MDC Holdings Inc (MDC) 2002 Q2 法說會逐字稿

Good morning, and welcome to the MDC Holdings second quarter earnings conference call. All participants will be able to listen only until the question and answer session of the conference. Today's conference is being recorded at the request of MDC Holdings. If anyone has any objections, you may disconnect at this time. I would now like to turn the all over to Mr. Joe Fritz, who will read the statement concerning forward-looking statements. Sir, you may begin.

Before introducing Larry Mizel and Gary Reece, certain statements made during this conference call, including those related to MDC of anticipated home closings, home gross margins, backlog value, revenues and profits and responses to questions may contain forward-looking statements within the meaning of the private securities litigation reform act of 1995. These statements involve unknown risks uncertainties factors that may cause the company's actual results achievements to be materially different from the results, performance or achievement expressed or implied by the forward-looking statements. The company's actual results, performance and achievements may be impacted by various factors, including, among others, changes in general economic conditions, changes in interest rates or labor and material costs, the availability and cost of insurance, weather, government regulations, consumer confidence, actual or threatened terrorist acts, and other acts of war and the results thereof and competition. Additional factors that could impact the company's actual performance are set forth in the company's 2001 Form 10K in the first quarter 2002 Form 10Q. I will now introduce Larry Mizel, Chairman of the Board and Chief Executive Officer of MDC Holdings. Larry?

Thank you, Joe. Good morning. We'd like to welcome each of you and thank you for participating in MDC's second quarter 2002 conference call and web cast. This has been a strong quarter for our company. While exceeding wall Street expectations for earnings by 10%, we continue to perform at a level that has established MDC as an industry leader. We're particularly proud of the 2,753 home orders we received in the quarter, 40% higher than orders received in the second quarter of '01, including a 50% increase in June. As a direct result of the increased homeowners, MDC achieved an all-time high quarter end backlog in June 30th of 4,935 homes, with the sales value of $1.3 billion. Our record home orders reflect the 20% increase in our active subdivisions since the beginning of the year, as well as our success in getting models open in markets like Colorado and Las Vegas. In addition, throughout most of 2002, our industry and MDC in particular have benefitted from the strong demand for the new homes in the growth markets around the country, driven by historically low mortgage rates and a constrained supply of new homes in these markets. Consistent with our focus throughout the last decade, we have continued to maintain one of the strongest and most liquid balance sheets in the industry. Our stockholders equity has grown by 28% in the last year to $730 million, or over $27 per standing share. The ratio of debt-to-capital and debt-to-EBITDA improved to .31 and 1.1 respectively, with our quarterly interest coverage approaching 14 times., each of which rank among the best of our peers, and we ended the quarter with over 300 million in liquidity. In addition to our operating successes in the second quarter, we developed substantial visibility toward our opportunities to grow and produce record results in 2003. During this period, we acquired the assets of John Lang Homes of Las Vegas and northern Virginia, enabling us to accelerate our growth in these markets. Another acquisition from John Lang facilitated our entry into the Salt Lake City market, and our new Dallas Fort Worth position has already gained control over 300 lots and 3 subdivisions. These accomplishments combined with continued organic growth in most of our other markets should contribute to increasing our active subdivisions by an additional 20% by the end of 2002, and as a result, MDC should be positioned to close more than 10,000 homes and generate record revenues and earnings in 2003. This substantial growth should mark the first step towards achieving our goal of doubling the size of the company in five years or less. I'll now turn the call over to Gary Reese, our Chief Financial Officer, who will provide more specific information about our 2002 second quarter performance. Gary?

