Editor's Note: An earlier version of this article mis-characterized Lennar CEO Stuart Miller's message and tone during the 2nd-quarter earnings call with analysts. As the article indicates, Miller offered a few notes of measured optimism, amid a deeply cautious market outlook.
A 63% quarter-over-quarter increase in new home orders had Lennar's CEO Stuart Miller sounding positive Thursday morning June 25 at the beginning of the company's second-quarter conference call with analysts.
"Abject pessimism (from consumers) has given way to a sense that opportunities are available to those who qualify," he said. "While there continue to be significant headwinds ... there are some significant positive influences out there that are beginning to shape a more positive future."
But by call's end, Miller wanted to make sure nobody mistook those words for optimism, only a single ray of sunshine in what still is mostly a dark sky.
"I don't in any way want to suggest that I am optimistic," he said, adding he only meant to convey that he is seeing a "lifting of the confidence cloud. I think people ware coming out of their basement and getting out of the sunlight a little bit. ... I am using the words 'could' and 'might.' "
"That's materially better than the absolute hopelessness that has continued for so long, he said." Then he re-emphasized the "headwinds" faced by builders.
"The increase in interest rates is very concerning and I don't think we can keep a lid on them," he said. "The elimination of the tax credit program is significant. I am hopeful that good minds will find the virtue of stabilizing the market. I think the higher gas prices are important. I think unemployment continuing to climb is very important."
That said, Lennar had what many analysts have interpreted is a good quarter, considering those headwinds. It lost 76 cents a share, less than expected and 65 cents of that was related to valuation adjustments and other write-offs including deferred tax assessment valuations.
Margins on sales were improved at 14%, excluding valuation adjustments and 9.6% including them. SG&A expenses were down. And the cancellation rate was 15%, compared with 22% a year ago during the same period and 21% in the company's first quarter.
Miller said he has been spending his time in the field, visiting all the company's divisions, busy with the work of streamlining the company by centralizing purchasing and accounts payable and by pushing costs down and pulling efficiencies in.
At the same time the company has worked to create smaller products that will work for different markets since product preferences are different across the country.
That work has been going well, he said. The company's seen a recent 20 percent reduction in construction costs, from reducing what's included in its homes and the costs of labor and materials. Even more costs have been cut by doing more with fewer people and by increasing cycle times, he said.
The short-term goal is to have all divisions operating at break-even or a profit. "Many of our divisions are already there and those that are not are clearly on their way," he said.
Miller used the Chicago market as an example of how the company has pared down to meet the market. In that market Lennar once employed 400 associates who worked in 92,000 square feet of office space and built 1,200 homes a year. Now there are 31 employees who work in 6,900 square feet building 225 houses a year.
"This group is rapidly approaching break-even performance and beginning to look for opportunities," for growth, Miller said. Expansion will come organically
Once they reach that, the next goal is what Miller calls "organic growth" with Lennar buying lots only when needed.
Miller said he hasn't lost sight of the company's big-picture balance sheet even as he spends time in the front lines of division offices.
Lennar continued to disentangle itself from joint-ventures that have been by analysts as holding risk that is difficult to assess. It has 83 now, down from 270 at the peak in '06. Lennar's maximum recourse debt in JV's is now $442 million down from $1.8 billion at the peak.
Still, the JV's left continue to eat into the company's profitability. It took $57 million in J.V.-related charges during the second quarter and logged about $59 million in losses as two JV's in California collapsed.
Lennar also performed some major work on its debt during the quarter, issuing $400 million in bonds due in 2017, paying off $281 million in senior notes due in March, and issuing 12.8 million new shares of stock which netted $126.3 million.
One analyst questioned Miller about why, if he is more optimistic about the market, he sold company stock at about $10 a share when book value is closer to $14, triggering Miller's reaffirmation that he isn't optimistic, only not quite as pessimistic as he was earlier.
"I have a health respect for the real possibility that the market is going to have some more down-side risk and I am going to be prepared for that with a healthy, bolstered balance sheet," Miller said. "I am continuing to prepare for the worst."