This summary is based on the fourth quarter earnings call conducted by Lennar Corp. (LEN) on January 17, 2007.
Management:
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Chief Executive Officer and President: Stuart Miller
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Vice President and Chief Financial Officer: Bruce Gross
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Vice President and Controller: Diane Bessette
Key Investors Issues
- Revenues decreased 15.1% from $5 billion in the prior year to $4.3 billion.
- Net loss was $195.6 million or $1.24 per share, compared to net earnings of $581.2 million, or $3.54 per share in 2005.
- The backlog decreased 42% year-over-year and the average sales price in the backlog stayed 323,000, which is down 9% from the prior year.
Full Year Highlights:
- Revenues increased 17.3% to $16.3 billion from $13.9 billion in 2005 to a 15% increase in the number of home deliveries in 2006.
- Earnings dropped 56% to $594 million or $3.76 a share.
- New home deliveries, excluding unconsolidated entities, increased to 47,032 homes from 40,882 homes last year.
Fourth Quarter Highlights
Revenues decreased 15.1% from $5 billion in the prior year to $4.3 billion due to a 4% decrease in wholly-owned deliveries and an 11% decrease in average sales price on wholly-owned homes from 338,000 to 300-2000 year-over-year.
- This decrease was a result of increased sales incentives from $11,000 per home in the prior year to an average of $47,000 per home.
- The east region was down 11% from 345,000 to 309,000, the central region was down 5% from 212,000 to 202,000.
- The west region was down 10% to 445,000 from 492,000.
Net loss was $195.6 million, or $1.24 per share, compared to net earnings of $581.2 million, or $3.54 per share in 2005 as market conditions remain depressed.
- Gross margin on home sales percentage before impairments decreased from 27% in the prior year to 14.4% driven by the increase in sales incentives, from just over 3% in the prior year to 13.5%.
- The sales incentives were broad-based, with increases in all of the regions, however, generally the markets had experienced the highest gross margins in the last two years, also experienced the larger sales incentives.
Gross profit on land sales was a loss of $119.9 million versus a $58.2 million profit in the prior period.
- Joint-venture results decreased to a loss of $59.6 million from a profit of 79.1 million in the prior year''s quarter.
- The SG&A percentage increased 230 basis points to 12.1% versus 9.8% in the prior year due to a 14% decrease in revenues and higher broker commissions and advertising, but partially offset by lower incentive compensation expenses.
- Continued focus on reducing the headcount to match the current environment has resulted in the associate headcount dropping 10% from the peak level in 2006.
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Financial services income increased to $42.9 million versus $34.6 million in the prior year as mortgage profit improved to $38.1 million from $21.6 million in the prior year.
- This was a result of an increase in the capture rate from 64% in the prior year to 70% in the current year, as well as a larger component of fixed-rate mortgages as that number is now up to 70%.
- FICO''s scores did not change significantly from the prior year and remain in the low 700 range.
- The backlog decreased 42% year-over-year and the average sales price in the backlog stayed 323,000, which is down 9% from the prior year.
Strategic Overview:
- Strategy for the past year has been to focus on the balance sheet by maintaining very low inventory level, delivering the backlog of homes under construction and finished homesite, and reducing the land asset.
- The firm was able to reduce home sites owned and controlled from a peak at the end of the first quarter of 2006 of some 345,000 home sites to a year-end number of some 282,000 home sites, which is down 18%.
- It expects to continue to see balance sheet improvement into 2007 as it reduces the delivery expectation and continue to reduce land and homes under construction.
The firm recently announced the LandSource transaction, whereby Lennar and its partners LNR Property Corporation sold the 62% interest in what is primarily the new homeland asset.
- Going forward, the firm has set a goal of achieving flat earnings at $3.69 a share.
- Additionally, it will focus on cost reductions, product realignment and refocusing on what the market is looking for in current market conditions.
- It will continue to negotiate and renegotiate land pricing as well as refine and redefine product offerings, leading market desires and requests in the current market conditions.
Balance Sheet Management:
