M/I Homes Inc (MHO) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the M/I Homes earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Phil Creek, Chief Financial Officer. Mr. Creek, you may begin

Thank you for joining us today. With me on the call is Irving Schottenstein, our CEO, Bob Schottenstein, our President, Steven Schottenstein our COO. First to address regulation per disclosure. As you know, we provided our earnings guidance in our press release, and we encourage you to ask any questions regarding issues that you consider to be material during this call. Because as you know, we are prohibited from discussing significant non-public items with you directly.

As to forward looking statements, please note the section in our press release regarding forward looking statements and the safe harbor statement under private securities litigation reform act of 1995, filed in our annual report on Form 10-K for the year ended December 31, 2002. Also, please be advised that certain statements in this call may constitute forward-looking statements within the meaning of this act, and that actual results could differ materially from those described in such statements.

Be advised that the company undertakes no obligation to update any forward looking statements made during this call, the audio of which will be available on our website through October 2004. It should also be noted that certain information related to the use of non GAAP financial measures required by SEC regulation G is posted on our website. This information can be accessed by logging on to the M/I Homes website at www.mihomes.com, click on the investor relations section of the site, and select non-GAAP financial disclosure reconciliations. Now we'll turn the call over to our President, Bob Schottenstein.

Thanks Phil. We're pleased to report today that we had another record setting quarter. At record pre tax income, record backlog, record sales value, record sales, record average sale price and all of these represent records in the 27-year history of our company.

Pre tax income of $32.3 million resulting in net income of $19.4 million was a record for the company. As I said, it represented a 14% increase with diluted earnings per share going from $1.15 a year ago to $1.31 today. We also had record margins for the quarter. Our gross margins increased to 25.1% from 24.6% in 2002, year to date our gross margins have increased 150 basis points, just slightly over 26%.

Third quarter operating margins increased to 12.8%, from 12.1% in 2002, and year to date, our operating margins increased to 13.9%, compared to 12.5% a year ago. The net income of $19.4 million is a third quarter record as I said, and the year to date net income of $56.8 million is also a record for our company. We're very pleased with these results, especially in light of the fact that our closings were slightly down for the quarter and year to date. In terms of sales, our new contracts were, at third quarter, reached an all time high of 1,127, which was up 6% from 2002's third quarter.

This increase in sales occurred notwithstanding the fact that we experience a slight decline in traffic. For the quarter our traffic was down around 9%. While we report sales on a quarterly basis, because we think sometime monthly reporting can be misleading because of seasonal variations that can be caused by unusual weather or what have you, our sales nonetheless for the various months, they were up 24% in July, up 2% in August from a year ago, and September down 4%.

It could well be that the spike up in July ate up some of August and September's business, but nonetheless, all in all for the quarter, we were very pleased. For the nine-month period our sales totaled 3.611, which is 12% higher than the same period in 2002. Cancellations, slightly higher, the third quarter than in the same period a year ago. A cancellation percentage being 23%, versus 21% a year ago.

As we've said repeatedly during past calls, our highest cancellations occur with our entry-level product. Entry-level product company wide represents approximately 35% of our business. The majority of the cancellations occur within this product line, and within that product line, the vast majority of cancellations result from financing issues, and the majority of those occur prior to the commencement of construction.

We're not a spec builder, we build primarily to contract. As of the end of September, we had 117 specs in the entire company in various stages of construction, representing approximately $14 million of total investment. So you can see, notwithstanding the cancellation rate, the impact on speculative construction is almost negligible.

As previously mentioned, our backlog unit sales value and average sale price since September 30, were the highest ever in our history. Backlog units reached 3,123, with a sales value of nearly $790 million, and an average sale price of $253,000. This represents a 20% increase in units, a 26% increase in sales value, and a 5% increase in average sale price.

