Welcome to Lennar's Second Quarter Earnings Conference Call. [Operator Instructions] 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 David Collins for the reading of the forward-looking statement.

Thank you, and good morning, everyone. 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 represent 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 the 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 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 now like to introduce your host, Mr. Stuart Miller, Executive Chairman and Co-CEO. Sir, you may begin.

Good morning, everybody, and thank you for joining us today. I'm in Miami today, together with Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, you just heard from our Controller and Vice President; Fred Rothman, our Chief Operating Officer; Bruce Gross, our CEO of Lennar Financial Services; Mark Sustana, our General Counsel; and a few others as well. As usual, I'm going to give a macro and strategic overview of the company. After my introductory remarks, Jon is going to give an operational overview, updating construction costs, cycle time and some other items. And as usual, Diane is going to give a detailed financial highlights along with some guidance for our Third Quarter of 2025. And then, of course, we'll take questions in our question-and-answer period. As usual, I'd like to ask that you please limit yourself to one question and one follow-up so that we can accommodate as many as possible. So let me begin. We're very pleased to review our 2025 Second Quarter results against the continuing backdrop of a challenging economic environment for the housing market. In the second quarter, we remained focused on our stated strategy by driving volume and growth, matching production and sales pace using margin reduction to enable affordability and sell and deliver homes to avoid building excess inventory. While our margin and earnings have been adjusting and of course, falling in order to accommodate the realities of the housing market conditions, we remain focused on volume and even flow production to enable rerationalized cost structure and overhead in order to find a floor and rebuild margin even as the overall housing market continues to soften. We expected that the new normal of higher interest rates for longer would mean lower margins for longer as we drove…

Thank you, and good morning, everyone. Stuart has described in detail the why and how behind our strategy of being a consistent high-volume, technology-enabled homebuilding manufacturer and our commitment to execute that strategy. We strongly believe this strategy will produce greater efficiencies and drive down costs throughout our platform. I'll further review this as I discuss our performance on sales pace, cost and cycle type reductions and the execution of our asset-light land strategy for the second quarter. Our sales pace for the second quarter was 4.7 homes per community per month, in line with our sales plan. The well-documented softness of the spring selling season that showed the impact of affordability challenges driven by higher interest rates and elevated home prices along with the uncertainty associated with the macro environment. As the market softened, we leaned into our people and processes, define market and maintain sales pace. This involves the rigor of a daily review of marketing and sales data to make needed adjustments. Based on a real-time analysis of traffic, sales, sales pace and inventory, we would even make no adjustments to prices, increased incentives or decrease incentives. This is powered by some of the technology that Stuart referenced as we've added new automated pricing capabilities to Lennar Machine. This particular technology analyzes all of this marketing and sales data and provides pricing recommendations. It is in its early stages, but we're encouraged thus far. We continuously make pricing adjustments with the goal of ending the week with both the targeted number of sales and with a focus on selling our completed or suite-related inventory. If any community falls short of these goals at any given week, analysis of the data provides us, of course, correcting actions. By hearing to this discipline, we ended the quarter well positioned…

Thank you, Jon, and good morning, everyone. Stuart and Jon have provided a great deal of color regarding our operating performance. So therefore, I'm going to spend a few minutes on the results of our financial services operation, summarize our balance sheet highlights and then provide estimates for the third quarter. So starting with Financial Services. For the second quarter, our financial services team had operating earnings of $157 million. The strong earnings were primarily from our mortgage business and were driven by a higher profit per loan as a result of higher secondary margins and also due to a higher capture rate. The financial services team is intensely dedicated to providing a great customer experience for each homebuyer and has created a true partnership with our homebuilding team to best accomplish that goal. Our LSS teams together with our homebuilding divisions are truly one Lennar. Turning to our balance sheet. This quarter, once again, we were highly focused on generating cash by pricing homes to market conditions. The result of these actions was that we ended the quarter with $1.2 billion of cash and $5.4 billion of total liquidity. We are now positioned as a land light, lower-risk manufacturing homebuilder. Our year supply of owned homesites was 0.1 years, as Jon noted, and our homesites control percentage was 98%. We ended the quarter owning 12,000 home sites and controlling 520,000 homesites for a total of 532,000 homesites. We believe this portfolio of home sites provides us with a strong competitive position to continue to grow market share and scale in a capital-efficient way. With our focus on returns, we are pleased that our inventory turn increased to 1.8x with a solid return on inventory of 27%. As we stated in the past, we balance margins and asset turnover as…

[Operator Instructions] And our first question will come from Alan Ratner from Zelman & Associates.

