Q4 2024 Lennar Corp Earnings Call
Please continue to standby for today's conference call. The call will begin momentarily again, please continue to standby and thank you for your patience.
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Speaker Change: Welcome to <unk> fourth quarter earnings conference call. At this time, all participants are in a listen only mode. After the presentation. We will conduct a question and answer session. Today's conference is being recorded if you have that.
Speaker Change: You may disconnect at this time I will now turn the call over to David Collins for the reading of the forward statement.
David Collins: Thank you and good morning, everyone.
David Collins: Today's conference call May include forward looking statements, including statements regarding <unk> business financial condition results of operations cash flows strategies and prospects.
We're looking statements represent only <unk> estimates on the date of this conference call and are not intended to give any assurance as to actual future results 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 active.
David Collins: <unk> results to differ materially from the activities and results anticipated in forward looking statements. These factors include those described in our earnings release, and our SEC filings, including those under the caption risk factors contained in <unk> annual report on Form 10-K, most recently filed with the SEC.
David Collins: Please note that <unk> assumes no obligation to update any forward looking statements.
Speaker Change: I would like to introduce your host Mr. Stuart Miller Executive Chairman and CEO CEO, Sir you may begin.
Stuart Miller: Very good. Thank you good morning, everyone. Thanks for joining today and then Miami.
Stuart Miller: Today, together with Jon Jaffe, our co CEO and president.
Stuart Miller: Diane Bessette, our Chief Financial Officer, David Collins, who you just heard from our controller and Vice President.
Speaker Change: Fred Rothman is here.
Speaker Change: Chief operating officer, and Marshall lanes, as well chairman of <unk> to our charitable foundation, along with a few others.
Speaker Change: Sure.
Speaker Change: As usual I'm going to give a macro and strategic overview of the company. After my introductory remarks, John is going to give an operational overview updating some construction cost cycle time, and some of our land strategy and position as usual Diane is going to give a detailed financial highlight.
Speaker Change: Along with some limited guidance for the first quarter of 2025, and then of course, we will have our question and answer period and as usual I'd like to ask that you. Please limit to one question one follow up so that we can accommodate as many as possible.
Speaker Change: Sure.
Speaker Change: So let me begin.
Speaker Change: Our fourth quarter was a challenging quarter ethanol as interest rates declined approximately 100 basis points through the quarter and further challenged affordability.
Speaker Change: Starting early in the quarter, we saw sales stall at than existing price in incentive levels.
Speaker Change: That necessitated increased incentives interest rate buy downs and price adjustments to activate sales and avoid increased inventory buildup.
Speaker Change: Accordingly, our fourth quarter results missed expectations as new orders were 16895 short of the 19000, we expected and our gross margin was 22, 1% short of the 22, 5% that we expected.
Speaker Change: The shortfall in margin resulted from increased incentives on homes sold and delivered within the quarter.
Speaker Change: Accordingly, we are moderating our expectations for margins in sales in the first quarter of 2025 as the market adjusts and stabilize.
Speaker Change: Overall, the economic environment, which we believed last quarter was constructive for the homebuilding industry has certainly turned more challenging as longer term interest rates along with mortgage rates have climbed steadily since our last earnings call.
Speaker Change: While underlying demand for new homes remains very strong and the supply of available dwelling remains chronically short.
Speaker Change: Combination of wavering consumer confidence and elevated cost of acquisition have challenged the customers' desire and ability to transact.
Yes.
Speaker Change: While there continues to be considerable traffic of customers looking for homes. The urgency to actually transact has quieted as customers adjust to a new normal.
Speaker Change: Of course affordability has been eliminating factor for demand and access to homeownership for some time now.
Speaker Change: Inflation and interest rates have entered the ability of the average family to accumulate a down payment or to qualify for a mortgage.
Higher interest rates have also locked households, and lower interest rate mortgages and curtailed the natural move up as families expand and need more space.
Speaker Change: Great buy downs and incentive has have enabled demand to access the market.
Speaker Change: While consumers remain employed and are generally confident that they will remain employed and their compensation will rise.
Speaker Change: Higher interest rates and inflation of that strip their ability or desire to act.
Speaker Change: While strong employment often goes hand in hand, with a strong housing market interest rates have put many with need on the sidelines.
As strong demand enabled by incentives that mortgage rate buy downs has driven the new home market over the past years, we expect the broad based demand cycle to reestablish.
Speaker Change: To reestablish as rates stabilize or even moderate and as pent up demand continues to build against short supply.
Speaker Change: While demand has been constrained by affordability the supply of homes remains constrained.
Speaker Change: Well documented chronic housing shortage is the result of years of under production.
Speaker Change: This shortage is exacerbated by continuing shortfalls in production driven by now muted demand together with already existing restrictive land permitting and higher impact fees at local levels and higher construction costs across the housing landscape.
Speaker Change: Mayors and governors across the country are acutely aware of the housing shortage in shortfall in their respective geographies.
Speaker Change: Many have been pounding the table about the need for affordable housing attainable housing and workforce housing and their respective markets.
Speaker Change: On a final note immigration and tariffs have recently been added to the list of questions and potential concerns confronting the industry.
Speaker Change: We recognize that the landscape is still being shaped around these issues and cannot be addressed with certainty.
Speaker Change: Nevertheless, our early evaluation suggests limited impact to us and to the industry and John will discuss this in further detail shortly.
Speaker Change: Against this macro backdrop, we continue to have conviction around the two core parts of our operating strategy.
Speaker Change: First we are focused on volume and matching our production with sales pace.
While our execution in the fourth quarter was challenged by the rapid and unexpected change in the direction of interest rates, we did adjust and adjust and adapt to new market conditions, and we adjusted incentives and pricing and we did not and we.
Speaker Change: We did not enable our inventory levels to spike.
Speaker Change: We are currently focused on keeping sales volume up as we accelerate in order to catch up pace and correct. The sales Miss that we had in the fourth quarter.
Speaker Change: Of course, the catch up in sales pace comes at a cost and that cost us additional pressure on margin.
Speaker Change: Accordingly, as we have looked ahead to the deliveries in the first quarter of 2025.
Speaker Change: Expect to sell between 17500 homes, and 18000 owned and deliver between 17000 and 17500 homes.
We expect our margin to be 19% to $19 two 5% as we expect approximately 50% of the deliveries in the quarter will be sold during the quarter and this will dilute the 20% margin that is already embedded in our backlog.
Speaker Change: Nevertheless, we are focused on driving sales and closings driving strong current cash flow, even at reduced profitability and maintaining carefully managed inventory levels, so that as market conditions stabilize or improve we will benefit from.
Speaker Change: Normalized margins across our growing volume.
Speaker Change: Secondly, and simultaneously we continue to migrate our operating platform to an asset light configuration.
Speaker Change: We are much closer to the completion of the strategic rework of our operating platform from being a land company that happens to build homes to becoming a pure play land light asset light.
Speaker Change: Manufacturing model homebuilder that benefits from just in time finished homesite delivery.
Speaker Change: Again, we have conviction that our structured asset light land.
Speaker Change: A land light model enables far more predictable volume and growth with a much lower asset base and lower risk profile that has been and will continue to be at the core of our operating model.
Speaker Change: The value of this structure will be seen in the execution of our router Coleman combination in conjunction with the mill Road spin and I'll discuss this in more detail shortly.
Consistent volume and growth enables improving operating efficiencies in construction costs and cycle time customer acquisition costs and SG&A and <unk>.
Speaker Change: Additionally, it has driven consistent and dependable cash flow, even with variable bottom line results.
