Welcome to Lennar's Second 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 any objections, you may disconnect at this time. I will now turn the call over to Alexandra Lumpkin for the reading of the forward-looking statements.

Thank you and good morning. Today's conference call may include forward-looking statements including statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies, and prospects. Forward-looking statements represents only Lennar's 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 Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in this morning's press release and our SEC filings including those under the caption "Risk Factors" contained in Lennar's annual report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

I would like to introduce your host, Mr. Stuart Miller, Executive Chairman. You may begin.

Good morning. Thank you and good morning everybody. This morning I'm here with Rick Beckwitt, our Chief Executive Officer; Jon Jaffe, our President; Diane Bessette, our Chief Financial Officer; Dave Collins, our Controller; of course you just heard from Alex; and a number of others. I'm going to go ahead and start as we always do with a brief overview. Rick and Jon will give an operational update and then Diane will give further detail on our second quarter numbers as well as some additional guidance for the rest of the year. As always when we get to Q&A, I'd like to ask that you limit your questions to just one question and a follow-up so that we can accommodate as many as we can . So, let me go ahead and begin by saying that we're very pleased to report a very solid second quarter performance, reflecting both a pickup of the homes that were lost in the first quarter due to weather conditions and a general recovery in the housing market. Deliveries improved 5% over last year while new orders improved to last year's levels and exceeded the upper end of our guidance by just a little over 2%. In the second quarter, we achieved net earnings of over $421 million or $1.30 per share and our strong cash position enabled us to opportunistically repurchase another 1 million shares of stock and set up the repayments of $500 million of debt just after the quarter ended. At quarter's end and before the debt repayment, we recorded a debt to total capital ratio of 38.3%, which is a 410 basis points improvement over last year's level. Overall, our results reflect the fact that the housing markets strengthened throughout the second quarter confirming and continuing the trend that we reported…

Thanks Stuart. In these recovering market conditions, our homebuilding operations executed at a high level and produced solid results. Homebuilding revenues for the second quarter totaled $5.2 billion, representing a 3% increase from 2018. This was driven by a 5% increase in deliveries to 12,729 homes and a 1% decrease in average sales price. Deliveries for the quarter exceeded the high end of our guidance as we were able to accelerate some third quarter closings into the second quarter. Our gross margin for the quarter totaled 20.1%, which was within the range of prior guidance and flat sequentially with our first quarter. As Stuart mentioned, our second quarter gross margin was impacted by an increase in sales incentives offered to homebuyers during the market pause in the fourth quarter of 2018. Our margin was also slightly impacted by an increase in the number of closings coming from third-party option contracts versus on land that we developed ourselves. This is in line with our land-lighter strategy that is focused on maximizing cash flow and our internal rates of return. Notwithstanding that our gross margins were down in the quarter, we expect our margins to increase in both Q3 and Q4 through a combination of reduced incentives and lower direct construction costs that Jon will talk about. Our SG&A in the quarter was 8.4%. This marks an all-time second quarter low and highlights the power of our increased local market scale and our operating leverage. Homebuilding operating earnings on the sale of homes totaled $603 million, up 48% from the prior year. Net earnings for the quarter totaled $421.5 million, up 36% from 2018. New orders for the quarter increased 1% to 14,518 homes, exceeding the high-end of our Q1 guidance. From a dollar value perspective, new orders totaled $5.8 billion, which…

Thanks Rick. Today I'm going to give some color on the various cost factors that impact our cost of sales and the timing of how they flow through our deliveries. First, with respect to direct construction costs, there are several components impacting our direct costs. The positives are tailwinds that come from the drop in lumber prices, cost synergies and our production-first operating platform. The headwinds are cost pressures from the ongoing labor shortage in tariffs. While there are many variables that affect our direct cost, including the mix of homes closing in any particular quarter, as we look back at Q2 and look forward at the next few quarters we see that directionally our direct construction costs are decreasing. In the second quarter, the cost of materials, which account for 57% of our directs will lower sequentially by 0.5%. This is the first time in years that the cost of materials has dropped as lower-cost lumber and synergies flow through our closings. The biggest factor impacting material cost is lumber, which represents approximately 13% of direct cost. The peak pricing for lumber was back in June of 2018 at approximately $600 per thousand board feet. That pricing went into place for homes we started in July through September of 2018 and those homes deliver primarily in Q1 and Q2 of 2019. Lumber dropped to around $330 per thousand board feet in December of 2018. It then bounced back to $400 before trending to its low point earlier this month in June of $300 per thousand board feet. The December pricing will impact homes that started in January through March for Lennar, which will primarily be delivering in our third and fourth quarters. Deliveries in our second quarter will mostly start in October through December and priced off of September's…