We're very, very pleased with the quality of our backlog, the product mix, and the strength of our margins in backlog. During the third quarter, we closed 1,048 homes. As I made note of earlier, this was slightly down from 2002's third quarter, the decline being 2%. The closings were impacted largely by unusual weather conditions, which we experienced in the first half of this year, in many of our cities. And in the last several months, we have experiences some unusually wet weather, which has impacted many of our markets, and we have every confidence that this delay in closings will be made up significantly in both the fourth quarter this year and what looks like will be a very strong closing first quarter next year.

In terms of community count, something that, while we focus on our total land position, sometimes a lot more than community count, nonetheless, we do want to report to you our community count is down slightly from a year ago, 140 communities versus 146. Although, many of these are significantly larger communities than we've had in the past. So that number standing alone oftentimes can be a little misleading.

We do focus intently on our land position as we stated in our press release. Thus far this year we have already purchased over $180 million ground in the first nine months, which is more than we purchased all of last year, and we still have a significant number of purchases yet remaining for the balance of this year. Our land position is the strongest it's ever been, and is, as we talk about the markets, perhaps there will be more comment on that.

Basically, in reviewing the markets, our Columbus operation is having an outstanding year, we've got a very strong land position. This will be a record year for Columbus, and as we look to the future, we expect very, very strong results from a unit standpoint, margin standpoint, and profit standpoint. Cincinnati sales are down from a year ago, we don't think we're alone in that, the market there is off slightly. Our margins are very strong. This will not be a record year for M/I Homes in Cincinnati, but it will be, nonetheless, a very strong and solid year.

Indianapolis is in somewhat a similar situation to Cincinnati. The market is a little spotty, our sales for the first nine months were off about 10% from what would have expected. Nonetheless, we're experiencing some of the margins we've ever had in Indianapolis and this will be from a profit year the best year we've ever had in Indianapolis. It's a very good city for us and one that we expect to do very well next year as well.

Overall, our operations in Florida were outstanding. Nothing short of outstanding. Tampa had a phenomenal quarter, record sales, record margins, we're going to have a fantastic year in Tampa, we'll close well over 500 homes. Our land position, because we chewed through ground a little quicker than may have anticipated, despite the fact that we continue to push margins, we perhaps in the future will have a slight interruption into continuity of our sales that that could happen in the first quarter of next year, that our land position going forward is very strong and we're positioned for very significant growth in the Tampa market over the next one to two years.

Orlando also has just had an outstanding quarter and first nine months with record sales, up year to date 20% from a year ago. Excellent margins, record results, well over 300 closings. Our land position there was very strong in improving as we speak. And we expect to experience very strong and continued growth in Orlando over the next one to years as well. Likewise in West Palm Beach, though it's one of our smallest markets in terms of units, closing only about 100 homes this year.

We have beefed up our land position, despite the tremendous shortage and demand for land there, we expect to double our business in Palm Beach over the next twelve months and then continue to grow it from there. All in all, our results in Florida were superb. Charlotte and Raleigh, our two markets that were struggling in a little bit, our new orders or sales in Charlotte were slower than anticipated. Closings are flat with a year ago and our results there are mixed. Same with Raleigh, our sales are flat, off 15% from a year ago. The market from a macro standpoint, we believe is also off, and while we will make money in Charlotte and Raleigh, our results there are very average and not where we need them and want them to be.

Finishing up with Washington, D.C., we've had an exceptional quarter and a very strong nine months. Sales are up, if we had the land and the location we would be selling even more homes than we sold thus far and we have worked to significantly strengthen our land position over the next one to two years, we hope to double our business in the Washington market in terms of units. We're in a position to do so, we continue to see very strong market positions there and should have a very strong year there from a profit standpoint.

Just one final comment before I turn it back over to Phil. As you know, we exited the Phoenix market a little over a year ago, or formally exited it, and have been in the process of disposing of our remaining assets, which largely consisted of unsold lots. All are under contract, the exit is complete with the last handful of remaining lots expected to close by the end of this year and that transition has gone very, very well. Phil will review now in more depth our financial results.