And finally, it has enabled the consistent and predictable takedown of just in time delivered fully developed home sites and that has attracted capital to the structured land banking partnerships that have driven that nearly $20 billion of transaction that has enabled our land light transformation.
Speaker Change: To date.
Speaker Change: We are confident that our operating strategies of consistent volume and growth with adjusted time delivery of developed home sites will continue to enable our company to be best positioned to rationalize our cost structure and be best positioned with strong volume as margins normalized.
Speaker Change: Let me turn back briefly to our fourth quarter operating results.
Speaker Change: As I noted earlier, while we are disappointed with our first quarter with our fourth quarter actual results. They do represent a consistent and strategic quarter of operating results in the context of a difficult affordability environment.
As mortgage interest rates migrated higher to around 7% through the quarter, we drove volume with starts while we incentivize sales to enable affordability.
Speaker Change: In our fourth quarter, we started almost 18500 homes sold almost 17000 homes and closed approximately 22200 homes.
Speaker Change: While I've already talked about market conditions later starts and sales were also attributable to a lighter community count at the beginning of the quarter, which has now been corrected.
Speaker Change: We've been able to solve the community count shortfall that we described last quarter and we brought our community count up from 1283 communities at the end of the third quarter to <unk> hundred 47 communities, which is now 13% higher than last quarter and 15% higher.
Speaker Change: In the prior year.
Speaker Change: Our community count positions us materially better to drive the volume, we expect at lower absorption rates as we enter 2025.
Speaker Change: We expect lower absorption rates to put less stress on our margin over time as we deliver between 80 688000 homes in 2025, reflecting an 8% to 10% increase over 2024.
Speaker Change: During the fourth quarter sales incentives rose to 10, 8% as we address the affordability and the community count lag.
Speaker Change: As an offset we were able to maintain construction cost and reduce cycle time as John will detail shortly and we have maintained our customer acquisition costs, while our SG&A rose to 77, 2%, reflecting our lower volume and lower average sales price leverage.
Speaker Change: On the positive side.
Excuse me.
Speaker Change: On the positive side, we have driven production pace.
<unk> with sales pace and abused our margin as a point of adjustment to enable consistent cash flow.
Speaker Change: Our strategy has enabled us to repurchase another 3 million shares of stock for $521 million.
Speaker Change: In the fourth quarter, bringing our total stock repurchase for the year to $13 6 million shares for over $2 billion in cash.
Speaker Change: We ended the quarter with $4 7 billion of cash on book and a seven 5% debt to total capital ratio.
Speaker Change: We are extremely well positioned to spend mill rose and to be able to continue to repurchase shares and reduce debt as we have driven strong overall operating results to date.
Speaker Change: We continue to be exceptionally positioned as a company from a from our balance sheet to our operating strategy to be able to adjust and address that.
Speaker Change: The two.
Speaker Change: Just and address the market as it unfolds as we enter 2025.
Speaker Change: With that said, we're very optimistic about our future.
Speaker Change: On the one hand, we remain confident that the current volatility driven by affordability and interest rates will subside.
Speaker Change: Demand will adapt to a new normal.
Speaker Change: The supply shortage will remain the dominant theme.
Speaker Change: Volume will continue to help reduce our cost structure.
Speaker Change: And incentives will normalize and margins will normalize and our increased volume will multiply bottom line.
Speaker Change: On the other hand, we are equally enthusiastic about the mill road spin and the Roche Coleman acquisition and the way both will work together.
Speaker Change: As most of you know from yesterday's press release <unk>.
Speaker Change: Millrose properties the subsidiary we formed to carry out the spin that we announced some time ago has now filed a public SEC registration statement and it is available on the SEC website.
Speaker Change: In the very near future.
Speaker Change: Been off will be public and well and that will complete are now almost five year migration to an asset light operating model.
Speaker Change: <unk> will be the first publicly listed land banking brief and we will use our homesite option purchase platform that we call the hopper.
Speaker Change: To provide just in time fully developed homesite inventory for Lamar.
Speaker Change: Before Lennart for Lenoir related adventures and subsequently to other homebuilders across the U S as well.
Speaker Change: The Hopper is a comprehensive suite of systems and procedures used to operate and manage the acquisition financing and development of land assets at scale designed and refined by <unk> over the past 20 years.
Speaker Change: Mill recoveries will be externally managed by a subsidiary of Kennedy Louis investments and institutional alternative investment firm.
Speaker Change: With approximately $17 billion.
Speaker Change: AUM and extensive experience with both lenoir and with the land and land development business for homebuilders.
Speaker Change: All of mill Roses operating costs will be paid by Kennedy Lewis Lewis through its management fee and mill Roes will have no employees of this zone.
Milagros will receive consistent cash flows pursuant to option contracts.
Speaker Change: It will receive recurring monthly option payments, which will be used to pay predictable dividends to shareholders and we will Additionally received initial deposits and proceeds from the sale of fully developed homesites.
Speaker Change: Millrose will recycle proceeds from the sale of fully developed home sites into new acquisition and development land deals without needing to raise new investor funds.
Speaker Change: Accordingly, Millrose is an added source of more permanent capital for Lenoir, and Ed and at and as an addition to organically negotiated option agreements with developers and other professionally managed programs that are currently private equity base.
Speaker Change: Yeah.
Speaker Change: As such Millrose as an important evolution of our land light strategy as it enables growth through attractive organic and inorganic opportunities.
Improved cash flow generation and strong return on equity and inventory to Lamar.
Speaker Change: <unk> will contribute to mill rose approximately $5 2 billion.
Speaker Change: [laughter].
Speaker Change: Yes.
Speaker Change: Of undeveloped and partially developed land and approximately $1 billion of cash.
Speaker Change: Additionally, Melrose will acquire approximately $900 million of land assets as part of our Roche Coleman acquisition, while we're nor will acquire the whip inventory and the homebuilding operations.
Speaker Change: We believe that the ongoing relationship with Millrose can facilitate other transactions and an asset light manner as well.
Speaker Change: Milagros will be positioned with adequate capital to operate its core business and we will have a balance sheet that enables additional debt or equity as needed for strategic engagement or for growth.
Speaker Change: <unk> will distribute 80% of the stock of mill rose to lend to our shareholders.
Speaker Change: There will be one share of mill road stock for every two shares of <unk>.
Speaker Change: <unk> will shortly thereafter dispose of the remaining 20%, which by the way is nonvoting in a distribution of mill road shares or a potential exchange for Lenoir shares, which would basically effectuate a cashless buyback of Linda our shares.
Speaker Change: Let me say this one more time as it might be a little confusing the additional 20% interest which is nonvoting shares will be retained by <unk> for a very brief period of time and will quickly either be distributed or exchanged for la <unk>.
Speaker Change: Theres two effectuate, a cashless stock buyback.
Speaker Change: Needless to say, we are very excited to bring millrose public in the very near future.
Speaker Change: Now, let me turn briefly to the rash Coleman acquisition.
Speaker Change: As I have noted the Millrose spin will work hand in hand, with our previously announced purchase of Rouse Coleman homes, which is based in Fayetteville, Arkansas.
Speaker Change: Roche Coleman is led by John Roush of fourth generation builder, who built his company into the 21st largest homebuilder in the country.
Speaker Change: We look forward to welcoming John and his extraordinary team to the Linde or family as John will continue to work alongside <unk> as a partner and many of the rash Colm and associates will actually joined the company.
Speaker Change: This acquisition fits squarely into our strategic growth plan of acquiring companies in concert with our mill Rose properties spinoff webinar acquired the operating assets, including web and Millrose acquired the land holdings.
Speaker Change: This enables <unk> to acquire with a limited investment and producing a high return enabled by the by the mill Rose platform.
