MDC Holdings Inc (MDC) 2003 Q1 法說會逐字稿

Good morning Ladies and Gentlemen and welcome to the MDC Holdings 4th first quarter earnings conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to Mr. Joe Fretz who will read the statements concerning support of those statements. Mr. Fretz, you may begin.

Before I introduce Larry Mizel and Gary Reece, it should be noted that certain statements made during this conference call, including those related to MDC's anticipated home closings, home gross margins, backlog value, revenues and profits, and responses to questions, may contain forward-looking statements within the meeting at the private security's litigation reformat of 1995.

These statements involve known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance or achievements to be materially different from the results, performance, or achievements 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 the interest rates or labor and material costs, the availability and costs of insurance, weather, government regulations, consumer confidence, actual or threatened terrorists 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 2002 form 10-K. It should also be noted that SEC regulation, G, requires a certain information of the company of the use of non-gap financial measures. The information required by Regulation G is posted on our website. This information maybe accessed by entering the MDC website, www.richmondamerica.com, clicking on, Investor Relations and selecting MDC Holdings 2003 First Quarter Conference Call. I will introduce Larry Mizel, Chairman of the Board and Chief Executive Officer of MDC Holdings.

Good morning. We would like to welcome each of you and thank you for participating in MDC's First Quarter, 2003 Conference Call and Web cast. 2002 was the most profitable in many ways the most successful year in our company's 31 year history. As we continue to improve our position among the top performers in the home building industry in measures of financial strength and stability. Our achievements were validated in part by Moody Investment Service, which is signed and investment grade rating to MDC's senior debt in January of this year, one of only 5 of such rating of our entire industry. Following on that accomplishment, we're proud to report that the company again produced record setting results in the first quarter of 2003. These results reflect the successes of our operating strategy and the organic expansion of our operations. We also have been a beneficiary of the resiliency of the home building industry in the face of tremendous challenges to our nation and our economy.

During this quarter, we achieved the highest first quarter revenues, net income and earnings per share that the company has ever produced. Both our home building and our mortgage lending business contributed new highs for the first quarter operating profits on the strength of record home closing and mortgage loan originations. And our active subdivisions at the end of the quarter exceeded 200 for the first time in our history. This contributed to a 21 percent year over year increase in the first quarter home orders and a quarter end backlog of 5,300 homes with an estimated sales value of 1.4 billion dollars.

Our first quarter performance should position us to meet our goals for 2003 of closing more than 10,500 homes and establishing new company highs for revenues and net income. As we have grown, we have maintained our focus on maximizing value for our share holders. We believe this begins with maintaining a strong balance sheet and substantial liquidity. Consistent with this focus, are share holders equity at March 31st, 2003, increased to 816 million dollars and are leverage and interest rates, coverage ratios continue to rank among the best in the home building industry. In addition, we ended the quarter with over 550 million in liquidity, 120 million higher than last year at this time. We further enhanced share holder value in the quarter with the repurchase of 727,100 shares of MDC Common Stock and our recently approved repurchase authorization will enable us to repurchase up to an additional 1,769,600 shares under appropriate circumstances. I will now turn the call over to Gary Reece, our Chief Financial Officer, who will describe with more specific financial highlights of our 2003 first quarter.

Thank you Larry. We began 2003 on the basis of providing operating income which is the highest first quarter income in our history on revenues that are the highest revenues for the first quarter in our history. This is the sixth consecutive year that we have reported record highs in the first quarter. First quarter net income was over 37 million dollars compared to 32.3 million in the first quarter last year up 15 percent. This contributed earnings per share of 1.36, which is up 20 cents a share over last year of 17 percent. Our revenues for the quarter were 569.6 million up 25 percent from the 456.4 million dollars in revenues in the first quarter of 2002.