Thank you for all the details so far. Very helpful. A lot to touch on here. But I think, first, maybe if we could just chat a little bit about the consumer and what you're seeing there. I know, Stuart, you went into a lot of detail about the overall demand environment. But we've been getting a lot of questions, hearing a lot of concerns, reading headlines about just the overall quality of the consumer today and some headlines about student loan. For example, that's beginning to impact some credit scores and just overall kind of stretched kind of quality there. So have you seen any dramatic shifts year-to-date in terms of credit quality or just the overall ability for consumers to purchase homes? Or has this been kind of just a slow steady grind over the last few years given affordability constraints?

Look, I'm just going to say, generally -- and I'm going to turn it over to Bruce for a second. But just generally speaking, the market has definitely softened or continue to soften. New normal interest rates are higher, but more importantly, consumer confidence has started to wane a little bit. In our last earnings call, I did talk about the fact that we are seeing higher debt levels in some of our loan applications and that, too, is starting to weigh in on the market. Bruce, maybe you could give some more color.

Sure. From a credit perspective, if you're thinking about credit scores, it's been very consistent. What we are seeing though is a little bit of a shift to more government loans, which helps with the ratios for some people that don't qualify. So our government loans were up from 40% to last year. to about 48% in the second quarter of this year. So that's the one noticeable difference. You also brought up student loans, but people do have to qualify assuming the student debt. So we haven't really seen any shift there with any changes with student loans at this point.

Second question on the -- just overall, I guess, price elasticity in the market, Stuart, obviously, with the Machine and your ability to flex incentives to maintain a targeted sales pace impressive results there. I'm just curious across your portfolio. Do you feel like there are any markets right now that don't really have elasticity and demand, meaning incentives? It doesn't really matter how high you take them, you're struggling to achieve a certain targeted pace. And as a result, you've dialed back the production? Or would you say across the board, there is a market clearing price. It's just a matter of finding what that level is to achieve the targeted absorption?

So I'll just say quickly and then turn it over to Jon that -- as you know, Alan, we are on top of these numbers, our divisions, our regions every day. And I would say that you do see somewhat of a rotation where one week it's one market and one week, it's another where the question of elasticity is raised and challenged, and it's a real ebb and flow market out there that moves around. Jon?

I completely agree with that, Stuart. It's nothing you can point to where you say this market is behaving consistently in a different direction. As I highlighted some of the markets that are harder to find that pace. As I said, it's in part driven by perhaps where pricing is and particularly tech workers who are foreign check workers just the uncertainty around that. in combination, you tend to see a bigger impact. But that also tends to be very community-specific, and we make the adjustments.

Next, we'll go to the line of Stephen Kim from Evercore ISI.

Appreciate all the color as always. I guess last quarter, we discussed your view that long-term normalized operating margins before corporate expense were like in the mid- to high teens and that you could be nimble in adjusting your operations to a lower level of volume if you needed to. You made clear today, again, you're definitely committed to driving volume-based efficiencies. But based on the third quarter order guide, it looks like maybe you are tweaking down volume a little bit and your comments there just in response to Alan, it sounds like maybe some markets where there's an inelasticity of demand, you sort of tweaking volume down a bit. So I'm just wondering, first of all, to make sure that I heard that correctly. I also noticed you didn't really give -- I didn't hear it at least a full year volume guide. So my question basically is could you talk a little bit about how you see the overall level of volume for -- on an annualized kind of basis? Has it changed in the last few months? And is there some sort of a metaphorical line in the sand for either volume or margins that is worth talking about in addition to the sort of the long-term normalized level? Is there like a bottom line or a bottom or floor level that's worth talking about?