Speaker Change: Ralph Coleman builds and 12 primary markets across seven states and is the number one builder by market share in six of these markets.
Speaker Change: This acquisition will result in our expanding into new and desirable markets in Arkansas, Kansas, and Missouri, while growing our existing operations in Texas, Alabama, Oklahoma and Florida.
Speaker Change: <unk> is a very strong cultural fit for lenore sharing a common operational philosophy focused on building on the building of reasonably priced homes with strong basic home designs.
Speaker Change: <unk> rushed Coleman offers few optional changes in proven markets and has an overall commitment to delivering high quality homes within budget and on schedule.
Speaker Change: We expect that the acquisition will add approximately 100 communities.
Speaker Change: 4000 deliveries and for new orders in 2025, assuming that this does this acquisition closes by the end of the first quarter.
Speaker Change: After the 2025.
Speaker Change: Activity, there will be more than 37000, homesites controlled through Millrose for <unk> operation in 2026 and beyond.
Speaker Change: The 2025 activity is concentrated 30% in markets, where <unk> has existing operations and 70% in new markets <unk> will take advantage of Roche <unk> exceptional reputation and well run operations as we integrate into one lenore.
Speaker Change: Yeah.
Speaker Change: We are very excited about the <unk> coal mine conditions to the all in our footprint.
Speaker Change: So we've covered a lot and in conclusion, let me say that while this has been a difficult quarter and year end for Lamar.
Speaker Change: The short term road ahead might look a little choppy, we are very optimistic about the longer term road ahead.
Speaker Change: In spite of bumps in the road. This is an exciting time for <unk> Atlas, we are upgrading the financial and operating platform as we drive production and sales. We have continued to drive production to meet the housing shortage that we know persist across our markets.
Speaker Change: With that said as interest rates normalize we believe that pent up demand will be activated and margin will recover and we are well prepared with a strong and growing national footprint growing community count.
Speaker Change: Yeah.
Speaker Change: And growing volume.
Perhaps most importantly, our strong balance sheet, and even stronger land banking relations afford us flexibility and opportunity to consider and execute upon thoughtful growth for our future.
Speaker Change: In that regard, we will focus on our manufacturing model and continue to use our land partnerships to grow with a focus on high returns on capital and equity.
Speaker Change: We will also continue to focus on our pure play business models and reduce exposure to noncore assets. We will continue to drive just in time home site delivery and an asset light balance sheet.
Speaker Change: And as we complete our asset light transformation, we will continue to generate strong cash flow and returned capital to our shareholders through dividends and stock buyback, while we also pursue strategic growth.
Speaker Change: For now we are guiding to 17000 to 17500 closings in the first quarter of $25 with a margin of 19% to 19% in the quarter percent.
Speaker Change: And we expect to deliver approximately 86 to 88000 homes in 2025.
Speaker Change: We also expect to continue to repurchase stock in 2025, and we will determine the amount as we watch the evolution of our Millrose spin and our land light operating model perform.
Speaker Change: We look forward to 2025 and for that I want.
Speaker Change: I want to thank the extraordinary associates of Lenore for their tremendous focus effort and talent and with that let me turn it over to John Thanks.
John Roush: Thanks, Stuart and good morning, everyone. As you just heard our operational teams of Anoro continue to focus on executing our operating strategy to become a consistent high volume homebuilding manufacturer using margin as a shock absorber.
John Roush: Ill discuss our fourth quarter performance and sales pace cost reduction cycle time reduction and asset light land position.
John Roush: Our focus begins with knowing the sales pace needed to match our production pace.
John Roush: While our production so start pace and cycle time performed as expected as Stuart noted market conditions changed from what we anticipated and our sales did not keep pace at the quarter began we expected affordability to ease and we priced accordingly, however, mortgage rates client instead of lowering and this pricing led to.
John Roush: Yeah.
John Roush: The design sales pace for the first part of the quarter as we saw that mortgage rates remained higher in the consumer needed more help with affordability, we adjusted our pricing to meet the market where it was as we've made these adjustments we've been continuously measured results against the desired pace and if we were still not achieving pace. We adjusted further.
John Roush: These incentives primarily were in the form of mortgage rate buy downs and for some buyers, we use closing cost or price reductions to address their specific needs.
John Roush: In addition to adjusting pricing our divisions engage daily with Lenoir machine to evaluate if we have the volume of leads and appointments needed. That's not we adjusted the digital marketing plan.
John Roush: Michelle sales shortfall.
John Roush: Overall fourth quarter sales pace of $4 two homes per community per month being lower than our start pace of $4 six while sales were slower for the first part of the quarter. We adjusted as I noted, resulting in our November pace of four six sales per community per month that enabled us to end the quarter with an average of about two unsold.
John Roush: Completed homes per community.
John Roush: To be clear it wasn't that the market improved in November it was our adjusting incentives to where the market was that improved pace.
John Roush: Contrast that with a more challenging sales environment, our construction costs and cycle time continued to benefit throughout the fourth quarter from our focus on even flow production along with our high volume.
John Roush: This focus on a manufacturing approach along with a maximize efficiencies of our core product strategy will allow us to continue to improve cost and cycle time into 2025.
John Roush: The fourth quarter, our construction costs were consistent with Q3 and decreased on a year over year basis grew 2%.
John Roush: Accomplishing a 2% cost reduction during an inflationary environment, consisting of higher labor and material cost inputs for the supply chain over the past year demonstrate you're affecting the effectiveness of our strategy and affirms the benefits of our builder of choice approach.
John Roush: This manufacturing strategy also resulted in continued reduction in cycle time in.
John Roush: Our fourth quarter cycles have decreased on average by two days sequentially from Q3 down to 138 calendar days on average for single family detached homes. This is a 23 day, a 14% decrease year over year and a material contributor to our inventory turn improvement.
John Roush: I also want to comment on the potential impact of new tariffs, where immigration policies as each of the potential tool of affecting cost and cycle time.
John Roush: With respect to tariffs, we made a major shift starting eight years ago to move away from Chinese and other Asian manufacturing to where today. The majority of what we purchase from our supply chain is from U S based manufacturers.
John Roush: There remains some parts made in charge offs, primarily electronic components used in the manufacture of products that are assembled here.
John Roush: As components become subject to tariffs, we estimate the potential cost impact would be in the range of 5% to $7000 per Boe.
John Roush: With respect to lumber, we've already shifted to more usage of domestically grown timber.
John Roush: On the issue of immigration the potential impact of immigration policies, it's much more difficult to assess first we do not know what policies will be.
John Roush: Additionally, there are no reliable information on what percentage of the workforce for our local labor trades or four manufacturers may be subject to new regulation and enforcement. What we do know just like with the supply chain disruptions. During the pandemic is that we will be able to work with our local trades and national manufacturers to find them.
John Roush: Effective solutions because of our builder of choice position with consistent high volume and a focus on production efficiencies.
John Roush: Learn from that prior experience how important our strategy into the supply chain, allowing us to minimize the impact from disruptions. We believe we will be able to do the same again.
John Roush: The fourth quarter to effectively work with our strategic land developers Atlanta.
John Roush: So in the fourth quarter, we continued to effectively work with our strategic land developers and web bank partner to purchase land on our behalf and then deliver Justice had a finished home sites to our homebuilding machine.
And we will give the detail on how our land bank purchases in the quarter breakout, but most of the purchases purchases. Our just in time takedowns to match our store pace on a community by community basis.
John Roush: During the quarter land banks acquired on our behalf about 17000 home sites for about $1 5 billion in land acquisition.
John Roush: Commitment of about $648 million and web development.