Thank you, Larry. Just to pick up and give you some of the details about the quarter, our operating earnings for the quarter were $34.3 million, compared with $38.8 million in the second quarter of 2001. This is $1.22 cents per chair, and is 10% higher than consistent estimates of $1.11 cents per share, and is the second best second quarter we've ever had, second only to last year at $1.42 a share. Our earnings for the six-month period were $66.7 million, and for the second quarter or for the first six months of 2001 at 68.1 million. Our earnings per share for this first half of 2002 at $2.39, compared to $2.51 for the first six months of last year. This is all on web use for the quarter, which were fairly consistent with the year ago quarter at $509 million, and record level for the first six months at over 965 million for the first six months of 2002, compared to 928 million for the first six months of 2001. With respect to our home building operations, starting with closings, closing levels were fairly consistent with closing levels of last year at 1956 homes closed in the second quarter, 3630 homes closed for the first six months. Average selling prices were also fairly consistent with last year at $254,000 per home, compared to $258,500 a year ago. We saw average selling prices decline in southern California, as we picked up more closings from the M and M power in lower priced markets. We also saw Colorado average selling prices down from a year ago, and one thing I'd like to mention about that. We actually had an average for the quarter in Colorado of $250,000. There's a bit of a mis conception about our position here in this market. Many think we're a moveup builder, and although we build in every price point across this market, almost 90% of the homes that we build in the Colorado market that closed during this quarter and during this half of the year were below $300,000. Only 2% of the homes that we closed during this period were actually above $500,000, so we're right in the sweet spot of this market as well. We also saw home prices increase as a partial offset to these decreases in Virginia and Maryland as we've moved from lower-priced attached product to more single-family detached homes which have higher average selling prices. Our prices were up for the first six months at just short of $260,000, compared to $246,000 a year ago. Really all of our markets were up except southern California and Colorado. Gross profit margins stood at 22.5% compared with 23.7% a year ago and 22.9% for the first six months, compared to 23.5% for the first half of last year. As we mentioned in the press release, these margins were down slightly from last year, primarily due to the impact of closings from homes last year, which had basically very little pricing power, higher incentives. That was a big part of it. Land costs continue to move up and land as a percentage of revenues was actually up 50 basis is up 10% from a year ago. Also, a record first six months at $10.2 million, an increase of 14% from the first six months a year ago. The primary reason for the increases in both these were a 46% increase in gains on sales and mortgage loans in the quarter and that same component was up over 40% for the first six months. Our capture rate continued at a high level for our company and for the industry actually at, in the low 80s, and this is down slightly from last year, primarily due to the fact of the Lnag closings coming in, which were tied up prior to our acquisition with no impact from our mortgage company. On a balance sheet side, the balance sheet continues to improve. As Larry mentioned, we have one of the strongest balance sheets we believe in the industry. This is a balance sheet which is characterized by what we've said when we talked to people, it's kind of what you see is what you get. We have no offbalance sheet financing, no partnerships or joint ventures, no goodwill and no specific performance arrangements with respect to our option lots. Our equity has increased significantly over the last few years and just in the last twelve months is up 28% to $730 million, which is $27 per outstanding share. Our EBITDA, similar to, well, as kind of followed the direction of our earnings is at a substantial level, $67.2 million for the six-month period and over $130 million for the first six months of 2002. Our interest coverage, our interest costs actually are down due to lower interest rates versus a year ago, and as a result, our interest coverage has improved at 13.7 times coverage for the quarter and close to 15 times coverage for the first six months. Our debt-to-capital ratio continues to perform at a level that is one of the lowest, if not the lowest in the industry. Our debt-to-cap ratio at June 30th was .32, down from last year, which was at .36 and our debt-to-EBITDA is also down to 1.09 versus 1.14 a year ago. We continue to maintain tight controls on our inventories. On unsold homes, our investment in unsold homes is actually down about 15% from where it was a year ago. At the end of the quarter, there was a company that's closing in between 8 and 9,000 homes a year. We had 60 finished homes in the entire company that were finished and not yet sold, and including all of our spec homes, we had less than a two-week supply. We have a substantial lot supply that's growing to help fuel the growth that Larry mentioned that we're anticipating for next year. We own close to 17,000 lots. We have another 6400 lots under option. We have over 4,000 lots in process. By the way, our option lots we tie up with less than $16 million in cash and letters of credit, so we have a relatively nominal amount tying up a substantial number of lots. This lot supply includes close to 3,000 lots that we acquired from John Lang Homes, 2400 between Las Vegas and Houston and another 400 that we acquired in Virginia. In addition to these lots, we have in excess of 13,000 lots that the company is currently considering for which we have soft dollars up on but are in feasibility in various stages of consideration, which will be there to replace the lots we're closing and to help fill the need for lots for next year. Looking at statistics that are more forward-reflecting, our order is very positive for the quarter. This was a record quarter. We've had four record months in a row starting in March. We were up in the quarter 780 units, up about 40%, 2,752 orders versus 1973 a year ago. For the six-month period we had over 5500 orders, up 18% over the 4700 orders we received a year ago. These order increases have come from really most of our markets were up, but in particular, Las Vegas, up over 150% over last year as our active subdivisions increased from seven a year ago to 15 at the enof the quarter. Arizona also up 26% due to the increase in subdivisions from 29 active subdivisions a year ago to 35 today, and in our California markets, we're up 59% in southern California and 41% in northern California. On pretty much a flat subdivision count, so this is due to the strong demand for homes that we're seeing in that market. Our traffic was up nicely, up close to 15%, and our CAN rate was actually down almost ten points where where it was a year ago and for the quarter was up over 30% and this quarter was down in the low 20s. These orders have contributed to a record backlog at the end of the second quarter of close to 5,000 units, compared to 4400 units a year ago. This is up 13%. Up 563 units, versus last year. This is obviously the start of the growth that we are, have projected for next year. One thing that I would point out, would like to point out is that a big part of this increase has come from, because of the change in our operating model of building more to suit rather than building spec homes, as we continue to control our inventories. Many of the, much of the increase that we're seeing here is in the category of homes sold and not started. We show on the graph for those of you that are looking at the web cast, a category in our backlog of homes sold not started which is just short of 1700 homes in backlog here at June 30th, compared to around 1200 in that same category a year ago, so you can see a big part of that, of the increase in our backlog is for homes that haven't started, and therefore, you know, when you back out that difference, at least in terms of the near-term, we're in a very similar position for the next quarter or two relative to where we were last year. All in all, a very good quarter. We've got a great start to, in preparation for 2003, as Larry mentioned, where we anticipate to start the year with subdivisions in the neighborhood of 200 active on our way to closing over 10,000 homes and recognizing record levels of revenues and earnings in 2003. That completes my prepared comments. I'd like to open the floor for questions at this time.