Our home building revenues also were an all time high for the first quarter, 554.9 million up 24 percent. Our home building and mortgage lending operations led the way to these strong results. We produced operating profits from home building in the first quarter of 64.5 million dollars up 11 percent from 57.8 million dollars of a year ago. The primary driver behind this increase is an increase in closing levels. We closed 2100 homes, which is a first quarter record up 25 percent from 1674 closed in the first quarter of 2002. The markets that contributed the most of this increase were Las Vegas, which was up 94 percent. Our southern California markets were up 50 percent, and our Phoenix market was up 58 percent from the first quarter 2002.

We are actually down in the Virginia market approximately 20 percent due primarily to severe weather conditions during the months of February and March in the market. From an average selling price standpoint, we saw our average selling prices remain relatively stable with where they were in the first quarter of last year. Our average selling price was 263.6, 263,600 versus 265,900 in the first quarter a year ago. As we said in the press release, we do expect to see a decline, and we had discussed this point in previous conference calls as we move into more affordable markets. This is consistent with our strategy to build more affordable products and in the affordable markets.

We do expect to see this average selling price decline by approximately 5 percent in each of the next two quarters. As we see a greater percentage of homes closed in our Los Vegas, Salt Lake City, and Dallas, Fort Worth markets, where our average selling prices should be below 190,000 dollars. We also expect to see lower prices in our southern California markets as we move into new communities in the more affordable market and close fewer homes in the higher price coastal communities. We also expect a lower percentage of homes closed in our Colorado market as well as homes that we did close at a lower price point. This is consistent with our strategy to reallocate our Capital to markets outside of Colorado consistent with our efforts to diverse for our operations around the country. Our gross profit margins for the quarter were 22.8 percent and before interest, were 23.6 percent.

This compares to 23.4 percent before interest in the first quarter last year and 24.4 percent after interest. I would like to point out also, as you may have noticed in reading the release, that our G&A costs in the quarter were higher by approximately $7 million than they were in the first quarter a year ago. This is a result primarily of our expansion efforts and our addition of new markets in Texas and Salt Lake City, our expansion in Las Vegas, we've set up some new-a new division in our Phoenix market, we've expanded in Virginia and Maryland, set up stand-alone divisions in Sacramento and San Diego, and these expenses are incurred primarily as a result of our-the significant increase in active subdivisions and expansion of our operations around the country.

We also saw record results in the quarter from our financial services segment which is primarily our mortgage lending operations. We generated earnings from this segment of $7.6 million, which is up 50 percent from the $5 million earned by this segment in the first quarter of 2002. This increase is attributable primarily to a 112 percent increase in gains on sales and mortgage loans. We were aided this quarter by a couple of factors in this area, not the least of which is the fact that we closed over a thousand loans in December which were sold early in the first quarter of this year, which is almost double the amount of loans that were originated in the month of March of this year. We also saw a very favorable interest rate environment that enabled us to capitalize and maximize our earnings in the secondary marketing area. We also benefited from the refinancing , which created a less competitive environment from a pricing standpoint. We were able to capitalize on that. In addition to the gains on mortgage loans, we also saw an increase of 10 percent in our origination fees as we originated and brokered a record 364 million in mortgage loans in the quarter; that's up 20 percent from a year ago. We originated and brokered loans for approximately 81 percent of our home buyers in the quarter.

Our EBITDA was also up, consistent with our operating earnings. We were up 16 percent, to $74 million. This increase in EBITDA enabled us to continue our trend of strong interest coverage ratios; for the last 12 months our ratio is 14 times coverage. We have reflected in the slide in the Web cast here a comparison to our peers in the industry and we're-our coverage ratios are more than twice the peer average at 5.7 times. We also continued our improvement in our balance sheet. As Larry mentioned, this is a priority for us, as it always has been. We saw our equity increase approximately 18 percent to $816 million. This is $31.50 a share, compared to $25.81 this time last year. We-our debt to cap ratio also continues to be at the bottom of the industry, or near the bottom. We are at .3 and this is net of available cash we had at the end of the quarter of over $56 million. We've also reflected in this slide a comparison to our peer average. We're 30 percent less than the average of our peers, which is 42 percent. Our net debt to EBITDA is well. At 1.05, it is approximately half of the peer average of just under 1.9. And as Larry also mentioned, we believe it's a priority to maintain a large amount of liquidity, which we had debt $556 million in liquidity at the end of the first quarter which is up 28 percent from March 31 of 2002.

