Prepared remarks
Welcome to Lennar's Second Quarter Earnings Conference Call. 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, everyone, and thank you for joining us today. I'm in Miami with our Co-CEO and President Jon Jaffe, Chief Financial Officer Diane Bessette, Controller and Vice President David Collins, Chief Operating Officer Fred Rothman, Lennar Financial Services CEO Bruce Gross, General Counsel Mark Sustana, and a few others. As usual, I'll start with a macro and strategic overview of the company. After my introductory remarks, Jon will provide an operational overview, updating us on construction costs, cycle time, and other items. Diane will then give detailed financial highlights and guidance for our Third Quarter of 2025, followed by a question-and-answer session. Please limit yourself to one question and one follow-up to accommodate as many inquiries as possible. We are pleased to review our 2025 Second Quarter results amid a challenging economic environment in the housing market. During the second quarter, we focused on our strategy by increasing volume and growth, aligning production and sales pace while reducing margins to enhance affordability and deliver homes while avoiding excess inventory.
Although margins and earnings have adjusted downward due to market conditions, we remain concentrated on volume and balanced production to establish a sustainable cost structure, which will enable us to rebuild margins as the housing market continues to soften. We anticipated that the new normal of prolonged higher interest rates would lead to lower margins, compelling us to reduce home prices through incentives and mortgage buydowns to achieve affordability and stabilize supply and demand. We recognized early on that rationalizing margins from lower average sales prices would require a more efficient cost base. We believe we are ahead of these market realities and are building a robust margin-driving platform by leveraging volume to reduce costs across our organization. Although we have not yet achieved our goals, we feel we are nearing the bottom and the time to rebuild margins from a lower cost structure, which I'll detail shortly.
First, I'll discuss the market environment, then our strategy, followed by how our strategy relates to our reported numbers and expectations for the near future. Starting with a macro view of the housing market, the broader economy remains challenging with elevated mortgage interest rates and consumer confidence affected by various uncertainties. Actionable demand has decreased due to affordability issues and declining consumer confidence, resulting in continued market softening. Simultaneously, supply is limited due to years of underproduction. The slowdown in new construction reflects builders cutting back on production in response to mixed demand signals, which intensifies the persistent supply shortages stemming from the Great Recession and its aftermath. Additionally, restrictive land permitting and higher impact fees are further hindering supply, while labor and material costs, particularly lumber, continue to rise.
As a result, short supply has kept home prices high, with median sales prices around $400,000 in many areas. However, demand remains strong as Millennials are reaching an age where homeownership is essential, yet affordability issues and diminishing confidence are sending mixed signals. While we don't want to overemphasize negatives, the market is not crashing; it's just cooling. Inventory has slightly increased from last year's levels but remains limited. Currently, the housing market is characterized by a supply and demand imbalance, where low supply leads to high prices, ultimately excluding many potential buyers. State officials continue to highlight the housing shortage and prioritize affordability. For instance, during a recent discussion, Utah's Governor Cox emphasized the state’s significant housing shortage and the urgent need for more supply. He indicated that the state has a 350,000 home deficit that is driving prices to unaffordable levels and stressed the importance of starter homes for those entering the workforce and starting families.
His administration is actively making efforts to modify zoning restrictions to facilitate increased supply. The days of strong demand driven by low interest rates are behind us, and while some hoped for a return to lower interest rates, this has not happened. There is little evidence indicating that materially lower rates will come soon, reinforcing the elevated interest rates as the new normal. The environment now acknowledges that high prices are maintained by short supply, and only reduced prices through lower cost structures can create affordability. This trend has initially involved lowering margins and utilizing incentives but will increasingly require transitioning to more efficient cost structures. Turning to Lennar's operating strategy, our approach remains clear. We aim to deliver consistent value by meeting market affordability through increased volume and enhancing efficiencies across our platform.
Financially, we focus on an asset-light, land-light balance sheet to manage land assets effectively and build cash flow. While we are not fully there yet, we are finding a margin floor and getting close to rebuilding those margins even amid softer market conditions. As the market softness has unfolded, we have concentrated on maintaining volume by aligning production and sales rates. Although there were questions about our decision to prioritize volume over margin protection, we’ve been resolute in our strategy. Historically, when we protected margins during improving market conditions, we learned that regaining momentum once lost became increasingly difficult. By maintaining volume, we are fostering new efficiencies that will last into the future and lead to substantial long-term cost efficiencies. Halting our operations to protect margins would lead to a costly restart without significant changes.