So thank you Jon, and good morning to everyone. So let me summarize and reemphasize a few points from our second quarter starting with homebuilding. So as we've mentioned looking at deliveries, deliveries increased 5% from the prior year and exceeded the upper range of March guidance by 6% as we benefited from both deliveries that were postponed by weather from our first quarter, and the recovering housing market. Our second quarter gross margin on home sales was 20.1%. The prior year's gross margin was 21.6% excluding CalAtlantic's purchase accounting. Q2 2019 gross margins were impacted by an increase in sales incentives offered during the homebuilding market pause and an increase in construction cost as a result of continued cost pressures due to land and labor shortages. Our second quarter SG&A was 8.4%, which is the lowest second quarter SG&A percent we have ever achieved. This compares to 8.7% in the prior year. The decrease was primarily due to continued operating leverage, evidenced through improvements in personnel and related expenses, and a decrease in broker commission's year-over-year. And then turning to new orders, new orders increased 1% from the prior year and additionally new orders exceeded the upper range of March guidance by 2%. Looking at absorptions, absorptions for the second quarter was 3.7 versus 3.6 in the prior year. Additionally, we ended the quarter with 1,325 active communities. And finally for homebuilding joint venture land sales and other categories, we had a combined loss of $21 million compared to $17 million of earnings in the prior year. This was primarily due to a loss on consolidation of a previously unconsolidated entity, partially offset by our share of operating earnings from one of our unconsolidated entity. Then turning to Financial Services, looking at the results, the operating earnings net of…

We will now begin the question-and-answer session. [Operator Instructions] We ask that you please limit yourself to one question and one follow-up per person. Our first question is coming from the line of Mike Rehaut of JPMorgan. Your line is open.

Thanks. Good morning, everyone, and congrats on the results. First question, just on the housing market and some of the commentary that you gave earlier on in your prepared remarks, specifically talking about the housing market strengthening during the second quarter. You highlighted traffic and sales. And, I believe, even, if I heard you right, incentives declining, but I just wanted to get a little bit more granular in terms of the order trends, if possible. How they progressed during the quarter? Obviously, they came in a little bit above your guidance. And any commentary around June as well particularly as it relates to any possible early impact from the recent further decline in rates.

Yes. So, Mike, I think that, what we highlighted in the call is that the market had really continued the trend that we saw in the first quarter. There had been progressive improvements through the quarter, though fairly mild. And I was clear to say that, the market rather than being robust could be qualified as solid and it really did solidify through the quarter. And I think that's what you're seeing play through our numbers. Rick, you want to add to that?

Yes. And if I had to give you sort of trajectory in the quarter, May was the strongest month for us from both the new sales orders, from an absorption pace standpoint, and from just an overall field traffic and buyer sentiment. Incentives were down quite a bit from our fourth quarter with regard to the incentive in the sales order. And that's what gives us a little bit confidence that you'll start to see some margin improvement in the back half of the year combined with the construction cost up that Jon highlighted.

That's great. Thank you Stuart and Rick on that. I guess, secondly, just to highlight your -- or talk a little bit more about the incentive trends. Specifically, the gross margins, you kind of highlighted that the increase -- if I heard it right, that the sequential increase in incentives on closings was still more of a flow-through from the softness in the fourth quarter. I wanted to be sure that that was fully the case. And that, as you're saying, maybe we could just shift the attention a little more towards, if you have any stats, around incentives on orders. And you've kind of been saying that they're down materially from the fourth quarter. I was curious on the cadence -- the continued cadence if there was any improvement in incentives on 2Q orders versus 1Q? So, I think, that's an area of focus right now as it relates to -- if the market continues to strengthen, as you talk about -- if the pricing has further improved 2Q versus 1Q?