On the order side, as we had previously reported earlier this month, we had a very strong quarter from an order standpoint, particularly in view of world events and things happening in our economy here locally. Our orders for the quarter were up 21 percent; we received 3,365 orders, compared to 2,776 of a year ago. These order increases were led by our Las Vegas market which was up over 180 percent; Maryland was up over 70 percent and Virginia was up over 70 percent, we saw our Arizona markets up close to 40 percent, so these are all markets that we have discussed in the past as being those markets where we've added the most amount of active subdivisions. We did see a slight decline in California, primarily because we've sold so well there, we've closed some subdivisions before we get the new ones on, so we're actually down in terms of subdivision count on the holding in California. And then Colorado was down as well due to more challenging market conditions here in Colorado.

Traffic was strong, up 15 percent for the quarter. We actually saw very little impact when the war started. The only major impact we saw to traffic was a couple of little blizzards that we had in the Virginia/Maryland market as well as in Colorado, and we did see traffic slow for a few days during that period of time. But other than that, traffic was-has been fairly steady throughout the quarter. The cancellation rate is 22 percent, which is very close to where it was last year. These strong orders have enabled us to build the highest level of backlog that we've ever had at the end of a quarter; 5,300 units, which was up 33 percent from the 3.984 units we had at this time last year. Our average sales value in backlog is $1.4 billion.

This growth is driven in large part by the-by the large increase in active subdivision count that we saw throughout 2002 and here in the first quarter of this year. We're actually-we stand at 204 active subdivisions today, which is up 36 percent from the 150 active that we had a year ago, and we're already up 15 percent from the 178 we had at the end of last year. So we've seen strong increases, primarily in the markets where we saw increased sales. In Virginia, we added 19 active subdivisions over the last year, Las Vegas is up 14, our Arizona markets are up 10, and Maryland's up four. So these are the markets that we have targeted for the highest level of expansion and they are the ones contributing the orders at this point.

So as we also said in the press release, I'd like to just reiterate it, is that we do expect-we are evaluating prudent uses of our capital and considering all options in view of our strategies and we-in view of that, we do-and in view of the growth that we've already experienced over the last 12 months, we believe that with the pace of sales that we've seen and if we see a continuation of that, we'll see subdivisions going on and new subdivisions-subdivisions closing out and new subdivisions coming on, which will kind of cancel each other out over the next couple of quarters. Expect to see our subdivision count to be relatively flat over that time and then see it begin to move up again by as much as 10 percent in the fourth quarter of this year as we prepare for our growth into 2004.

That concludes my prepared remarks. I'd like to open the floor for questions.

Thank you. We will now begin the question and answer session. If you have a question, you will need to press the 1 on your touchtone phone. You will hear an acknowledgment that you have been placed in queue. If your question has been answered and you wish to be removed from the queue, please press the pound sign. Your questions will be queued in the order that they are received. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, for any questions, please press the 1 on your touchtone phone.

Our first question comes from Joe from Merrill Lynch. Please go ahead.

Good morning, everyone.

Good morning, Joe.

Gary, can you-if you back out the subdivisions and their impact on the Nevada orders and the Nevada deliveries, do you have what that would be?

You know, Joe, I don't have that handy, but it's not-it's not a material number. And we've kind of-a lot of the-a lot of the closings out of the subdivisions that were active when we acquired those properties have been closed. We're really viewing the subdivisions we acquired from , some of which were acquired after the original closing under option, to be pretty much an extension of our organic expansion in that market.

OK.