So that's a number of questions in one. Let me clear up, Steve, that in my comments, I did say that we are still expecting for the full year to hit the bottom of the range that we previously articulated of 86,000 to 88,000 homes. So we did detail that. I think that we're remaining consistent, and we're focusing on driving volume, but we're not trying to break anything. This is a day-by-day kind of program of working with market conditions. And what we're doing is adjusting pricing using incentives to meet the market at affordability. And at the same time, we were working with cost structure to say, okay, the market is going to be able to afford X. Now we've got to be able to build something that is market desirable at a cost structure that enables us to make a responsible margin. Is there a breaking point? I don't think so, Steve. I think that we're really focused on saying the market is going to be where it's going to be. And that interest rates -- the interest rate is part of the affordability program. We're going to have to find a way. The challenge for the industry is going to be to find a way to build a cost structure and take inefficiencies out of our system build that cost structure, housing that the market can afford at the end of the day, this conundrum that you've got a supply shortage and demand challenged at the affordability level, I tried to really highlight that. It's not something that we've really seen before. And so the market needs supply, it needs supply at a cost structure where we can make a margin and where the customer can afford. And that's what we're driving towards with everything that we're doing.

I think you said it very well, Stuart. As I highlighted in those markets that have some more challenges, Steve, it's exactly as Stuart said, we are finding our way to a recalibrated cost structure to meet that demand. The demand is there, and it is just challenged as we all know. So it's up to us to do the hard work to figure out how to provide pricing with our homes that is actionable for those consumers.

Yes. And obviously, a lot of that is just good old blocking and tackling and making sure you're sharing the pain with all of your partners who are benefiting from your volume. But you also talked intriguingly, Stuart, at length about technology and the major productivity gains you anticipate from technology. And you made clear that you felt like you weren't quite there yet. And so what I wanted to clarify is, is the gap, is it one of know-how and time?

It's a really important question. Let me first say, I don't think -- I think that we need volume, but I think that we have volume. So I'm not making an argument that we need more volume in order to run through. I think that we have that high level of volume that will enable us to learn. But what I did try to articulate is, I don't care if you look at the technology companies that are self-made as technology companies like Amazon, like Meta, like Google, like -- if you look at those companies, the amount of money that they invested to become what they were and before they ever saw $1 of profit was enormous. If you then back up and look at the companies like Home Depot and Walmart that on an old chassis, they put a brand-new engine to enable than to be prepared for a digital future. The dollars that were invested by those companies was not just numbers of dollars, but it was management time, it was general overhead, it was focus and attention. I'm not sure that any of these companies did what they did in the context of a softening market. And so the coincidence of -- we didn't start what we're doing in a softer market, but we're traversing a softer market as we are building these components that we think position our company to be very unusual within the industry. And it just takes time, it takes attention, it takes overhead to get the programs working well. But if I look back at the time that I said we are developing the Machine, and you should all come here and see what we're doing to today, the advances have been breathtaking. And they're critically important. The problem is in a descending market. It's hard to see what we're actually doing. But our grasp on the numbers, moment by moment, day by day, of what's coming through our system and how we're set up for sale and how marketing is driving the sales component that we're looking at. If I think about the response time and the quality of engagement with our digital customers. These things are, I'm going to say, revolutionary in terms of what we're used to as a company, and we're learning every day. So we're pretty enthusiastic about what we're doing in these spaces. And we are engaging top-flight professionals to work with us so that we are learning -- we don't know what we don't know. We're learning what we don't know. As we migrate forward, it takes time. We're not there yet. And we probably will never be there, but we're getting closer, and we're adding efficiencies to our program even as we build the systems. Sorry for the long-winded answer.

Next, we'll go to the line of John Lovallo from UBS.

The first one is, I guess, I understand that you guys are working through some older land assets, and you guys talked about the land management system today that you're developing. You've also been very clear about what you believe to be the benefits of the even flow model. But I guess what I'm curious about is what margins and returns are you putting capital to work at today?