Yes. That's what I was trying to address. If you looked at the incentives in the new sales orders, not in the closed home, for Q4, that was about 6.1% in the fourth quarter. As we moved into Q1 and Q2, we saw additional improvement, Q1 was about 5.7%, Q2 was about 5.6%, but trending in the quarter down through the quarter of Q2.

Okay. So the 5.7% and 5.6% were -- you're talking specifically on orders?

That's what you asked, yes.

Perfect. Thanks so much.

Thank you. Our next question comes from the line of Stephen East of Wells Fargo. Your line is open.

Hi. Good morning, everybody. This is actually Truman Patterson on for Stephen. Thanks for taking our questions. Just piggybacking off that last commentary with you guys saying that May was the strongest month of the year from, I believe, orders and absorptions and incentives. Do you guys believe that the lower interest rate environment has extended the spring selling season?

Well, I think, that's yet to be seen. We generally don't comment beyond the end of the quarter, but we definitely saw the market being fairly solid through the second quarter. And even as we've started to go into the third, it feels like the market is, as I said, solid. Lower interest rates clearly are impacting affordability. That's bringing people back to the market. And while new home sales are reported across the nation right now at down by about 7% or 8%, we're still looking at a generally solid economic environment with low unemployment and increasing wages basically getting customers to act on their appetite to find a home. We're in short supply relative to homes and interest rates is really enabling affordability to kick in and to bring buyers back to the market. So that's a trend that we've been seeing and that's kind of how we see things as we look through the end of the year, continuing to improve and solidify.

Yes. And as I said in my remarks, the market is really following its typical seasonal pattern with improvement from the prior quarter periods. So I think it's too soon to tell whether it's going to be an elongated selling season because of mortgage rates being down. But what it has done is peak buyer interest, because things are more affordable right now.

And this is Jon. I'll just add to that, if you think about it the second quarter of 2018, everyone thought that was a very strong market for new home sales and we surpassed that level in our second quarter of 2019. So again, direction talks about an improving marketplace. And there's no question as Stuart mentioned that the affordability impacted the lower interest rates is helping that.

Okay. Thanks for that. I didn't hear a community count number. Could you guys just give us an update on community count growth? And last quarter you guys mentioned some weather-related catch up. I'm really just trying to get a sense of where you all think you could end the year and looking forward to some longer-term growth potential?

Yes. Steve. So we ended the quarter with 1,325 active communities. And if you look at where we think we'll be for Q3, we think it'll probably be flattish with the prior year. And if you look ahead as you get to the end of the year, we might be a little bit lower than the prior year just because we're accelerating our absorption pace.

Okay. Thank you guys. And then anything kind of longer term, how you guys are thinking about community count growth?

Well we haven't really given projections into 2020, so I think that's a little bit premature right now.

Okay. Thank you.

Thank you. Our next question is coming from the line of Ivy Zelman of Ivy & Associates. Your line is open.

Good morning.

Good morning and congratulations on the quarter. So I'm going to go for the bigger picture question given the fact that your stock is selling off and I think there's a big elephant in the room that no one's addressing, which is the fear of recession and the yield curve is certainly telling us that. So people say to me, why in the world would I want to own a homebuilding stock late in the cycle with the risk of recession around the corner after 10 years of economic recovery. And I think something you guys said today, sorry for the background noise was really interesting about your ability to sell homes to single-family rental operators. And one of the big concerns I hear about Lennar's specifically is that your factory of 50,000-plus units a year being the number three or higher in 25 markets, you actually have to continue to take a lot of risk in terms of exposure to land. And recognizing that if there is a downturn, you actually have more exposure than anybody else, because you have such a big machine to feed. So talk to us about in the downturn, if in fact a recession were to come to fruition, which I personally don't think is going to happen, but I'm not an economist and predicting recessions. But if in fact, how much of it for example of the single-family rental piece, whether it's Opendoor that's buying your homes or is -- or some of these guys that then sell it to a single-family rental operator. I think people are just very concerned about the risk of being involved in homebuilding sites this late in the cycle. And all of your size, even if you guys are doing an awesome job on scale, it's still a very capital-intensive business with obviously cyclicality risks. Thank you.