Thank you, Mr. Reese. At this time, we're ready to begin the formal question and answer session. If you would like to ask a question, you may press star one. You will be announced prior to asking your question. To withdraw your question, you may press star two. Once again, to ask a question, please press star one. One moment, please. Our first question comes from Mr. Joseph Skorca of Merrill Lynch. Sir, you may ask your question.

Good morning, fellows. How are you?

Fine, Joe.

I want to recognize the subdivision increase here, you went from 137 to 165, three of those were from the DFW startup. How much did you pick up in the Lang acquisition?

We actually picked up, well, Joe in terms of active, the three endouts are not active at this time.

They're not counted in that 165?

No, they're not. We considered them active after sales has started, and so those subdivisions we've just tied them up and they're not yet open for sales, but should be before the end of the year, so they will add to our subdivision count as we start the year, but the increases basically have come in , the large increases were in, we picked up four in Utah and approximately four in Las Vegas from the Lang acquisition. So that was part of the increase, and then of course, we picked up five in Arizona and we actually increased our subdivision count in the mid- Atlantic by seven and the rest are spread throughout the rest of the market.

Okay, and do you deal or do you have the ability to do mortgage operations in Utah now that that's a new state?

Okay, and then do you know approximately what your break was between fixed and adjustable underwriting for the quarter?

Yes, roughly 80/20, which is quite a bit higher than it was a year ago, despite the lower fixed rate; however, the spread between the fixed and the adjustable has widened quite a bit of late.

Okay, that's fair. I appreciate the questions.

You bet.

Mr. Steven Kim of Salomon Smith Barney. You may ask your question.

Thanks very much. Congratulations, gentlemen, on another great quarter.

Thanks, Steve.

I wanted to see if you could give us a little clarity on the gross margins. Obviously, you know, pretty good performance here relative to what we had maybe thought six to nine months ago, but you indicated you thought that some of the pressures you might saw this quarter might continue in the next couple of the quarters. I was curious if you could break out the impact of the John Lang acquisitions on those margins spec cliff. I would imagine that might have a little bit more of a temporary effect.