John Roush: With a focus on big asset light our supply of owned Homesites decreased to $1. One years down from one four years and controlled homesites percentage increased to 82% from 76% year over year.
John Roush: These improvements in the execution of our operating strategies enabled reduced cycle time.
John Roush: Less land owned resulting in improved inventory turn which now stands at one six versus $1 five last year, a 7% increase.
John Roush: Fourth quarter was a challenge operating environment as mortgage rates moved higher from buyers needed more help to achieve a monthly payment they can afford we.
John Roush: We will continue with our strategy of pricing to market as we navigate whichever direction as rates move in 2025.
John Roush: We will lean into the lower sales machine, if they focus on <unk> high volume manufacturing production and with Millrose in place execute even better on our asset light land strategy.
Also want to acknowledge and thank our extraordinary associates for their hard work focus and execution and now I'll turn it over to Diane.
Diane Bessette: Thank you John and good morning, everyone. So Stuart and Jon has provided a great deal of color regarding our operating performance. So therefore, I'm going to spend a few minutes summarizing the balance sheet highlights and then provide estimates for the first quarter, so turning to the balance sheet.
Diane Bessette: Once again as you've heard we adhere to our volume based strategy of maximizing returns by training inventory at the appropriate market margin.
Diane Bessette: The results of these actions was that we drove cash flow and ended the year with $4 7 billion of cash and no borrowings on our $2 9 billion revolving credit facility. That's provided total liquidity of approximately seven 6 billion.
Diane Bessette: As a result of our continued focus on balance sheet efficiency and reducing our capital investment. We once again continue to migrate towards our goal of becoming land light at.
Diane Bessette: At year end our years owned was one one years and our Homesites controlled was 82% our lowest years owned and highest control percentage in our history.
Diane Bessette: We ended the year owning 85000, homesites and controlling 394000 homesites for a total of 479000.
Diane Bessette: We believe this portfolio provides us with a strong competitive position to continue to grow market share in a capital efficient way we can.
Diane Bessette: Spent $2 $1 billion on land purchases. This quarter. However, almost 80% were finished homesites where vertical construction will soon begin this is consistent with our manufacturing model is buying land on adjusting time basis.
Diane Bessette: The homes closed during the quarter approximately 66% with a third party land structures, where we purchase the home sites on a finished basis.
Diane Bessette: Finally, our inventory turn was one six times up from one five times last year and our return on inventory was 29, 2%.
Diane Bessette: As we move forward with the Miller spinoff and <unk>.
Diane Bessette: Continue to reduce our ownership of land and purchase Homesites on adjusting time basis.
Diane Bessette: NIM should more consistently approximate cash flow and over time, it would be our goal to align capital returned to shareholders more closely with this cash flow.
Diane Bessette: During the quarter and consistent with our production focus we started about 18400 homes and ended the quarter with 35600 homes in inventory.
Diane Bessette: This this inventory number includes approximately 2900 homes that were completed unsold, which is about two homes per community and within our historical range.
Diane Bessette: And then turning to our debt position, we had no redemptions or repurchases of senior notes. This quarter. However for the 2024 year, we repaid $554 million of notes and since 2018, we have repaid or repurchased over $7 billion.
Diane Bessette: Note with an interest rate savings of almost $400 million. These.
Diane Bessette: These actions for our homebuilding debt to total capital ratio down to seven five at year end, our lowest ever and our next debt maturity is not until may of 2025.
Diane Bessette: Insistent with us.
Diane Bessette: To increase shareholder returns.
Diane Bessette: <unk> noted, we repurchased 3 million shares of our outstanding outstanding shares for 521 million.
Diane Bessette: This brought the total for the year to $13 6 million shares totaling $2 1 billion. Additionally, we paid total cash dividend this quarter of $135 million and a total of approximately $550 million for the year. So in the aggregate for fiscal 2024, we returned about $3.
Diane Bessette: $3 billion to our equity and debt holders.
Diane Bessette: Our stockholders' equity increased to almost $28 million and our book value per share these per share increased to $104.
Diane Bessette: In summary, the strength of our balance sheet strong liquidity and low leverage provides us with significant confidence and financial flexibility as we move into 2025.
Diane Bessette: So with that brief overview I'd like to turn to Q1 and provide some guidance estimates note that these estimates do not include the impact of the acquisition of browser called me or spin.
Diane Bessette: Spinoff, that's starting with new orders, we expect Q1, new orders to be in the range of 17500 to 18000 homes as we match sales pace with production, we anticipate our Q1 deliveries to be in the range of 17000 to 17500 homes, but the continued focus on.
Training inventory into cash.
Diane Bessette: Our Q1 average sales price on those deliveries should be about 410 to 415000, as we continue to price to market to meet affordability.
Diane Bessette: We expect our gross margins to be between 19% and $19 two 5%. So it stood at Illumina alluded to to provide additional context. The gross margin in our backlog expected to close in the first quarter is about 20%, while we do not have visibility into at this point is the gross margin.
Diane Bessette: On homes, we expect to both sell and close in the first quarter, which we anticipate will be roughly 50% of the closings.
Diane Bessette: As we sit here in mid December with the limited visibility, we are going to head into the spring selling season. We anticipate these closings we will have a lower gross margin than our backlog. However, if market conditions conditions improve we will benefit from this upside.
Additionally, recall that our Q1 margins are fully negatively impacted by the current period expensing of field costs. Since revenues in Q1 are the lowest of the year. Additionally, as historically is the case the first quarter will be the low point for margins during 2025 or.
Diane Bessette: Our SG&A percentage should be in the range of eight 7% to eight 8% as we anticipate increased costs to maintain sales activity.
Diane Bessette: For the combined homebuilding joint venture land sales and other categories, we expect to be about breakeven.
Diane Bessette: We anticipate our financial services earnings to be approximately $100 million to $110 million.
Diane Bessette: Our multifamily business, we expect a loss of about $10 million.
Diane Bessette: Turning to learn or other we expect a loss of about $20 million. However, remember that it excludes the impact of any potential mark to market adjustments to our public technology investments.
Diane Bessette: Our Q1 corporate G&A should be about two 6% of total revenues and our charitable foundation contribution will be based on $1000 per home deliveries.
Diane Bessette: We expect our Q1 tax rate to be approximately 24, 5% and the weighted average share count should be approximately 266 million shares.
Diane Bessette: So on a consolidated basis. These estimates should produce an EPS range of approximately $1 60 to $1 88 per share for the quarter.
Diane Bessette: And since as we turn to 2025 as we noticed since market conditions are uncertain. We are only providing delivery guidance, we're targeting to deliver between 86080 8000 homes for the full year of 2025, including the rush Crouched comment acquisition.
Speaker Change: With that let me turn it over to the operator.
Speaker Change: Thank you at this time, we will begin the question and answer session. Please limit to one question and one follow up.
Speaker Change: I would like to ask a question you May press Star one to withdraw your question you May Press Star two.
Speaker Change: Please for the first question Alan Ratner with Zelman and Associates you May go ahead Sir.
Alan Ratner: Hey, guys. Good morning, Thanks for all the detail, but definitely a lot going on right now.
Speaker Change: I appreciate that.
Speaker Change: Stuart I guess I'd love to just hear your thoughts on on part of the consumer and the drivers that impacted.
Speaker Change: The demand during the quarter.
Speaker Change: Obviously rates moved in the wrong direction and I think.
Speaker Change: Makes sense compared to where you guys were back in September why things where people are.
Speaker Change: Weaker than expected, but if we look at the absolute mortgage rate in the high sixes, maybe adding seven in the quarter.