I mean, if you'd like those numbers I can...

Yes, I can...

... I can call you later.

I can come back to that. And then, just the second comment on sort of a gradual capital rotation out of Colorado to help diversify your business, when you get to a point where you think you're satisfied with the progress there, about what percentage would Colorado eventually represent of your portfolio?

mizel Colorado is still gong to be an important market to us and we're not-I think when we talk about redeploying we're still very profitable here and we're talking about taking our profits and reinvesting-or investing those profits in other markets while maintaining and strengthening, where possible, our market position here. But we expect a faster paced growth in markets outside of Colorado, so you know, it could be-it could continue to be, you know 20 to 25 percent of our business in the future.

OK. And currently, I know you've expanded into Texas. Are you set with the number of markets your-you like being in or do you have any plans for any other markets here on the horizon?

We are looking at some other markets and they include-we have hired an individual to lead our efforts in the-as an extension of our Maryland operation into southern parts of Pennsylvania and southern Philadelphia area. We're looking at a couple of markets in Florida and there are other markets around the country that we would consider at some point.

OK, excellent. Thanks for your time.

OK.

Our next question comes from from Smith Barney. Please go ahead.

Hi., it's for . Congratulations on the quarter.

Thanks, .

Just wanted a couple of things. First of all on the margin front, if you could provide a little bit of commentary on the margins you're seeing in backlog and how you'd expect things to spread out over the rest of the year?

OK. Well, margins, and you can see margins were fairly consistent with where they were in the fourth quarter, we're seeing a couple of things occurring. We are-as we are-we're aggressively approaching our turns and our sales process here in Colorado which has required us to add some incentives, so those incentives will have a-tend to have an impact on closings going forward as they have in the current quarter as well. But that process is continuing. You know, , one of the things that we discussed-that we have discussed in prior calls is the fact that because we have expanded so dramatically in terms of new subdivisions, which will be contributing new closings over the next couple of quarters, we will have opening pricing for those new subdivisions which will tend to have a negative impact on margins for the short run.

You know as we'll begin ramping up and we'll be increasing prices, assuming the market will allow us to, as those subdivisions mature, but we have a disproportionately large number of active subdivisions that are new with opening pricing that will be impacting us. It did impact us some in the first, but on an increasing basis in the second and third quarters of this year.

OK. Also in terms of just noticing on your balance sheet, your accounts receivable increased pretty significantly from where it was at the end of the year. I was just hoping you could provide a little bit of color on that.

Be happy to. We typically try to, in a normal month, in a normal period of time on a-as we have normal operations, we would tend to see a greater number of closings occur throughout the month and therefore we'd be able to collect on those receivables before the end of the month. In this particular case, with the storms that we experienced in several of our markets, we had a very large number of closings occurring near the end of the month and a very large number of closings even occurring on the last day of the month. And so it is something that is short term. It was collected within days after the end of the quarter, so it's just a matter of timing.

OK, great. Thanks very much.

Yes.

Our next question comes from Jim Wilson from JMP Securities. Please go ahead.

Thanks. I guess, Gary or Larry, if you look-as you look into some of the markets like Denver that have been a little tough or as you look to possibly enter Texas or others, is there a price point strategy or anything you're looking to change? I mean, most places you've been doing very well, but in places you've had any trouble with price point or any other focus you're looking to change as you move into new markets?

I don't know that we would necessarily be looking to change anything, Jim. You know we do have as part of our strategy to maintain a balanced attack in new markets so we hit a variety of price points. We do tend to weight those price points that we hit, though, on what the market demand is and as you-as you've seen some of our public information, we tend to see between 70 and 80 percent of our product is generally first time-first time move out because that's what the demand is. And so I think that we would look to maintain that strategy as we move into some of these new markets. And the markets that we're in, we are focusing on the more affordable product and that applies pretty much across the board.