Thanks, Bob. Revenue increased 3% for the third quarter and decreased 2% for the nine months compared to the same period last year. Homes delivered in the third quarter were 1,048 compared 1,067 for last year's third quarter. And homes delivered in the first nine months this year were 2,809 compared to last year's record of 2,953. As Bob mentioned, unfavorable weather conditions in the first half of the year, along with an unusually wet summer season, coupled with a slower housing permit process resulted in lower deliveries.

Our third quarter deliveries were 34% of our June 30 backlog, which was below the 41 and 40% of the past two years. Average sale price for the third quarter was $248,000, up from $235,000 from last year's third quarter, and for the nine months the average sale price was $242,000 versus $237,000 in 2002. Gross profit dollars increased $2.9 million for the third quarter of 2003 and $6.8 million for the first nine months, even though our deliveries were down.

And as Bob mentioned, margins in the third quarter increased to 25.1% from 2002's 24.6. Our margins have been exceptional in Tampa, Palm Beach and Washington, D.C. Our margin percentage for the first nine months of 2003 increased over 150 basis points to 26.1%. Our increased margin percentage reflects the effect of increased average sales prices, our management focus on margins by subdivision, and the favorable impact of M/I financial results.

Our G&A costs in the third quarter this year decreased a million dollars to 5.9% of revenue, down from 6.4% of revenue in the prior year quarter. This dollar decrease came primarily from lower insurance related costs, we are self insured up to a certain level. Our exit from the Phoenix market, a favorable mark to market adjustment as our interest rates swaps get closer to maturity, offset in part by payroll related incentive increases primarily related to our record results.

Selling expenses increased $1.3 million, an increase from 6.1 to 6.4% of revenue for the third quarter. This increase was primarily due to higher sales commissions and bonuses related to record results and higher spending on model related costs during the quarter than in the prior year. Overall, our selling expenses increased about $750,000 for the first nine months of 2003 versus last year.

Overall our SG&A expense decreased to 12.3% of revenue in the third quarter of 2003, compared to 12.5% for the third quarter of 2002 and remained relatively constant at 12.2 when compared to the first nine months of last year. We continually focus on controlling our costs. Operating income increased to a third quarter record of 12.8% for 2003, from 12.1% for 2002's third quarter and to 13.9% of revenue for the first nine months of this year, compared to last year's comparable period 12.5.

We are very pleased with these returns. Interest expense decreased $800,000 for the third quarter and $4.2 million for the first nine months of 2003 compared to the same periods in 2002. The decrease in the third quarter was primarily due to a lower weighted average interest rate and higher interest capitalization as we have more land under development and higher home building inventory than last year. This was offset in part by higher average borrowing in the third quarter of 2003.

The decrease for the nine months ended September 30 is due to lower average borrowing, offset in part by higher weighted average interest rate due to our subordinated debt representing a greater portion of debt outstanding in the prior year. Additionally, we have capitalized more interest this year than in the prior year due to higher inventory and higher amount of land under development this year compared to last year.

We have $14.4 million in capitalized interest on our balance sheet at 9/30/2003, compared to $12.2 million in 9/30/2002, and $11.5 million in December 31 of 2002. This is about 2% of our total assets and we continue to be very conservative in our capitalization policy, expensing interest when land is raw and the lots are finished. Our effective income tax rate for the third quarter was 40% compared to 38% in last year's third quarter and 39.3% for the first nine months of 2003, compared to 38% in the prior year period.

This increase in the rate primarily reflects an increase in state taxes due to a greater percentage of our profits being generated in higher tax states. Net income increase 8% to $19.4 million for 2003's third quarter, and as Bob mentioned, represents the highest third quarter in the history of our company. Net income for the first nine months, also a record increase, 12% to $56.8 million. We also were very pleased to bring 7.9% to the bottom line on a year to date basis. This is an increase of 100 basis points over last year.