Speaker Change: It's not too dissimilar to what you were selling at spring.
Speaker Change: 24, a year ago, yet it sounds like things were.
Speaker Change: Fairly meaningfully weaker from just an overall demand perspective.
Speaker Change: What do you attribute that to is it seasonality is it the supply demand picture given how many specs have been put on the ground because it doesn't feel like things have changed that drastically in the economy to warrant a much softer picture at that type of rate environment.
Speaker Change: Yeah, you know well and I think it's a combination of factors I think that the.
Speaker Change: The consumer and particularly at the entry level.
Speaker Change: Even as you move up into the move up level.
Acquiring a downpayment and today's.
Speaker Change: <unk>.
Speaker Change: <unk>.
Speaker Change: Inflated environment, what I mean by that is prices have gone up in the rate of inflation is has come down but that doesn't mean prices have come down.
Speaker Change: It's harder to accumulate a down payment.
Speaker Change: And it's harder to qualify for a mortgage.
Speaker Change: I think that.
Speaker Change: There is a combination of interest rates, moving up and moving down and moving up moving down.
It's created a little bit of a hesitancy when people actually pulling the trigger you have some seasonality sprinkled in here.
Speaker Change: There are a number of factors that are going on and it's just become a more difficult environment to get the buyer to actually make the.
Speaker Change: Decision to purchase <unk>.
Speaker Change: As we came to the end of our third quarter, where interest rates were trending down.
Speaker Change: Didn't see the same responsiveness to rates coming down that we had seen in prior movements.
Speaker Change: And then moving from there.
Speaker Change: Into the fourth quarter.
Speaker Change: As interest rates first take down and then moved up in the wake of the <unk>.
Speaker Change: <unk> 50 basis point fed reduction.
Speaker Change: The consumer kind of.
Speaker Change: It just felt like they felt a little surprised by that.
Speaker Change: Just been more sidelined.
Speaker Change: I'd just say its a combination of things that we have felt at the door at our welcome home centers.
Speaker Change: And in particular as rates started to started migrating up during the fourth quarter, it became harder and harder to navigate the waters of incentives and rate buy down and.
Speaker Change: Purchase price reductions all of the components that we have as tools.
Speaker Change: <unk> navigated those waters became a little trickier and and it took a little bit more to get the consumer over the fence.
Speaker Change: Got it I appreciate the additional color there.
And then second just kind of on your overall pace versus price strategy, you've always kind of articulated margin and price being a lever to achieve the volume targets.
Speaker Change: I'm just curious how you think about 25 and the targets you put out there for closings growth.
Speaker Change: Too dissimilar from where you were three months ago, even though the market seems to have shifted a bit lower.
Speaker Change: What are you thinking on the sensitivity there now that margins are kind of below where at least for the time being below what you consider to be normalized is there a lower bound on margin or an upper bound on incentives that you are willing to go to achieve that.
Speaker Change: Volume targets that you've put out there right now.
Speaker Change: We have conviction here that steady state volume will help us rationalize costs, both at the land level and at the hard cost sticks and bricks level.
As well as overhead over time.
Speaker Change: So the answer is we're going to adjust to market, we're going to maintain volume of course, there can be something that is so erratic that we might change our strategy.
Cause it's outside of the boundaries.
Speaker Change: But as it relates to the normalization of the market the adjustment to a new normal in interest rates or as it relates to.
Speaker Change: Affordability issues, just straight affordability, we're going to adjust to market conditions and maintain volume and we're going to use that as a leverage point to rationalize both land and production costs.
Speaker Change: Understood. Thanks, a lot appreciate it and happy new year.
Speaker Change: You too.
Speaker Change: Thank you our next caller is Michael Rehaut with Jpmorgan.
Speaker Change: Yeah.
Speaker Change: Hi, good morning, Thanks for taking my question.
Speaker Change: Rob.
Speaker Change: Sure.
Speaker Change: You know a lot of questions I'm sure, we're going to hear about no rose.
Speaker Change: Shortly but I'd love to just focus on the core business, which I think.
Is really the focus on you know.
Speaker Change: Most of the.
Clients that we speak we speak to investors that you're speaking with today.
Speaker Change: Stuart you mentioned a couple of times that.
Speaker Change: We are positioning the company.
Speaker Change: In terms of.
Speaker Change: Keeping your finished specs are kind of in line with historical as kind of continuing to move.
Speaker Change: Volume and you're positioning yourselves to benefit from a normalized margin.
Speaker Change: <unk> stabilized you also alluded to I think Diane alluded to.
Speaker Change: Conviction that the first quarter should be built.
Speaker Change: Below us in terms of the gross margin for the year.
Speaker Change: Well I, just think about what a normalized gross margin might need over the next 12 24 months.
Speaker Change:
Speaker Change: Relative to what you're seeing.
Speaker Change: Well, what you've seen in the past year, what you're seeing in the first quarter, how should we think about what a normalized margin means for Lamar, let's say once we get through this more bumpy period.
Speaker Change: You know Mike I think.
Speaker Change: It's hard to look out ahead, especially in what I would consider to be turbulent times.
Speaker Change: And maybe.
Speaker Change: Maybe turbulence too strong a word but.
Speaker Change: Interest rates are moving around.
Speaker Change: There's a lot of change injected in the system overall.
Speaker Change: What exactly is is normalized.
Speaker Change: I don't know what that number is it's certainly north of where we are now I think that the market is adjusting to a new normal there is underlying everything a supply shortage.
Speaker Change: And demand is building in the background.
Speaker Change: <unk>.
Speaker Change: By population and household formation.
Speaker Change: So what is the normalized margin, it's going to be higher than where we are right now.
Speaker Change: And it's going to.
Speaker Change: It's going to climb as demand is activated by market.
Speaker Change: Forces.
Speaker Change: That means enabled by interest rates enabled by stabilized pricing either at the grocery store or a gas or gas prices coming down.
Speaker Change: It's all of these things are going to work together, what we've focused on.
As we are we are going to price to market conditions and that means as the market ebbs and flows.
Speaker Change: <unk> will move up and down along with it.
Speaker Change: And we know that market conditions right now are difficult there will be easier times.
Ahead, where margin will migrate back up and we'll be multiplying by a larger volume number.
Speaker Change: Mike I would just add as you heard from from all of US is that our strategy really enables our approach to the supply chain to continue to find efficiencies and reduce costs. There that will help the margin equation.
Speaker Change: No I appreciate that.
Both Stuart and Jon Thank you for that.
Speaker Change: I guess second question I wanted to shift towards the top line.
Speaker Change: Last quarter and I think you reiterated this a few times perhaps now.
Speaker Change: Do you intend to grow volumes about 10% annually as what you stated last quarter.
For fiscal 'twenty five and beyond.
Speaker Change: Your guidance.
Speaker Change: Now is 8% to 10%.
Speaker Change: It does include the contribution of rash Goldman which I think you said was about a 5%.
Speaker Change: Contribution to growth 4000 units.
Speaker Change: It closed in the first quarter.
Speaker Change: Yeah.
Speaker Change: Obviously implies organic growth kind of in that.
Speaker Change: 3% to 5% range.
Speaker Change: Just wondering going forward you know you had the only other competitor of yours, a similar volume size D are boarded.
Speaker Change: Talk about flat to slight volume growth in fiscal 'twenty five.
Speaker Change: And a big part of that just due to the challenges of getting communities online.
Speaker Change: How should we think about organic growth from Lenore going forward is that still.
Speaker Change: Do you kind of view that 10%.
Speaker Change: The goal that you've stated as an all in number is there variability there is the organic growth, perhaps a little bit less.