Well there are a lot of embedded questions there Ivy and a lot of topic. And I think that we can all agree that there are crosscurrents in today's market. And there are a lot of reasons to be optimistic into -- this world quite positively. And there are some concerns that are out there, some of them are at the macro level and those are environmental programs that we're going to have to fit into. At the end of the day, our view is that the base of the economy is strong, unemployment's low. And relative to the housing market, you're really dealing in a world that we've not seen before. And that is for the past 10 years, you've really seen relative to the population of the country, a production deficit that has persisted. And that persistence means that housing is in short supply, is going to continue in short supply and there are going to be some movements in the market overall that are sometimes up, sometimes down. Affordability will be tested as we saw with the pause. But even with land short labor constrained prices or costs being pushed up, there's a need that is driving the housing market. And in our view and I've said this for some time, it presents somewhat of a floor for a downward limit on how constrained the market can get. And while the upside in the market is somewhat constrained as well, because of cost and affordability, there is a channel of production that it seems in order to fill the need for dwellings in the country, we're going to be traversing for quite some time. And if you look at a normalized level of production, and I know some people question it of around 1.5 million and maybe it's a little bit lower, we've been underperforming that for some time. Now what we've done is we've created some innovative land strategies and some innovative production strategies, recognizing that there will be a balance between what is sold and what is rented. And we're participating in both sides of that market in our rental program in our for-sale housing program that will in some instances be sold to groups that are buying and leasing. And we're really adopting a broad strategy of participating in all parts of the market as the country overall has to fill the need of dwellings that are in short supply.

I guess the other...

Well I think that's a -- go ahead Rick. Sorry.

I'd add -- Ivy is we benefit from being the low-cost producer. And while margins may move up or down depending on what goes on in the economy, we do know that we have an operating advantage. In addition to that, on this for-sale rental stuff, these are in areas that we wouldn't build, but for this type of program, because it's not a good for-sale market, it's more affordable markets where we found an opportunity to leverage our operating platform. As Stuart said, we are not seeing cracks in the system out there. We feel that the economy is moving along. And we're quite confident that if there is a downturn that we'll be able to react very proactively and slowdown the machine, but still have tremendous cash flow, because we won't have to buy as much land. So I think in an environment where the market goes down, we're really strategically positioned to outperform. Got to keep in mind that during the last downturn there were different issues at play. The biggest issue was that people couldn't afford to stay in their homes, because mortgage rates were much higher. We don't have that. And then past decline that's when a lot of inventory came to the market because people couldn't afford to live where they were living. That's not the case today.

Well I think that's really helpful both of you. I think I'm just trying to be -- play devil's advocate, because I think your stock's the best recommendation that we have in our sector, it's our top pick. And what I see is just this hesitancy and concern. So what you just said Rick is that even if there was a downturn, the cash flow that you would generate do you -- I'm assuming you guys have modeled out what a recession not led by housing but let's just say trade wars or something that creates a recession what your sort of different sensitivities are. And I think it'd be helpful maybe not on this call, but I just think that's what the market's talking about today reminds me of when China was blowing up in first quarter 2016 and there's just a lot of fear and uncertainty. And you guys as a homebuilding company till you lived through a downturn maybe people stay away. And I think they're not doing themselves a service buying the stock here, but it'll be helpful for you guys to help even though you don't think Stuart there's going to be a recession, what happens to the company's earnings? What does it look like? What does the cash flow look like? I think that all will be really constructive for us to understand better.

Okay. Look we can add some color to that. But I think that we start with the understanding that our strategy is basically derived from that view of this channel and the downside protected and upside, kind of, limited moving through this middle zone. And remember as we said, as we went through the pause in the second half of 2018 we're focused on building through using pricing to basically maintain production, which maintains cash flow. And so as you think about the way that we would model a recession that is not housing led, and I think that it would not be but might be a derivative of trade wars or other things. It would be defined by those thoughts that the production deficit is a buffer, land and labor is a limiting factor and we're going to continue to produce homes at an accelerated level by using pricing to keep our production machine moving through.

Great. Well, good luck guys. Thank you.

Thank you.

Your next question is coming from the line of Stephen Kim of Evercore ISI. Your line is open.