Well, interesting question. Look, anything that we're buying today is going to come through the system maybe a year or 2 years from now. We are working through some older land assets. But even as we work through those land assets, we are reworking and focusing on the horizontal development costs associated with that. And that can be as expensive as the land asset itself. As we look to put assets to work today, just remember that in a declining market, what we might underwrite today might still move around. Jon, how would you handle this?

Well, it will vary by market, obviously. But I'd say we're trying to adhere to finding our way to -- on a 20% gross margin as we do our underwriting with the expectation as you heard from Stuart and myself of recalibrating, driving down our cost structure as a buffer against the market conditions.

But just remember that because our land assets are generally much shorter term than they ever were historically, we are running through over shorter periods of time, those land assets and reloading with newly configured land assets on a regular basis. And that rotation means that we might suffer from some lower margins for a period of time. But over time, there will be a turnaround. Home prices presumably will start to migrate up and that notion will turn on itself where margins will be improved. Fred, do you want to add to that at all?

Yes. I think we're also exhibiting quite a bit of patience as we look at deals today, and be very selective as we fine-tune our negotiating skills again and bring back the lessons that we've learned over the many years at Lennar to buy land at the right price and most importantly, right now, on the right terms. So we're not taking down large tracks we're buying just in time, and we're being very selective in what market we're pursuing.

Great point because we've spent a lot of time with this. When you go from strong market conditions and maybe even overheated market conditions, the ability to negotiate and to really make sure that the terms, conditions and pricing are right, really becomes almost impossible. When you then migrate to slower conditions that we're in right now, we have to reeducate ourselves and start incorporating some of those old skills that are critically important. And that's exactly what we've been doing.

That's why I mentioned in my comments, just at the shorter term, but also at our high-volume, we generate cash flow for land sellers in a market that the macro conditions are slowing down. And so it's a very different environment today than what we've been through for the past 3 years.

Okay. Yes, that's helpful color. And it looks like homebuilding cash flow from ops was about $1 billion outflow in the second quarter and what's typically a positive quarter. Can you provide any color around the moving pieces there?

Yes, sure. I think what you're seeing, John, is just the impact of the lower average sales price for a variety of reasons and also just some lingering remnants of the Millrose spin-off. So the cash flow is really most dependent on our ASP and the margin -- the bottom line margin. And you've seen that sales are both challenged in the second quarter.

Look, in the context of our Millrose spin-off, which is still fresh, and some of the ins and outs that derive from that. We're still going through some of those reconciliations, and you're seeing our numbers move around. It will probably be another quarter of that. But we're really migrating to a strong cash flow environment.

Yes, continued cash flow. I think that's really important. As we're turning the assets, right? It's one of the most important components of cash flow. So the nominal amount moves around a little bit, but consistent cash flow is definitely our goal.

Next, we'll go to the line of Susan Maklari from Goldman Sachs.

My question is on the core product. Can you talk a bit about where you are in terms of integrating that into the business, how that perhaps benefited the improvement in inventory turns that you saw this quarter? And how we should think about the path to you really sort of fully integrating that into the strategy?

Susan, this is Jon, our core product continues to be rolled out across our divisions. It now represents about 1/3 of our starts. And yes, so way of example, it is more efficient from a cost and cycle time perspective. So we expect actually about almost a 20-day improvement in cycle time between noncore to core product as it is designed and engineered to maximize efficiency of both the build process and the cost to build. And so we're seeing continued improvement, and it just takes some time to roll out across all of our product portfolio. We started at a more entry-level price-sensitive products, knowing how important it is to deal with price sensitivity there. And now we are in the midst of designing product we're rolling out for move-up product and attached product like town homes.

Okay. That's helpful. And then maybe looking out further with that, do you think you can eventually get to 3x inventory turns? Or where can you get to with the turns? And what kind of an environment would you need to see that? And how does that work into the cash generation of the business over time?

It's interesting that you're bringing this up. We didn't spend a lot of time on core product today, but it is a core focus. And that's exactly where our focus becomes. Now it's going to take us a little bit of time, but we're definitely looking at a 3x kind of turn as a north star for the company and maybe beyond that. We think that there's still a lot of levers to pull our core product focus, something, again, is a drumbeat on a regular basis through our division, and it will make a meaningful impact in our ability to improve our inventory turns. So we kind of adjusted our discussion today towards some other things. And it's a lot like the machine that we brought back up today. 2 years ago, we were talking about it pretty regularly. And then we just went kind of quiet with it. The same thing with core. It is happening every day in the company, but it's not something that we need to talk about. You'll hear more about it over time. Why don't we take our last question.