Speaker Change: Does it certainly seems like fiscal 'twenty five might be below a quote unquote normal or aspire to growth year at least on an organic basis for for some builders.
Speaker Change: Hey, Mike.
Speaker Change: The.
Speaker Change: The line between organic and inorganic has become a little bit more.
Blurry.
Speaker Change: And the reason is that.
Speaker Change: <unk>.
Speaker Change: As we grow we're adding communities, sometimes we're adding communities through the acquisition of smaller builders, who have decided that an affiliation or collaboration with us as a better Avenue forward.
And sometimes that's really just the acquisition of additional communities instead of buying one more buying for.
Speaker Change: And this is something that has got ongoing on a regular basis in different markets at different rates. So it's kind of hard to.
Speaker Change: To decipher.
Speaker Change: Where the line between organic and inorganic is.
So.
Speaker Change: We're looking at basically.
Speaker Change: That kind of a growth rate is a combination between the two with Roche call them, we have a combination of some markets, where we're already embedded.
Speaker Change: Where we are adding community count to an already existing rather robust operating system or a platform and we have other markets, where growing de novo into new markets.
Speaker Change: Working with the tremendous reputation that Roche Goldman has and the high quality people that come along with the acquisition so even with Roche.
Speaker Change: The line between organic and inorganic.
Speaker Change: Really begs the question of can.
Speaker Change: Can we separate it out and.
Speaker Change: How do we look at it we're really looking at both organic and inorganic as being.
Speaker Change: Tied together with our growth strategy.
Speaker Change: Mike I think I would just add to that.
Speaker Change: Interesting with Raj Kannan.
Speaker Change: While we are expanding into new markets. We're also growing market share in existing markets and that's really the goal.
Speaker Change: Because the greater we grow market share that more benefits, we really are.
Speaker Change: Achieve from that market and I think what's really important to also remember is the way that we're structuring these will call an inorganic growth and I think that's a really big differentiator.
Speaker Change: Buying with turning it quickly adding profitability to the bottom line and at a high return. So I think you have to think about sort of that M&A activity. If you will in a very different light it used to be very negative. It came with a lot of goodwill and things like that but this is a different way to think about.
Speaker Change: M&A and I think it is more akin to organic growth then you might be thinking about historically.
Speaker Change: Yeah, and I appreciate that Diana.
Speaker Change: Clarified for the first quarter gross margin.
Speaker Change: That's not been as a result include any purchase accounting impact.
Speaker Change: Or throughout Goldman I guess not.
Speaker Change: Not expected to be in the first quarter, but let's say in the second quarter third quarter is there any purchase accounting.
Speaker Change: Okay.
Speaker Change: Yeah, there'll be there'll be some purchase accounting impact.
Speaker Change: Impact in the second quarter, if we were to close at the end of the first quarter, but I'd say when you think about it.
Speaker Change: And again, depending on when we close if we estimate 4000 deliveries over the second third and fourth quarter, you can see that the purchase accounting impact in that second quarter will not be material to margins overall.
Speaker Change: Great. Thanks happy holidays, everyone.
Mike: Thanks, Mike.
Thank you our next caller is Stephen Kim with Evercore ISI you May go ahead Sir.
Stephen Kim: Thanks, very much guys.
Stephen Kim: Tried to clean up a little bit if I can on the gross margin.
Speaker Change: Stuart I think you indicated that the backlog has gross margins that are kind of running closer to 20%.
Speaker Change: And I think I heard you say that you've sort of thought that the number or the percentage of closings that you would get in <unk> that you have not yet sold or had not yet sold.
At the end of November which was about half right. So then that makes it easy that sort of implies that your 19.
Speaker Change: Gross margin in the first quarter that implies that the stuff youre going to be selling here.
Speaker Change: You know over the coming weeks.
Speaker Change: You're sort of thinking there's maybe an 18% gross margin.
Speaker Change: I think you also indicated though that <unk> has sort of a catch up in sales going on because you missed your <unk> sales so that that might sort of suggests that if youre trying to figure out what a steady state gross margin is that 18% is probably a little lower because you're actually sort of overselling. If you will a little bit to make up for <unk> I just want to make sure I'm thinking about that right.
Speaker Change: <unk>.
Speaker Change: Or if there's some other adjustment that we need to be thinking about.
Speaker Change: I think you're doing a good job.
Speaker Change: Pretty right on.
Speaker Change: And we will have to see how the market actually unfolds and enables or not enables.
Speaker Change: Yeah.
Stephen Kim: Activity at that level, but we're going to solve two activity, yes, I think thats right, Steve in that 20% margin. If you think about it it has the impact of the increased incentive levels through Q4, which John really gave you some details on that and I think if if market conditions.
Stephen Kim: Prove there is upside to that but we're trying to be really conservative right now because there just isn't a lot of visibility as we sit here in the middle of December.
Speaker Change: And let me just let me just add and say look.
Speaker Change: We are solving to volume, but what we are doing is we're working with.
Speaker Change: While we solve to volume on rationalizing the cost structure and whether it's on the land side or whether it's on the production hard cost side, our relationships with our trade partners building predictable volume that they can count on and they know that we're in.
Speaker Change: Not flinching enables us to rework.
Speaker Change: Some of the efficiencies in some of those numbers, we've continued to be able to either bring our costs down or at least hold them steady in a tough environment.
Speaker Change: And we think that we'll be able to make more progress rationalizing costs by giving consistent volume. So there are some offsets in all of this.
That are important to the way that we're thinking about our business.
Speaker Change: Yeah, that's helpful and I I think I should also have mentioned that and you also indicated that <unk> has lower margins than sort of a full year. So that's.
Speaker Change: Correct. That's all so yeah, so 18 isn't exactly like sort of an annualized number anyway on top of being conservative.
Stephen Kim: Let me add to that field impact as well, Steve which is not an immaterial number.
Speaker Change: And let me say this that I do want to go back to the third quarter, where I detailed that our community count had fallen off.
Speaker Change: The the bolstering of community Count also helps alleviate some of the pressure at the community by community level. So these things are going to work through and work out we're confident in that and we will.
Like the fact that okay, we're a little lower right now, but over time, we're going to normalize and we're gonna multiplied by a bigger number.
Speaker Change: Gotcha, Okay switching gears to volume.
Speaker Change: Youre closing Sky is 86 to 88 up about 10%.
Speaker Change: I guess, Mike My question is does that assume orders for the year noticeably above the closings range or does it assume a meaningfully higher backlog turnover ratio for the year, because I think in order to hit that closings guide youre going to need one or the other you're going to need to have orders either higher than that number or are you going to have to have backlog turnover ratio higher than it was.
Speaker Change: Was last year and.
Speaker Change: So I'm kind of curious which is it and if you tell me if its orders that orders are going to be higher I just want to make sure that we're thinking right because that in my model is sort of telling me, it's got to be north of 20% order growth in <unk> and <unk>, including Roush.
Speaker Change: And if you're telling me no I know, it's probably a higher backlog turnover ratio I'm going to ask will then will are you contemplating cycle time impacts from maybe a crackdown on undocumented workers.
Speaker Change: Yes.
Speaker Change: So.
Speaker Change: Youre not going to be happy with my answer, but I think it's a little bit of both and.
Speaker Change: And.
Speaker Change: Look.
Speaker Change: We are driving and getting more and more efficient across the platform and what I mean by that is on the orders the new order side.
Speaker Change: Focus and attention that we're bringing to the generation of sales.
Whether it's through our digital marketing machine or whether it's through our dynamic pricing mechanism. We are building efficiency through those programs and so there will be some order.
Speaker Change: Some some order growth embedded in this but additionally, the focus and attention that we have brought to cycle times.