Thanks very much guys. Stuart, Rick, Jon if I can maybe follow-up here on that line of thinking. I think there's really no dispute about the -- some of the factors, which you've said can act as buffers to the industry as we go into the next downturn whenever that is. But by the same token, it's a little surprising to me that you would need -- that you wouldn't be seeing those same factors and then put together with lower rates, driving better pricing in the marketplace today without the need -- in other words it's surprising to me that you need to continue to have incentives. At the level that you're doing, I would have thought that your incentives would have been able to drop substantially sequentially from 1Q to 2Q in light of the lower rates and you've talked about the housing market having -- or your demand experiencing a typical seasonal pattern I think was your phrase. But rates have not been following a normal seasonal pattern this year. And so if I pull in my question with incentives, because you've been kind enough to give us this metric of 6.1%, 5.7%, 5.6%. Is that in your view keeping up with the market or are you leading the market with incentives? And if you could talk a little bit about why you think the incentive level that you're at has been necessary in light of the fact that the rates have dropped so much?

Hey, Steve its Jon. I definitely characterize that as keeping up with the market. We are not of a scale nor is any other builder to make the market, and so you have a consumer that is looking at what value can they get for their monthly payment, which interest rates will have a big effect on, and creates a market pricing. We're participating in that market from community, community it may vary, might be more or less aggressive depending on that particular marketplace. But in general we're in the market and I think it's just a reflection of a long upcycle, but one that's defined as slow and steady, which in a lot of respects is more healthy than one that is very robust because that can't last very long. And so when this channel that Stuart described in my view is slow and steady, so there isn't robust demand that as you think about your question of normal seasonality why hasn't it been stronger and created a greater reduction incentive. It's really a reflection of marketplace that we've seen for the last few years just continuing forward at that pace.

Additionally, I would say that if the perception is that we’re using incentives to stimulate the market in a broader sense, the incentive structure is -- advice that at a very local level community-by-community in response to existing market condition. This in cooperation with Jon, Rick our division presidents and the people on the ground. So you're really looking at a composite incentive number that derives from what the local level is telling us that the market is requesting. So it's an active feedback rather than something that is forced downward to drive the market.

Steve, let's also remember the incentives number would go to zero even in the best of markets where we are closing cost and cost of that nature. So the floor is sort of call it 3%-ish in terms of what the bottom in a really strong market would be.

I think, sort of, just to end this. We run the analytics and models to understand where we maximize returns and profitability based on pricing and pace. And we started this year saying that we were going to deliver a certain number, we knew what our fixed overhead and our operating cost were and we're driving towards a cash flow number and an earnings number. And we could certainly slow down production and push price, but that wouldn't produce a better result. So I think we're operating the company with the strategy that we entered the year and we are focused on one small piece of the puzzle and there's a big -- a lot of pieces around it.

Yeah, that's helpful and that is just one of the things that we look at where we look at, obviously, a lot and we try to look at as many things as you look at to the best of our ability. So in that vein going to land spend, I was a little surprised that your acquisition oriented land spend wasn't lower this quarter given a market environment that is solid but not robust and given an outlook for -- given the order situation being flattish year-on-year and community count going to be flat to may be even slightly down by the end of the year. I was a little surprised that your acquisition spend was I think it was about first half of this year it's about $1.5 billion, and I think in the back half of last year it was like $1.6 billion or so. I would have thought that the acquisition land spent would be declining as we go forward. So can you give us a sense for what we can expect from the acquisition oriented land spend, which obviously would tie into your cash flow outlook over the next couple of quarters?

Yes. I'll let Diane talk about the go-forward number. But I think, you need to keep in mind Steve that the land spend in any quarter is not necessarily dollars that are at -- that just came together in an acquisition in that quarter. Some deals take years to come together in order to get to a point where all the entitlements are in place and we're ready to go. And a lot of the land that you're looking at that got acquired has been under contract for two or three years. So you can't look at a comparison between last quarter and the quarter before that to this because it's apples and oranges particularly since we're buying and contracting for a much larger business now than we were in the past.

Yes Steven, I think if you just look at the numbers, our second quarter was not too dissimilar from the first quarter, a little bit higher, but not materially and so I think we're clearly are in the second quarter is a good proxy for what you'll see in the third and fourth quarters as well.