We are focused on integrating technology solutions within our operations to fundamentally improve and enhance productivity. As many are aware, we’ve invested significantly in exploring and implementing technology to elevate our business model. Companies such as Walmart and Home Depot have successfully remade their business models through technology, and we aim to do the same. We understand that technology can dramatically enhance our productivity and efficiency if effectively implemented across the company. However, modern technology requires substantial investment, management effort, and volume to develop and test. Nonetheless, we are confident that the returns on these investments will yield significant cost savings and improved efficiency in how we engage with customers. I’d also like to touch on our second core strategy: maintaining an efficient asset-light, land-light balance sheet to hold and develop land assets and build cash flow.
As noted in the last quarter, the Millrose spin was crucial to this strategy, but there is more to accomplish. Our land strategy is reinforced by predictable volume, which enhances certainty for capital markets and promotes a more capital-efficient environment for this vital segment of our business. Now, let’s review our results. We are pleased with our performance in the second quarter despite complicated market conditions. Our team has been executing our strategy and developing new technologies for future growth. During this quarter, we started over 24,000 homes, delivered more than 20,000 homes, and sold 22,601 homes. As mortgage interest rates remain elevated, we continue to drive volume through our starts while incentivizing sales to enhance affordability. Consequently, sales incentives increased to 13.3%, leading our gross margin to 18%, excluding purchase accounting, due to a lower average sales price.
As we look ahead to the third quarter, we expect our margin to be approximately 18%, depending on market conditions. We anticipate selling between 22,000 and 23,000 homes while delivering a similar number. Additionally, we project our average sales price to range between $380,000 and $385,000 as we continue to face pricing pressures. Nonetheless, we remain focused on driving sales and cash flow, maintaining appropriate inventory levels, and preparing for potential market changes. We expect our overhead to remain elevated in the third quarter, ranging from 8% to 8.2%, as we invest in various technology solutions that will shape our future. These initiatives will add to SG&A and corporate overhead as we commit long-term to these investments. I want to briefly highlight specific technology initiatives, such as the Lennar machine, guided by Ori Klein, Jeff Moses, and Benoit. This tool has become central to our marketing and sales and helps reduce customer acquisition costs while managing dynamic pricing.
Another advanced example involves our collaboration with Palantir to develop a technology-driven land management system, focusing on improving efficiencies throughout the process. Finally, in July, we aim to complete the transition of our ERP system to JD Edwards E1, a significant undertaking by our talented IT team. This transition will enable modernization of our financial platform, making our systems more efficient and effective in reporting and forecasting. In conclusion, while this quarter has been constructive for Lennar, we acknowledge the challenges ahead. We are optimistic about our future and recognize that although our current performance isn’t where we want it to be, we continue to prioritize innovation. This quarter has laid important groundwork for continued growth and efficiency, positioning us well in the housing market. Our strong balance sheet, solid land partnerships, and emerging technology solutions will allow us to pursue strategic growth opportunities moving forward. We will keep you informed on our progress, and now I’ll turn it over to Jon.
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 time 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 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 to define the 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 adjustments to prices, increase 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 with corrective actions. By adhering to this discipline, we ended the quarter well-positioned with an average of under 2 unsold completed homes per community.
All of the markets we operate in experienced some level of softening. Even in our strongest performing markets, buyers needed the assistance of incentives. Incentives varied across the different markets, but were primarily in the form of assistance with mortgage rate items. The markets that experienced more challenging conditions during the quarter were the Pacific Northwest markets of Seattle and Portland, the Northern California markets of the Bay area in Sacramento, the Southwestern market of Phoenix, Las Vegas and Colorado, and some Eastern markets such as Raleigh, Atlanta, and Jacksonville. These markets experienced sensitivity to higher home prices and/or the macro impact on the technology workforce. Turning to the production side of operations. As Stuart highlighted, achieving construction efficiencies with the goal of our production-first strategy. Our start pace in the second quarter was 5.1 homes per community per month, providing meaningful volume to the supply chain, which is critical to accomplishing our mission of lowering costs and cycle times.
Achieving these goals is measured by reducing costs across our entire platform. The proper execution of this strategy will deliver savings in direct construction, land development, land acquisition, indirect costs, and SG&A. Volume and importantly, consistent even flow volume, along with efficient-to-build plans, digitally enabled scheduling and quality control processes, all drive cost savings. Our commitment to this consistent volume means our trades can drive down their own cost structure as well as work successfully on lower margins, allowing us to stabilize and ultimately grow our margins. The cost reduction discussions with our supply chain are grounded in both the recognition that our consistent volume and market conditions require a recalibration of costs. Direct construction costs in the second quarter were lower sequentially by 1.5% from Q1 and on a year-over-year basis by 3.5% to our lowest direct construction costs since Q3 of 2021.