Speaker Change: <unk> enables that backlog conversion too.
Speaker Change: To accelerate.
Speaker Change: The efficiencies that we're injecting in our business I mean, if you listen to Johns.
Speaker Change: Articulation, it's not just construction costs that are holding steady in a in a.
Speaker Change: Higher pressured environment. It's also cycle time coming down now you've raised the question.
Speaker Change: Immigration and what happens with immigration policy and that's a wildcard out there and we're all going to have to figure out how that kind of mesh together, but I will say as an overlay here is that one of the things that we are doing is we're injecting predictability with our trade partners so that they understand.
Speaker Change: And that we are there for them and we're going to need them to be there for us and that is a quid pro quo kind of exists in the market.
Speaker Change: And we have been rock solid consistent and laying out the logistics and the predictability that enables them to be the best version of themselves.
<unk>.
Speaker Change: Even when the market says Lynch, we're not flinching and that predictability is a value add.
Speaker Change: Just how does that stay at the.
Speaker Change: That predictability comes with a real focus on simplification, we have greatly reduced SKU count than we used to have which enables the execution with stores. Just described to truly happened as you work through both the labor force and manufacturers.
Speaker Change: So just so I'm clear are you assuming any cycle time, it sounds like youre not assuming any cycle time impacts because if the if you do have it affecting the market, it's going to affect other people, but not you just just so I'm clear is that what you're sort of.
Speaker Change: Well, that's the two hunters with the bare chasing them and.
Speaker Change: We're not quite that mercenary we want all of our.
Speaker Change: Competitors to do well.
Speaker Change: But.
Speaker Change: But we are laser focused on our production our cycle time.
Speaker Change: And we are solving to the most consistency to be able to accomplish the things. We're accomplishing now are we assuming that there will be variability in here given an uncertain political environment.
Speaker Change: We are naturally thinking about that quite a bit.
Speaker Change: Working with and talking to trade partners to look at Eventualities are there clear answers at this point there are not and John was clear about that but it's not something that were asleep at the switch with it's something that is very much a part of our thinking.
Speaker Change: Great. Thank you so much guys.
Speaker Change: Yep.
Speaker Change: Thank you. Our next caller is Trevor Allinson with Wolfe Research you May go ahead Sir.
Hi, Good morning. Thank you for taking my questions sure I first wanted to follow up on some comments you just made talking about conversations with your suppliers and with the trades given <unk> gross margins are back to pre pandemic levels.
Speaker Change: Do you focus on growing volumes here are you expecting to see some cost concessions, maybe excluding any impacts from changes in policy, but are you expecting to see some cost concessions here in 2025 from for both your trades and your suppliers.
John Roush: Yes. This is John.
It's a continuous program of discussions with our supply chain to find efficiencies and bring cost down. So we do expect that to continue.
John Roush: A big part of that is relative to our product strategy, our core product strategy, which we've discussed before that I just mentioned.
John Roush: Get to the details of a SKU reduction, but the biggest thing is consistent predictable volume enables us to have that discussion with our trade partners and have their margin come down just as our margin is coming down.
John Roush: Yeah.
Speaker Change: Okay got you and it makes a lot of sense.
Speaker Change: Then second there's been a lot of talk in the industry about elevated completed inventory levels. It sounds like Youre a complete inventory levels remained relatively normal can you just talk about your comfort levels with where you are completed inventory levels are at and the current demand environment and then perhaps expand that commentary to the completed inventory levels overall.
Speaker Change: Markets and if he feel in any of your markets they've got more extended.
Speaker Change: Yes.
Speaker Change: That's a great question Trevor.
Speaker Change: Our our inventory as we came to the end of the year was within our range, but at the high end of our range.
Speaker Change: And we're very focused on maintaining an inventory level that is appropriate. So let me talk about appropriate.
Speaker Change: We recognize that buildup in inventory.
Speaker Change: Is the best way to really cast a dark cloud over your future.
Speaker Change: If we have too much inventory, it's going to constantly be a depressant on where pricing and margins can actually grow. So we're laser focused on keeping our inventory level within a range now historically, we've trended closer to one home per community.
Speaker Change: Versus the two homes that we're at right now, but we've been within that range of 1% to two homes, we've actually migrated to a thinking process that given our land light strategy where enabled.
Speaker Change: To maybe carry just a little bit more than we have historically.
Speaker Change: And that really enables us to address the customer that comes in and needs a AUM now as opposed to one that's under production or to be under production and therefore, we think that something closer to the two home per community range is where we want to land, but we do not want to get it.
Speaker Change: Above that so that's how we're thinking that's what we're solving to we're going to carefully maintained inventory, but we're going to be a little bit towards our historical higher side as a matter of strategy.
Speaker Change: And just to add to that Trevor we're very focused on electric maintaining inventory levels, but the freshness of that inventory. So we're very focused on not letting at age.
Speaker Change: And if you look at our inventory.
Speaker Change: About 80% of it is 90 days or pressure.
Speaker Change: From an aging perspective, so it's a big part of this overall focus of our operating platform.
Speaker Change: Thank you I appreciate all that color good luck moving forward.
Speaker Change: Thank you.
Speaker Change: Thank you our next caller is Susan Mcclary with Goldman Sachs.
Susan Mcclary: Good morning, everyone. Thanks for taking the question.
Susan Mcclary: My first question is going back to some of the focus on rationalizing our cost structure. In there can you talk about where you are in terms of standard standardizing those product offerings, how much more you can get over the next several quarters in there and how that will benefit the margin structure over time and then also just the cash generation.
Susan Mcclary: Our business.
Susan Mcclary: So we.
Susan Mcclary: We've been hard at work at standardized product offering, which we refer to as our core product.
Susan Mcclary: And in 'twenty four it represented about 10% of our starts and we expect that that's going to grow to about a third of our starts in 2025.
Susan Mcclary: So we do think there is further rationalization that will be very positively received by our supply chain, both labor and materials.
Susan Mcclary: As we create more and more consistency, but also efficiency with that consistency.
Susan Mcclary: Well.
Susan Mcclary: Health cost and cycle time, the bottom line Susan is that Theres, a tremendous amount of opportunity here that we've been laser focused on the migration from 10% to a third of our product migrating to core equates to a great deal of efficiency with which is not about.
<unk> with our trades as much as it is about value engineering and really building efficiency both into the design of the home and the production of the homes and so we think that over the next year, we will see a lot more core product.
Susan Mcclary: And a lot more reduction in cost.
Susan Mcclary: With that.
Okay.
Speaker Change: Helpful. And then one of the comments that you made was that you know youre going to continue to focus on repurchasing stock and shareholder returns and that will obviously evolve is no roads.
Susan Mcclary: Through the process.
Speaker Change: Understanding theres a lot that can change in there, but can you talk to some of the key factors that you're watching for and how that could perhaps evolve as we do get no rosebel and we move into a newer model of the business.
Speaker Change: Well, let's let's remember first of all no rose is.
Speaker Change: Is the end of a process that has been ongoing for five years. So we have a tremendous amount of experience with our other land banking partners starting with essential housing.
Speaker Change: And Angelo Gordon, where we have a tremendous program and opportunity to continue to grow.
Speaker Change: And no rose as a next step the biggest difference with no rose is that it is a permanent capital vehicle as opposed to one where our group has to keep going up and raising the next round of capital. So theres something strategic about no rose as we.
Speaker Change: Take a large part portion of land our remaining land.
Speaker Change: And move it into the system, we're going to see how capital flows, especially at the startup of the Millrose endeavor as we go public there will be a startup process and as we mature the engagement, which will dovetail with all of our other.