Okay, great. Thanks very much guys.

Thank you. Our next question comes from the line of Matthew Bouley of Barclays. Your line is open.

Hi, thank you for taking my question. I wanted to ask about the guidance. You're guiding to I guess implying growing deliveries by double digits in the fourth quarter, but you're saying that -- or guiding to order growth of kind of low single digits in the third quarter. Obviously, the backlog is down a bit year-over-year in units. So, is there any additional color there perhaps around your internal star projections? What else could you say that gives kind of insight into reaching that fourth quarter delivery guidance in light of where orders and backlog are? Thank you.

Yes, I think if you look at our third quarter of guidance on delivery, you're absolutely right. We're sort of in the single-digit range and we see pickup as you go into the fourth quarter. We're generally back-end loaded. So I'm not sure that we're too dissimilar. If you look at the pattern of last year, pretty similar, we always pick up and have our strongest --new order and delivery growth in the fourth quarter. So I'm not sure that we're too out of sync with the typical pattern.

Okay. Understood. And then secondly, the SG&A side, I think you've shown some pretty clear progress with the tech investments and streamlining all the costs. I think Stuart you termed it as a significant opportunity still going forward. So just any additional thoughts on kind of the longer term opportunity, broker commissions, advertising, what are the different buckets and how much runway is their on all that? Thank you.

Yes. Look I've noted this before. I think that there is still a lot of opportunity throughout our SG&A levels to improve our business operation by using technologies and we're working with a number of really vibrant programs and a lot of them are customer facing. We've talked about Opendoor. Opendoor enabled homes or home sales for our company continue to accelerate. And the better we get at working with Opendoor, the more we're able to drive our cost down. And that's a benefit to our SG&A. But at the same time, we're working with companies like States Title to improve the amount of time that it takes to get a title policy and to deliver documentation to our customers. And in time, though not yet, that will improve some of our financial services performances. We're using Blend to help our customer better access, the mortgage application process. And across our platform, there is just a number of technology opportunities to refine the way we do business and bring cost down incrementally. It's not going to happen in large steps quarter by quarter, but what we've been seeing is 10 basis points here, 20 basis points there over the last quarter year. And over years, you're going to start to see us become a much, much more efficient business because technology has made us better at what we're doing.

All right. I appreciate all the details. Thanks again.

Okay. You bet. Why don’t we take our last question?

Thank you. Our last question comes from the line of Carl Reichardt of BTIG. Your line is open.

Thanks very much. I wanted to ask two questions about California, I'll just ask one question with both of parts in it. One, just can you talk a little Stuart about how California performed for you? And then, with the move towards more lot options and what looks like a pretty significant move to smaller homes quick returns, does that impact at all how you think about California in terms of land mix and community mix on a long-term basis? How that might influence your thought?

This is Jon. I'll take your question. So California in general improved, but it's really two different categories to think about when you look at California. The high end coastal markets particularly the San Francisco Bay Area and Orange County are still a bit sluggish. Those are the higher price points, you're talking $1 million-plus homes and heavily influenced by what's being impacted with the Chinese buyer. So those we're going to call it for what it is those remain sluggish. The more eminent markets from the empire in the South in San Diego, up through the Central Valley and into Sacramento, those markets are all performing very well, very consistent with what Stuart described in terms of the overall market condition being solid. And we're seeing strength in market there much lower price points, say in the $400000 to $600000 price range is performing very well. With respect to land in California, we're well positioned. It's not a market that really lends itself to a lot of growing option developed program. It's mostly owned developed land, but we do have given our scale in the respective markets. We've got very strong strategic relationships where there are opportunities for phase takedowns for long-term relationships. We're in every one of those opportunities throughout the state and maximizing it. But you're not going to see the same kind of volume on just-in-time land inventory that you'll see in a Texas or Florida market that's the land position is more set up for delivering that.

Okay. Thanks, Jon. Appreciate it.

Okay. It sounds like we've come to an end. I want to thank everyone for joining us and we look forward to continuing to give guidance and understanding of our business as we go forward. Thanks.

Thank you. That concludes today's conference. Thank you all for joining. You may now disconnect.