This trend will continue into our third and fourth quarters. Another benchmark of efficiency is our cycle time. Our second quarter cycle time decreased by 5 days sequentially from Q1 down to 132 calendar days on average for single-family detached homes. This is an 18-day or 12% decrease year-over-year and is lower than pre-pandemic cycle times. We expect to see continued improvement in cycle time throughout our third and fourth quarters. Our operating strategy is also resulting in reductions in land development costs and in restructuring land acquisitions. As Stuart noted, our consistent volume comes into play as it provides the consistent and predictable work to the land development contractors to depend on utilization of heavy equipment. Similarly, the consistent and dependable takedown of land in a slowing macro environment allows for the proper alignment of timing of land closing and a recalibration of the purchase price of land.
With respect to the question regarding tariffs. Consistent with our commentary last quarter, we have had no impact to date on our costs from tariffs. We work closely with the supply chain to prepare for alternative sourcing if necessary, as well as the expectation that our trade partners will work with us to mitigate and offset cost impacts should they present themselves. As Stuart addressed, we are able to provide further detail; we continue to execute on our asset-light strategy. We ended the quarter with our supply of owned homesites improving to 0.1 years, down from 1.2 years a year ago, and controlled home site percentage increasing to 98% from 79% a year ago. During the quarter, land banks acquired a harbor half of about 17,000 home sites for about $1.4 billion and a commitment of about $2.1 billion in land development. We purchased during the quarter from our various land bank partners almost 22,000 finished homesites for about $2.7 billion.
The cost and processes in and around land banking provide another area for efficiencies, as Stuart discussed. Our focus on the coordination between land sellers and land banks of just-in-time land acquisitions with the commencement of land development. Our consistent volume provides the opportunity for processes and technologies that will lead to cost reductions. These improvements in execution of all of our operating strategies enable capital and production efficiencies, leading to an improved inventory churn, which now stands at 1.8 versus 1.6 last year, a 13% improvement. In our third quarter, we will continue to focus on meeting our planned sales pace while intensifying our efforts to reduce costs and maximize efficiencies across our operating platform. I want to thank all of our Lennar associates for their hard work, focus and dedication for the work accomplished in our second quarter and for the hard work that lies in front of us. And now I'll turn it over to Diane.
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 homesites and controlling 520,000 homesites for a total of 532,000 homesites. We believe this portfolio of homesites 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 both contribute to higher returns.
During the quarter, we started approximately 24,200 homes and ended the quarter with approximately 42,100 homes in inventory. This inventory number includes 2,900 homes that were completed unsold, which as noted, is under 2 homes per community and continues to be within our historical range. Turning to our debt position. We opportunistically raised $700 million in senior notes at 5.2% due in July 2030. We primarily used the proceeds to pay off $500 million of senior notes that matured in May. As a result, our homebuilding debt to total capital was 11% at quarter end. Our net debt maturity of $400 million is not due until June of 2026. Consistent with our commitment to increasing shareholder returns, we repurchased $4.7 million of our outstanding shares for $517 million, and we paid dividends totaling $134 million. Our stockholders' equity was just under $23 billion and our book value per share was about $87.
In summary, the strength of our balance sheet provides us with confidence and financial flexibility as we progress through the balance of 2025. With that brief overview, I'd like to turn to Q3 and provide some guidance estimates. Starting with new orders. We expect Q3 new orders to be in the range of 22,000 to 23,000 homes as we matched production and sales pace. We anticipate our Q3 deliveries to also be in the range of 22,000 to 23,000 homes with a continued focus on turning inventory into cash. Our Q3 average sales price on those deliveries should be about $380,000 to $385,000 and gross margin should be approximately 18% as we continue to price to market and use incentives to enable our customers to attain affordable homes. Our SG&A percentage should be in the range of 8% to 8.2%, impacted by our continued investment in technology solutions. All of these metrics, of course, are dependent on market conditions.
For the combined homebuilding joint venture, land sales and other categories, we expect a loss of about $25 million. We anticipate our Financial Services earnings to be approximately $175 million to $180 million. For our multifamily business, we expect a loss of about $40 million, as we continue to strategically monetize assets to generate higher returns. So turning to Lennar Other, we expect a loss of $35 million, excluding the impact of potential mark-to-market adjustments to our public technology investments. Our Q3 corporate G&A should be about 1.8% of total revenues, and our foundation contribution should be based on $1,000 per home delivery. We expect our Q3 tax rate to be approximately 25.3% and the weighted average share count should be approximately 257 million shares. And so on a combined basis, these estimates should produce an EPS range of approximately $2 to $2.20 per share for the quarter.
In conclusion, I, like Stuart and Jon, would like to say thank you to the financial teams in our division and in our corporate office. You bring an incredible amount of dedication to the table each and every day, and it is greatly appreciated. With that, let me turn it over to the operator.
Questions and answers
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 loans, for example, that's beginning to impact some credit scores and just overall kind of stretched 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 speaking, the market has definitely softened or continued 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% 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 regarding student loans at this point.