Well, Steve, it is - I would say that the effect is going to, should be improving, because obviously the margins on the homes that we close, the day after we close the transaction are fairly minimal, and as we move further away from the acquisition, the margins should improve. Which will bring them closer to the company average. In this particular period, the impact was about 40 basis points.

Great, and that should probably only last another quarter, right?

You know, it will - it will still trickle over into the fourth quarter a bit, but it will certainly - it should improve, and we're seeing pricing power in Las Vegas that's helpful there, not quite so much in Utah.

And I guess the remaining roughly 70 or 80 basis points of the margin degradation, this quarter year over year, was more attributable to the difficult environment six months ago than exists today. Would we also expect that additional, the remainder 80 basis points might also be made up here in the next couple of quarters?

Steve, there are competing factors here. Certainly we would hope that the lack of the ability to raise prices, that certainly has gone the other direction, and we have seen low er incentives, but land costs do continue to move up. You know, land alone was 50 basis points of a difference. So we had a number of different things going on, including higher incentives, but some other offsets that made up the remaining 30, but land and line were the two biggest differences for this quarter, and you know we are seeing some positive effects, but we are continuing to see that land component move up as just given the fact that mix size, the new subdivisions that we're bringing online generally have lower margins to start with than the subdivisions going offline that have been mature for a couple of years and have experienced those price increases.

You didn't give, at least that I gathered, any specific guidance on EPS for this year and next. Clearly, the direction seems set to exceed where the streak currently is, particularly as you head into next year. The number that I'm coming up right now, you know, suggests that by the end of the year, you could see positive year over year comparisons on the EPS line. Would that kind of performance surprise you?

Steve, it's hard to say at this point. You know, a lot of it will determine how quickly we can get some of these homes closed that haven't been started, and whether or not we can pick it up with volume. I think what we're indicating in our release here is that volume will, would have to be the driver if we were to get to that point because we don't receive offsetting factors that will keep margins relatively stable. So we were hitting record margins a year ago, and that would be difficult in this environment, given where we've been and what we see coming through to duplicate.

Yeah, but even if your margins remain even flat, that would almost certainly lead to upside in your earnings because your revenues are clearly higher, but in any case, great. Great quarter and I'll turn it over to somebody else.

Thanks, Steve.

Mr. Mike Kinder of Salomon Smith Barney, you may ask your question.

Yes, I wanted to just clarify the lot supply numbers that you gave out. I think you said 17,000 owned, 6400 optioned and 4,000 working progress, did I write those down correctly?

If you want the exact numbers, 16,800 lots owned, 6400 lots under option, approximately 4100 lots in, which have houses on them in various stages of construction, that being our backlog, our models and our specs, and a little over 13,000 lots that we don't have any committed dollars assigned to, but that we're evaluating.

Just to clarify, the 4100 that have homes in process on them, are those counted in the 16,800 or are those in addition to it?

Those are in addition to.

On the John Lang purchased accounting, my rough number gets me to a 2 million hit in the quarter for the purchase accounting writeoff, is that correct in terms of cost of goods sold?

That's roughly the, you know, the difference between where their margins came in and where the normalized margins are, yes.

Okay, great. Thank you very much.

Um-hum.

Mr. Robert Manowitz of UBS Warburg, you may ask your question.

Hi, good morning. Just two questions. First, realizing that it will remain a small part of your business in in '03, but can you talk about your expectations regarding '03 deliveries in Dallas and Fort Worth?

Talk about our expectations there?

Yeah, I understand it will be a small component of the overall business, but sort of how many deliveries do you think you can achieve in '03?

You know, it's hard to say at this point. We have three subdivisions and if we get them all up and going and we average, you know, four sales a month, you get somewhere in the 150 range, but we're actively looking for new subdivisions all the time. That's going to be a - you combine Dallas and Fort. Worth together, it was the second larger market in the country last year and we see that as a greatest opportunity for us, well beyond 2003.

So you think it's really more of an '04 contribution?

I think '04 we'd look to have a more of a significant contribution to the bottom line. Next year, we'll be more of a startup and getting in business.