In Colorado here that would mean, you know, more focus on seasons in Colorado Springs, and the lower price points in Denver. In California, the Inland Empire versus the coast on a relative basis. Same thing we've seen our operations in Northern California shift more towards Sacramento than, and the lower price points that are available there.

And so it is an evolving strategy to focus to a greater degree on lower price and more affordable homes, but we still intend to maintain the balance.

OK. And on the subdivision count side, how does it look to play out in California at the moment as far as being able to get communities open and getting that subdivision count back up?

It looks very good. We have a number of subdivisions in the pipeline, and it's just a matter of timing. As you know the transactions there are challenging and it takes real brain power to, and know how to get them to the finish line, but I think that's where we, and a lot of the other public builders have an advantage over some of the smaller builders, because of that expertise, but it does take time to get there. And, but we have a lot of action out there, lot of opportunity, and we have a strong commitment to those markets.

OK. All right. Good. Thanks.

Our next question comes from Ivy Zelman from Credit Suisse First Boston. Please go ahead.

Morning guys. on behalf of Ivy. I just a couple quick questions in relation to some comments you made last quarter on Denver. Gary you mentioned that you were anticipating sales to start to pick up somewhere around maybe the April/May area of the year, and given the slowness we saw, even through the first quarter, is that expectation pushed out a little bit further now?

Well, it's pretty much seasonal here in Colorado, and we expect it to continue in the same light. We're coming into the spring season, and it's generally, we have a little bit more momentum and we expect it to continue in that way.

OK, so we could expect another quarter or so of these kind of order numbers, or are you saying that we might be able to see a pickup?

It's hard to say . We have, we are taking steps to take maximum advantage of what's going on in the marketplace, and what the market will give us. We don't have plans right now to expand subdivision count here in the near future. We'll have some coming off, some new ones coming on and we're still very looking to maintain and possibly increase our market share, but you know, we're going to have to see how the local economy plays out, but we're certainly in the best position because of our leading position and the flexibility we have on the ability to offer varying types of product. We do have 14 to 15 different series of homes we offer here in Colorado. So being the, being this is our home market and we know it better than anyone else, and we're in the best locations, we certainly are in the best position to capitalize if market begins to turn around.

We have four division in Colorado, and each one has its own nuance and so they all have a little bit different characteristics.

OK, OK, I think I would agree with that. As you mentioned that you're rotating capital out of Colorado and being conservative with opening new communities, are you witnessing any of your competitors taking an opposite approach and being more aggressive in hopes of, you know, if we do see a rebound in three months or six months, and they're being more aggressive at this stage in hopes of taking some market share from you?

Are you speaking nationwide?

No, just in Denver or in the Colorado area, are your competitors stepping up their growth?

Nobody's taking any market share away from us. We're, we are very, very competitive as to our competition. I think and they'll tell you we're there.

OK, that's all I have gentlemen.

Thank you.

Our next question comes from Armando Lopez from Morgan Stanley. Please go ahead.,

Hi, good morning. I was just wondering if you could comment Gary a little bit more on the pricing. Maybe if you exclude mix what you saw in pricing in some of the various regions?

Exclude mix, basically Armando, we're, I mean, this is the time of year when demand is strongest and we were able to see price increases in most markets. It varies really market-by-market, but you know, anywhere from, here in Colorado, we were even able to raise prices on a selective basis. But we haven't seen anything off the charts here. It's generally ranged somewhere between a modest increase and three percent. They were averaging one-and-a-half to two percent across the board, but it does vary market by market. But each market we saw the ability to raise prices.

OK, great, and as some kind of like a follow-up on that, could you just talk a little bit maybe what you're seeing on incentives in the various markets? Are you seeing, you know, incentive levels accelerate a little bit here, or?

Not to any measurable degree. Again, just the opposite side of the equation on pricing is incentives tend to be a bit lower during this time of the year, and we have pretty much sent that being the case. They're, here in Colorado is kind of the exception, and our incentives are up a bit here in the first quarter in Colorado on selective homes and selective subdivisions, but depending on the conditions in that particular area. But this is the, other than Colorado, the rest of the markets are nothing extraordinary.

