And congrats on the quarter. So just a clarification around what's assumed in the guide.
<unk> to supply chain.
And.
So you mentioned in the Q&A.
That you are embedding conservatism in the guide, but I think at the top Stuart you mentioned.
In the second half that you do expect some I think you said mitigation in the supply chain disruptions I'm just curious as you think about closings and community guide.
Kind of what degree of contingency is built into that guide us or is there an assumption within the guide that that supply chain does get better somewhat thank you.
So you're right I did I did daylight that.
Debt.
The.
The second half of the year, we expect to see some stabilization in the supply chain and.
What we basically daylight it is that it's self imposed stabilization, meaning we've increased the number of starts in order to be.
Able to accommodate the fact that the cycle time is expanded deliveries are somewhat impaired I think the supply chain disruptions I can't predict what's going to actually happen in the field.
But what we've done is we've put buffers out there and increased starts our builder of choice program working with our.
Our subcontractor base, our building partner base to activate kind of safeguards and programming to enable a better delivery system and logistics system and additionally.
Our everything's included program really reducing the number of skus in our product offering.
<unk> is working to our benefit and helps with our builder of choice program.
To really create embedded buffers that I think are going to really position us well in the second half of the year. So your question is what what kind of conservatism have we injected.
I think that we're kind of expecting more of a steady state program through the year.
Certainly not getting over our skis and expecting.
That everything will stabilize.
And right level of perfection as we get to the second half.
Can't give you a number in that regard.
But conceptually.
Taken a conservative approach to looking to the remainder of the year, but we think that the market is going to stabilize at least on the supply chain side.
That's great color. Thank you for that Stuart and then last one on the gross margin guide just just to clarify the cadence you're assuming obviously that the normal stepped down in Q1 with fixed field expenses.
Simply looking at the math for getting to the full year guide, it's almost like assuming.
Normal levering of your fixed expenses as you go through the year.
Without really much else that different.
Simply doing the math so I'm just curious between you mentioned clearly lumber tailwind emerging as you get to Q2 I'm wondering if there's any other pressures to the gross margin that we should be aware of.
Ricky just mentioned more mixed the Texas lower priced homes for example, or perhaps the mix of delivering option lots just what other headwinds might be part of that gross margin guidance. Thank you.
Well look I think that you have a number of cross currents in just the cost side of the equation, yes lumber is moderating and were.
The bypass the first quarter's peak, but at the same time, you have pressures from labor and materials and other areas.
R R.
Clearly offsets to the benefit that we'll get from the lumber reduction.
So the cost side of the equation is moving around.
We'll still have to see where asps goes and.
But you are correct that.
When you start to normalize our field expense and lumber starts coming down there.
There is somewhat of a gap.
And some of our numbers, but we're going to have to see how that gets filled by the other traditional areas.
Where costs are going up don't underestimate whats happening in labor in a constrained labor market, you've got to pay more and sometimes to get things done you got to pay a lot more same thing on logistics.
So that's what's happening in the field right now you can't predict it all we can do.
Lay out our expectations and that's what we've done.
Great well, thanks, good luck and happy holidays. Okay. Thank you. Thank you very much so let's leave it there. Thank you everyone for joining US we look forward to reporting 2022 quarter by quarter, and we expect a very positive record breaking year for 2022. Thank you.
Thank you all for participating in today's conference you may disconnect and enjoy the rest of your day.