Okay. Secondly, you gave us some great insight on your spec inventory and I'm wondering if you had a sense of the general speculative inventory available in some of your

If we looked at Denver, in particular, would you make the assessment that your two-week supply of speculative inventory is pretty consistent with that market, or is that market a little bit higher than that two-week estimate?

Yes, you know, Rob, I don't honestly don't know the answer to that.

Okay.

At this point.

Okay, well, thank you very much.

You bet.

Mr. Greg Leibor of Deutsche Bank. You may ask your question.

Good morning, Gary and Larry, great Greg with Deutsche Bank. A couple of questions. One, I think you mentioned a dollar amount assigned to the land that you've optioned, and I just missed that dollar amount. Could you just repeat it, please?

It's roughly 16 million between letters of credit and cash deposits.

And that's for a principal dollar amount of how much? If you exercised the options and acquired that land, could you tell us what kind of expenditure that would necessitate?

Well, it's, you know, they're in various stages of completion, Greg, and you know - hold on.

I mean roughly, would that represent to 5 to 10% of the ultimate purchase price?

Actually, probably less than that, because it's - well, let me take that back. It probably is 5%, closer to 5%.

Okay, second question, you mentioned land prices rising and that being an influence in the margin and one that's likely to be sustained, I know philosophically the company's always maintained a fairly short land bank and turned its inventories rapidly. Is there any consideration to perhaps doing a little bit more of your own development work, given the tightness of the market and the fact that rising lot prices are beginning to impinge your profitability, and if so, do you have the personnel and systems in place in order to do that?

In answer to the first question, Greg, is that we have not, I mean we we certainly consider everything, but we are not desirous of change our operating model. We are handed, our hand is a bit forced in some of these markets because that's just the way the market is, and we're having to buy more lots and do a little bit more development, but our preference would be to buy the lots finished and pay full retail for them. We are into maximizing risk adjusted returns, and we think there's a big difference between acquiring lots that are finished that we can sell in today's market versus something that may have to be processed and sold a year or two years from now, and so we are continuing to operate under that model; however, as I said, we are doing a little bit more development in most of the markets that we operate in. We do have the people in place, and we have tremendous systems to track these items so that we have the expertise and the know-how and the capabilities to monitor it and the disciplines to manage it, but our preference is to buy finished lots.

Okay, finally, Gar, on an unrelated topic, there's obviously been a lot of discussion in the press and legislatively with respect to changes in the manner with certain items may be accounted for on a prospective basis, the most obvious one or the one that's received the most attention has to do with expensing of stock options. Is there anything that's being contemplated now, whether it be stock options or anything else that's being discussed that would have an effect one way or another on your reported P and L statement or are you accounting for your options and other items being contemplated in a manner that's consistent with some of the revisions that are being discussed?

Greg, the impact, we are not considering making any changes right now. The impact as we've calculated and disclosed in our 10K with respect to stock options in particular is the impact is relatively immaterial. We have, you know, there are a number of things that have changed over the last year or two, some of which have been positive, some negative, as you may recall, the changing the rules on the way goodwill is handled, helped earnings per share of a number of companies. In our case, we have no goodwill, so that that's a situation that has stayed constant for us. We had to calculate and disclose the impact in our 10K in the footnotes of expensing stock options and the impact is immaterial.

Terrific. Thank you very much.

Mr. John Stanley of UBS Warburg. You may ask your question.

Hey, Larry.

Hi, John.

Gary, on the land supply, I can't help but notice the increasing tilt toward the percent owned versus optioned. Is that just a consequence of the way the markets are driving you are or is that kind of the direction you're trying to take?

It's not the direction that we're trying to take. It is being dictated by what's available out there, and as I said, you know, it's all a question of timing as to when you count these additional 13,000 lots, if you roll those in, we're kind of 50/50 right now. So it is something that we prefer the option route.

Secondly, with respect to deliveries in the second half and last year, you delivered the June 30 backlog. I think your comments suggest that would be difficult to do this year and it kind of sounds like you're guiding us towards deliveries kind of approximately the same as last year's second half, with maybe some upside. Is that a fair way of paraphrasing what you were trying to say?

