This summary is based on the third quarter fiscal 2008 earnings call conducted by Lennar Corp. (LEN) on September 23, 2008.
Management:
President and CEO: Stuart Miller
VP and CFO: Bruce Gross
EVP and COO: Rich Marcogliese
VP and Treasurer: Diane Bessette
Controller: David Collins
Director, IR: Scott Shipley
Key Investor Issues:
- Nine months total revenues were $3.3 billion versus $8.0 billion in the year ago period.
- Net loss for the first nine months was $298.1 million, an improvement from a net loss of $689.4 million same period last year.
- The Q3 deliveries decreased by 50% to 3,791 homes.
Third Quarter Financial Highlights:
The Q3 gross margin improved 400 basis points year-over-year before valuation adjustments to 18%.
- The operating margin before valuation adjustments improved 230 basis points to 2.3% producing a diminished loss from operations for the quarter of just under $7 million.
- A portion of this improvement derived from impairments previously taken and from a focused re-engineering of the product, materially reduced construction costs and a determined attention to right-sizing the SG&A which stands at a still-disappointing 15.7% of lower than expected revenues.
- However, SG&A was down $148 million or 49% year-over-year and the company expects continued meaningful improvement in SG&A in the fourth quarter in both dollars and percentage.
- The management reported that pre-tax loss before valuation adjustments declined from $36 million in Q2 to just below $7 million in Q3.
- Impairments also posted a modest decline from approximately $137 million in the second quarter to approximately $132 million in the third quarter.
The management reduced the number of joint ventures from a peak of 270 to 146 currently and that’s down from 163 last quarter.
- Of those 146 joint ventures, 67 of them have no debt, 31 have non-recourse debt, and 48 have recourse debt.
- Recourse debt to joint ventures was down from a high of $1.8 billion in 2006 to the current quarter level of $630 million which was down $177 million from last quarter.
- The company is close to a rework on most of the non-performing joint ventures and the trend on joint ventures remains positive.
The balance sheet remained strong with a substantial cash position of $857 million.
- While that is down slightly from the second quarter, the management continues to seize opportunity where distress creates unique value.
- It is anticipated that available cash will be used to harvest value and opportunity from joint ventures as they arise.
- There were no borrowings on the revolver facility and the debt-to-total capital position was 40.5% and net of cash that is just over 30%.
Revenues from home sales decreased 54% to $996 million during the quarter.
- The decrease was driven by a 49% decrease in home deliveries and a 9% decrease in average sales price to $270,000.
- The average sales prices net of sales incentives averaged $45,900 per home during the quarter and that was flat with the prior year’s number.
- The average sales price declined regionally as follows: the East was down 7% to $263,000, Central was down 3% to $200,000, the West dipped 15% to $376,000, and the Other category was flat at about $300,000.
Third quarter selling, general and administrative expenses were 15.7% resulting in a 2.3% operating margin.
- The pre-impairment gross margin improved 400 basis points over the prior year.
- The improvement in gross margin was due to a lower land base from the exhaustive asset reviews each quarter.
- The lower construction costs also contributed to the improvement in gross margin.
- The construction costs per square foot have been reduced by close to 15% from the peak.
The East region reportedly experienced the largest improvement in the gross margin during the quarter.
- The operating measures taken relative to right-sizing SG&A have taken time to be implemented and recognized in the numbers.
- SG&A expenses were reduced by $148 million or 49% versus last year and as a percentage of revenue was up 170 basis points to 15.7%.
During the quarter, the company expensed approximately $15 million of non-recurring severance and lease termination costs as a result of additional division consolidations.
- The management reportedly made significant progress in reducing SG&A costs.
- The volumes have however fallen at a faster pace.
- The company has now reduced headcount by approximately two-thirds since the peak in 2006.
New orders were down 42% during the quarter compared to the prior year.
- The number of homes in backlog declined 44% year-over-year.
- The cancellation rate declined to 27% for the quarter from 32% in the prior year’s quarter.