In regards to price elasticity in the market, Stuart, your ability to adjust incentives to maintain a targeted sales pace has led to impressive results. I'm interested to know if there are any markets in your portfolio that currently lack demand elasticity, meaning that no matter how much you increase incentives, you're having trouble meeting a certain sales target, which has resulted in a reduction in production. Alternatively, do you think there is a price in the market that could be reached, and it’s just a matter of identifying that level to achieve the desired absorption?
So I’ll just say quickly and then turn it over to Jon that as you know, Alan, we are closely monitoring these numbers, our divisions, and our regions every day. I would say that there is somewhat of a rotation where one week it’s one market and another week it’s another, which raises questions about elasticity. It’s a real ebb and flow market out there that shifts frequently. 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.
Thank you for the insights, as always. Last quarter, we talked about your perspective that long-term normalized operating margins before corporate expenses would be in the mid- to high teens and your ability to adjust operations for lower volume if necessary. You've reiterated your commitment to enhancing volume-based efficiencies. However, based on the third quarter order guide, it seems like you might be lowering your volume slightly. In response to Alan, it appears that in some markets with inelastic demand, you are indeed reducing volume somewhat. I just want to confirm that I understood you correctly. I also noticed that you didn’t provide a full-year volume forecast. So, could you elaborate on how you see the overall annual volume level? Has there been any change in the last few months? Additionally, is there a specific threshold for volume or margins worth discussing beyond the long-term normalized levels? Is there a minimum level that is significant?
I understand there are several questions in your remarks. Let me clarify that we still expect to reach the bottom of our previously stated range of 86,000 to 88,000 homes for the full year. We're maintaining consistency in our approach and concentrating on increasing volume without taking undue risks. Each day involves working with market conditions and adjusting our pricing through incentives to align with what the market can afford. Additionally, we are refining our cost structure to ensure we can deliver desirable homes while still achieving a reasonable profit margin. As for a breaking point, I don't believe there is one. We recognize that the market will settle where it does, and interest rates play a role in affordability. The industry faces the challenge of building an efficient cost structure to meet market demand while overcoming the current supply shortage and affordability issues. It’s a situation we haven’t encountered before. The market needs affordable housing that allows us to maintain profitability while being accessible to customers. That's our primary focus.
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? Or do you think that you actually need to have a higher level of volume than you have today in order to capture and optimize those productivity gains?
It's a really important question. First, I don't believe we need more volume, as I think we already have a sufficient level of it that will allow us to learn. The technology companies that became major players, like Amazon, Meta, and Google, invested significantly before they saw profits. Similarly, companies like Home Depot and Walmart have invested not just money but also management time and focus to prepare for a digital future. I don’t think they achieved their successes in a softer market. While we're developing our initiatives in a challenging market, it's essential to recognize that it takes time and attention to establish these systems. Since I mentioned our development of the Machine, we've made significant progress that is crucial, though it's difficult to measure in a declining market. We're closely tracking our numbers daily and how marketing drives our sales. The response and engagement quality with our digital customers have become revolutionary for us, and we're learning continuously. We are partnering with top professionals to broaden our knowledge as we advance. It takes time, and while we may never fully arrive, we're getting closer and improving efficiencies in our program. Apologies for the lengthy response.
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 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 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 non-core and 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 product, knowing how important it is to deal with price sensitivity there. And now we are in the midst of designing a product we're rolling out for move-up product and attached product like townhomes.
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. Two 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.
I wanted to start by discussing SG&A. You mentioned various factors influencing the year-over-year and quarter-to-quarter changes in SG&A. In the early part of the press release, you linked the increase in SG&A to further investments and efforts towards future efficiencies. However, later, you stated that the rise was mainly due to reduced leverage from lower revenues and a rise in marketing and selling expenses. I’d like to explore this further, particularly regarding the figures in the low 8s and the approximately 100 to 150 basis points increase in the first half of this year compared to last year. Is this primarily related to the investments you're making, or is it more attributed to the hikes in marketing, selling, and sales commissions, along with other factors tied to the housing market?
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 and 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 basis points 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 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 have 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. But all of the headwinds are why we're so passionate about making sure that we're focused on cost efficiencies.
I believe we have performed well, thanks to our financial group and its integrity. Both our forward-looking and historical perspectives are consistent. Our approach to margins remains unchanged, with no variability impacting our current strategies compared to the past. You are essentially comparing similar elements in your analysis. As we consider our margins, we acknowledge that the market is challenging. We are making vital adjustments to our costs during negotiations, whether they pertain to horizontal, vertical, or SG&A expenses. Our goal is to ensure we maintain an appealing margin that aligns with market affordability while building our products more efficiently and at reduced costs. This is reflected in our margin strategy and guides our business approach. Thank you, Mike, and thank you all for being here. We look forward to reporting again in the third quarter. Have a great 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.