John, you have quite a bit of insight there. I was actually, my reference was more in the short run, you know, particularly with respect to the third quarter, I think you can see obviously we can't deliver homes we haven't started yet in the third quarter, and when you take those out of the equation, we're in the same position that we were a year ago basically. So it would be difficult to see a significant amount of upside in the third quarter. The fourth quarter, we still have the ability to make some sales and get some deliveries, so I think the next few months will, in terms of orders will determine to a large degree the level of upside we have in the fourth quarter.

And then lastly, with respect to kind of a pricing and cost picture, it sounds like the shift in the pricing power from kind of, you know, less goods several months ago to better today is at least kind of, you know, offsetting current levels of cost increases, but I wondered if you could share with us kind of in terms of your major markets where currently you're able to raise prices faster than land costs are going up and which markets where you're not able to do that.

You know, it's interesting, John, the largest price increases today, at least that we've experienced over the last couple of quarters have actually been realized in the Virginia/Maryland markets, and so in that particular market, there again, that may be a market where land costs are probably accelerating faster than other places in the country. So it's kind of a, they kind of go hand-in-hand to a certain degree. Southern California has seen a bit of acceleration, but land costs are also gaining margin or losing margin.

We don't see it at this time.

Thanks, guys.

Mr. Jeff Feinberg of JE Asset Management. You may ask your question.

Hi, guys. Good morning, congratulations on the great results.

Thanks, Jeff.

I apologize if this was touched upon. I was a little bit late getting on the call, and it was addressed, I apologize. In 2003, you've obviously given us a good perspective on how things are going to continue to improve across the balance of 2002. If we look at 2003 and I think an earlier question touched upon this and look at the 10,000 plus closings and sort of look allege the profits you're making per home which looks like the first six months is a little over 18,000, sort of gets us around $7 or so per share in terms of earnings next year. I'm just curious if there's any offsets to that.

Well, there's one of the things, one of the factors that is also significant for consideration, Jeff, is the average selling price in terms of, you know, absolute earnings, and we are seeing a lot of our growth coming in markets where the average selling price is quite a bit lower. We're going to see contributions of significant growth in Vegas. We've got the addition of Salt Lake City, significant growth in Phoenix, and we're even moving toward more affordable products in markets like southern California and the Emon Empire and in Colorado with our seasons products and some of the other products we're offering at lower price points. So those factors, that's one factor that would have to be considered in that equation, that you know, the pressure will be on really a downward, from a downward standpoint on the overall average selling price, not because prices are going down, but because we continue to focus on the more affordable price points in each one of our markets.

Sure. Is the profit per home lower in the lower price point category or is that similar?

It would tend to be an an absolute basis a little bit lower, even if margins were stable, just because some people think that lowest price, you know, higher-priced homes give higher margins, et cetera, et cetera, but really we see relative consistency there between higher priced and lower priced, but just the average price going down would lower the average profit per home.

Okay, I'll take that into consideration. Still looks terrific for next year. Thank you very much.

Thank you, Jeff.

Mr. Carlos Rivera of Chris Suisse First Boston.

Congratulations on a great first quarter. Two quick questions. On the SG and A line, obviously a little higher this quarter than last year. Can you give us incentive to that. Was that just costs associated with community openings or was there also higher advertising costs there?

Sorry, Carlos, I missed part of that, you say marketing cost?

The SG and A increase on a year over year basis, was that increased marketing cost?

Primarily it was building up the base for the growth that we're expecting next year, and then adding the additional head count in Las Vegas and Utah. Those are the major components. I think it's not significantly higher, but those are the components that are driving it.

Okay, and just secondly, with respect to current business, have the trends that you saw back in June, have they continued into July?

In terms of the -

The management, new orders.

You know, it's, we really haven't, don't have a whole lot of information to work with. We have one week, and I guess, you know, things, we haven't seen a dramatic change plus or minus right now.

Fair enough. Thanks, guys.

You bet.

Once again, to ask a question, please press star one. At this time, there are no further questions.

We would like to thank all of you for joining our call and web cast today. We look forward to speaking with you again in October following the announcement of our third quarter 2002 results. Everybody, please have a good day. Thanks.