And for the last question, we'll go to the line of Michael Rehaut from JPMorgan.

Wanted to first dive in a little bit to the SG&A. You kind of highlighted different drivers of the SG&A move year-over-year, quarter-to-quarter. And even in the press release, initially in the press release earlier on the rise in SG&A was tied to a further investment and an engagement in future efficiencies. But later on in the press release, you said the rise was primarily due to less leverage due to lower revenues and an increase in marketing and selling expenses. So I just wanted to dive in a little bit to that line item and understand when you talk about low 8s and about up 100, 150 basis points roughly over the first half of this year versus last year. Is it more the investments that we're talking about? Or is it more due to the increase in marketing and selling and sales commissions and other marketing -- market-related -- housing market-related drivers?

So Mike, you're right on. It's really all of the above. The reduction in average sales price and in revenues, that's just math. And we're just pointing out the obvious math. But underlying our very, very strong and high SG&A levels and corporate for that matter, is the fact that we are running through those items some significant time, attention, investment, specific dollar outlays, but additionally, additional overhead people that are working on these programs that we think build lasting efficiencies. We believe that the return on that investment is going to, in the rear view mirror, look very, very attractive. But as you're building these models and programs, it's very hard to be able to identify what that return is going to be, but the investment is nonetheless still there and running through the system. And as I said, and this is the tricky part is most companies that have rebuilt systems and spent significant dollars have done it in the context of fairly strong market conditions. And decidedly, right now, we are in an industry that is going through a bit of an industry recession. And therefore, I'd just say that it's unusually high dollar spent on technology at a time when the market is pulling back. So you do have some of that math issue as well.

Okay. I appreciate that. And I guess, secondly, just on the gross margin. I just want to understand kind of what's in that and when you give the guidance for next quarter, what is it and not in that? So what I'm referring to specifically is, first of all, the Millrose dividend payments or option deposit payments I think annualized of around $500 million. Is that full annualized impact at this point, fully reflected in the 18%? Or is that something that might be a headwind for next year? And secondly, when you give the 18% gross margin guidance, is that also inclusive of the 20 bps of purchase accounting?

So Mike, I'll take that. The first one. So let's talk about the purchase accounting, pretty negligible for the third quarter. So I think you can kind of take that off the table. As far as the auction maintenance fees, remember, since we started our land banking program 5 -- 4, 5 years ago, that's been embedded in the cost. Now of course, with the spin-off of Millrose, there is that additional fee. But yes, it's all included in the margin guidance that we give. And as Stuart and Jon has been really pointing out all of the pressures, whether it's the market, option fees, all really just keep us incredibly focused on cost efficiencies to offset any of the negative that are in the gross margin. So it's really not just additional option fees. That's one component.

I think that one of the things that we've done particularly well, given our financial group and the integrity that is wrapped in that financial group. The -- looking forward and looking backwards is the same, it is consistent. The way that we look at margin is consistent. There are no moving pieces that are changing the way forward versus what we're doing right now. It's exactly consistent with what we've been doing. So you're really looking at apples for apples in the evaluation. And if you look at the way that we're thinking about margin, again, we know the market is soft. We know the market is difficult. We are injecting some important shavings or cost alterations in the negotiating that we're bringing to whether it's horizontal costs, vertical costs or SG&A costs. We are working through how do we make an attractive for at least appropriate margin given where market affordability is the product that we have to build and building it on a more efficient basis and at a lower cost. That's what you're seeing in our margin, and that's how we're approaching the business. So with that, Mike, thank you, and thank you, everyone, for joining. We look forward to coming back in the third quarter reporting again. Have a nice day.

That concludes Lennar's Second Quarter Earnings Conference Call. Thank you all for participating. You may disconnect your lines, and please enjoy the rest of your day.