Speaker Change: Land banking relationships as well as episodic programs, where we're.
Speaker Change: Dealing with landowners and have rolling option programs as well.
Speaker Change: As we mature our engagement with now what will be a fully land light strategy will develop the confidence around how much of the capital that we're producing the cash flow that we're producing actually goes to return to shareholders either through dividend or.
Speaker Change: Through stock buyback.
Speaker Change: And as we're paying down debt as well I'm not sure that answers your question, but.
Speaker Change: It's just a maturing process that will go through as Melrose goes public and since then I would add to that.
Speaker Change: As you.
Speaker Change: The goal is to really have our net income equal our cash flow and I think 25, 2025 is sort of a year, where a lot is coming together.
Speaker Change: And we will still be embarking on that journey of making sure that we're increasing shareholder returns through all the mechanisms of dividends and buybacks, but I think as you look on a on a longer term sustained basis.
I think that we will get to the point, where net income is pretty close to cash flow and we don't have a large maturity ladder from a debt standpoint.
Speaker Change: So by design and that cash will be more heavily geared towards buyback.
Since we were formally very focused on the debt reduction.
Speaker Change: So I think that should give you sort of a trajectory of where we're going to get what's important to us is to have a sustained program and I think that we are taking another step in that direction.
Speaker Change: Okay. That's very helpful color. Thank you good luck with everything.
Thank you Susan and when we take one last question.
Speaker Change: Our next caller is John Lovallo with UBS you May go ahead Sir.
John Lovallo: Hey, guys. Thank you for taking my questions as well maybe the first one on the spin I'm just curious why you decided to partner with an external manager in the Millrose deal and then along the same lines. What are you sort of think of as the rate comps I mean should we be looking at mortgage Reits.
John Lovallo: They do tend to trade at.
John Lovallo: A 20% discount to book value. So I'm just curious what you would consider to be good comps and why he's an external manager.
Speaker Change: So John Thanks for the question.
Speaker Change: I guess, Fred Rothman sitting right next to me and and Fred has done a tremendous amount of work on building the programming and the execution around mill Rose I'm, just going to start by saying.
Speaker Change: We chose an external manager and we chose the external manager of Kennedy Lewis.
Speaker Change: Because they have been a strong counterparty for us in this business.
Angelo Gordon and we started it Ken.
Speaker Change: Kennedy Louis has been a participant along the way and Fred do you want to weigh in on the Kennedy Louis relationship.
Fred Rothman: Sure we have a law.
Fred Rothman: Along a strong history.
Fred Rothman: Louis that is produced there.
They are very very good working relationship and using them as an outside managers here allows no rose to get going from day, one we're going to be.
Conveying and transferring.
Fred Rothman: Large number of home sites, and we need Melrose to be up and running to develop the internal platform and to develop the systems.
Fred Rothman: They are already familiar with our hopper. So on day, one mill roles will be very active up in running and be a strong partner for Illinois.
Fred Rothman: Let me, let me just add to that and say we've been asked why wouldn't you have done it with Angelo Gordon and let me let me tell you the relationship with Angelo Gordon is extremely strong and beneficial.
Fred Rothman: But multiple pools of capital are going to benefit us and the industry for that matter as we go into the future and so therefore, we have strong participants that are familiar as Fred said with the hopper the way that we govern the overall oversight of purchasing land developing land.
Fred Rothman: Financing land and moving it through the system in an orderly fashion, we have a lot of experience with the professionals at Kennedy Louis already they were a natural external manager why an external manager it gives clear visibility on what the cost structure is the cost structure is borne by the professional.
Fred Rothman: Manager.
Fred Rothman: A very clear fee.
Fred Rothman: Is it supports the payment of of all of the overhead associated with the administration.
Fred Rothman: It's a much more simple structure for the world to understand.
Fred Rothman: And then you asked the question of what are going to be the comps I think were going to leave that.
To the next couple of months as we take.
As we take <unk> public so theres, a little bit of wait and see and we're going to stay within the boundaries of what's in the S. 11, right now, but we're very enthusiastic about this addition to the capital markets and what it means for the future of the homebuilder as a manufacturer that benefits from just in time.
John Lovallo: Delivery of home sites, Yes, John I would want.
Fred Rothman: Wanted to add.
Speaker Change: So think about one of them goes listen only rose was to have milagros produce.
Staying nimble recurring cash flows and income and I think about that well, it's not perfect I think about that sort of.
Speaker Change: Compared to the the returns that you're getting from a bond investment for example, and so that I think that that recurring sustainable component will be very important and so as Stuart mentioned, having a very fixed fee structure against that recurring income and cash flow I think will occur.
Speaker Change: Complex the goal that we're trying to it one of the goals that we're trying to accomplish as you think about us from an investment standpoint.
Speaker Change: Anything else you would add.
Speaker Change: Just the.
Candidly Louis just put the team together and just has a proven track record that is just going to make this a seamless transition for us from day, one and I think that's critical for the success of <unk> and the.
Speaker Change: Payable in future growth.
Speaker Change: Great. Thanks.
Speaker Change: That's really helpful. And then just as a follow up I just wanted to go back to an earlier question just to make sure I understand the strategy here the 10% growth in delivery that target was out there pre Roche you guys maintain that at the high end, including Raj. So I guess I guess the question is if it were not for Roush would you have.
Speaker Change: That target or Conversely, as Ralph just keeping you sort of the opportunity to not push pace quite as hard in the existing communities and still.
Get that same volume at perhaps a higher margin.
Speaker Change: So let me let me just add.
Speaker Change: A little correction.
Speaker Change: We've been working on the Roche deal long before.
Speaker Change: It became public.
Speaker Change: In our world.
Speaker Change: When we do deals it is all about relationship and fit and we have.
Speaker Change: Spend a tremendous amount of time working through not just the relationship but a thoughtful negotiation on how things work best and bringing something together, so our 10% really didn't pre date roush.
Speaker Change: Ben.
Speaker Change: Been aware of and predisposed for this to be a part of our growth strategy and a very strategic part.
Speaker Change: If you look at the way, we're thinking about growth strategy today or the way we have been thinking about it it has been in part.
Speaker Change: Densify some of the divisions that we already have in place some of them are already densify, but we've also been thinking about how we bring our brand to a broader geography and so.
Speaker Change: A an acquisition component of entering new markets has been a thoughtful accelerants to the way that we've thought about growth.
Speaker Change: And the Roche program has fit well within the boundaries of what we've been expecting of our own growth strategy now once again I'm going to say Fred has been.
Fred Rothman: The primary driver negotiate or in and around the Roche deal Fred would you add to that <unk> also has a strong position in many of the markets. We're not in so we hit the ground running with Roush is number one.
Fred Rothman: By market share in many of the markets, we're not in and so we immediately we will be able to capture the opportunities and the growth of being the number one builder in a bunch of new markets.
Fred Rothman: Accessing our ability combined with the Ralph Coffman excellent track record and access to land going forward, So really an exciting opportunity for both companies.
Fred Rothman: Okay.
Speaker Change: At what price point, which is attractive in today's affordability challenge market right.
Speaker Change: Okay. Thank you guys.
Speaker Change: Okay Youre welcome well.
Speaker Change: I want to thank everyone for joining today I know, it's a bit of a turbulent ride, but we're pretty excited about our future short term lumpy long term excited and we look forward to reporting back at the end of our first quarter have a nice day, everyone and happy holidays.
Speaker Change: Thank you. This concludes today's conference call you May go ahead and disconnect at this time.
Speaker Change: What we know.
Speaker Change: Right now Sheila.
Speaker Change: Okay.