OK, and then just one last one. You mentioned traffic for the quarter, is there been any change to that more recently?

No, no there's not. You know, and we're only a week into the month of April, and you know, it's, I'd have to say it was a typical week.

OK. All right. Great. Thanks a lot guys.

As a reminder to all participants please press the one on your touch-tone phone for any questions.

Our next question comes from from Deutsche Bank. Please go ahead.

Yes hi. from Deutsche Bank, on behalf of . Just trying to ask one quick question, given that 70 percent of the 10,500 units delivery already in the, you know, backlog and first quarter closing, is that 10,500 units a little bit conservative in your opinion?

Well , I would say that we kind of set that as a floor, and that's the way we stated it in the press release, but you know, I would, I wouldn't want to comment on the level of conservatism there, but we do, we have made the statement we think we will close more than 10,500. But, you know, we, with a steady subdivision count over the next couple of quarters, you know, that will influence the answer as well.

OK. Is that bank.

I'm sorry.

Once again, for any questions, please press the one on your touch-tone phone.

Our next question comes from from ACI Capital. Please go ahead.

Hi good morning. Nice quarter. Just one quick question, maybe I missed it, got on the call a little late, I was wondering if you could just talk about the composition of the marketing expenditures and you know, in light of the incentive questions prior the call. What pushed that up relative to revenue?

Well on a year-over-year basis, you talking about incentives, or are you talking about marketing costs?

Well, I'm just talking about the marketing costs, but you know, the incentive question spurred me to ask that.

Well the incentives in general, you know, I don't have an, the exact information on that, but my information is, is that incentives are not measurably higher, other than in Colorado than they were at this time last year.

The marketing costs are higher, because of the, primarily because of higher levels of volume, but we also saw a little bit of a disproportionate increase in some of the salaries and deferred marketing on the market side as we opened up close to 100 model homes during the quarter in relation to these new subdivisions.

So we've got a higher level of deferred marketing than we saw a year ago, and a higher level than it's associated with just the closings we saw this quarter. So, as well as some of the marketing related salaries that are fixed costs are higher as well, as we built our infrastructure in a number of these markets in connection with expansion that is yet to yield a comparable level of closings.

Thank you.

Our next question comes from from . Please go ahead.

Good morning. I have just a couple questions. I think I might have missed it, so what was the reason for the orders in California being down?

Orders in California were down only because we were down a few subdivisions, and this is not by design, but it's more as a result of two things, one the strong orders that we've seen over the last several months in California, which have caused us to close out subdivisions earlier than expected. And just the difficulty that exists in the market place of getting new subdivisions on line, getting approvals, getting the transactions completed, but they're in the pipeline. They're coming on, but for this particular quarter, we saw subdivision count down and therefore orders kind of followed that.

So the plan is in the future to get those orders back up?

We are planning to grow in California, both north and south.

OK, and also how many spec homes do you have in your inventory?

We have, our spec count inventory is probably in total somewhere in the neighborhood of, well I'll tell you what, hold on, we have about a week-and-a-half supply of total specs in the company. And somewhere in the neighborhood of maybe a three-day supply of those specs that are finished.

OK.

So it's relatively low and in fact, our spec count by the way includes homes for which we've only poured a foundation, which is a relatively modest investment above and beyond the lot itself. So a significant part or at least maybe 20 percent of those specs are actually just foundations.

So we continue to maintain a very conservative spec policy, one that which basically puts us in a position of averaging around two specs per active subdivision in the company.

OK. Thank you.

At this time we have no additional questions. Do you have any concluding remarks?

Yes, we'd like to thank you again for joining our call and Webcast today. We look forward to speaking with you again in July following the announcement of our second quarter 2003 results. Thank you very much.

This concludes today's teleconference. Thank you for participating. You may all disconnect at this time.