Diluted earnings per share increased 14% to $1.31 for the third quarter, and 17% to 383 for the first nine months of 2003, compared to the same periods in 2002, and both achievements are company records. Addressing M/I Financial, which includes our title operations; revenue for the third quarter was $8.1 million, an increase of 41% from the $5.8 million recorded during 2002's third quarter.

This increase is primarily a result of revenue derived from the sale of loans, which more than doubled from $2.3 million last year to $4.7 in 2003. This increase primarily relates to the favorable interest rate environment, including the impact of selling loans that have higher rates in market because of customers locking rates early in the sale process combined with our effective hedging of the interest rate fluctuation risk.

Favorability also resulted due to the mix of fixed rate versus variable interest rate loans closed during the third quarter of 2003, compared to the same period in 2002. In addition, the increase in revenue from the sale of loans is also due to a higher average loan amount, and increased service and premiums on government loans. Our revenue from loan origination fees actually decreased 2% compared to the third quarter of 2002. This decrease in origination fees is attributable to a 7% decrease in the number of loans originated, which was the result of a decrease in homes delivered.

However, the decrease in originations was partially offset by a slight increase in the average loan amount, which was $196,000 in the third quarter of 2003, compared to $189,000 for 2002's third quarter. Revenue from other sources, primarily loan application fees and title fees remain constant at $1.9 million for the third quarter. Loans originated were 2,260 in the first nine months, that is a 6% decrease from the 2,417 loans reported in the first nine months of 2002. Loans of value on our mortgages decreased from 89% to 87% in the third quarter of 2002, when compared to the same period of 2003.

In the third period of 2003, 66% of our loans were conventional, with 34% being FHAVA. The FHA maximum mortgage loan that's in the markets that we operate in range from 155,000 in Florida to 270,000 in Virginia. Pre tax income in the third quarter and first nine months of 2003 increased 64% and 22% respectively when compared to the same periods in the prior year. These increases were the result of the increased revenues with a relatively fixed operating expense base.

Eighteen percent of our overall closings in 2003's third quarter were down payment assisted, compared to 20% in 2002's third quarter. And the average mortgage amount on these down payment assisted loans was consistent at $166,000. The majority of these down payment assisted customers are in our Indianapolis and Columbus market. We sell our mortgages along with their servicing rights. Our contingent repurchase obligation due to loan delinquency is primarily limited to the first couple of payments being made timely.

And year to date, we have no repurchased any loans and our mortgage operation continues to capture about 90% of our business. Overall, our mortgage and title businesses produced 18% of operating income during the third quarter of 2003, and 16% during the first nine months of 2003. Balance sheet summary; we constantly focus on our land investment and on our April conference call, we stated that we intended to buy over $200 million of land this year.

And as stated in our press release, we have purchased about $180 million year to date. We are working very hard on getting additional quality sub divisions open. In Tampa, for instance, one of our best markets, we hope to open three new sub divisions in 2004's first quarter, and two additional sub divisions in next year's second quarter. September 30, 2003 homebuilding inventories increased 27% over last year and increased 37% from year-end.

Compared to a year ago, raw land has increased over 150%, land under development increased 61% and finished unsold lots has decreased by 25%. And these changes are in line with our expectations. Our total land investment, which is not under contract to a third party at 9/30/2003, is $313 million. This is significantly lower than our $386 million of net worth. We always strive to finance our longer-term riskier assets with equity dollars.

We own 11,600 lots at 9/30/2003, of which about 3,900 are either under development or finished. We have an additional 8,000 lots under our control. So in total, today, we own about a two year's supply and control about a four years supply of lots for a total under control of 19,600 lots, and this about 1,100 more lots than we had a year ago. And as Bob stated, we feel very good about the quality and quantity of our land position.

As previously mentioned our backlog units are up 20% and our backlog sales value is up 26% versus last year, reaching an all time company record. From a financing standpoint, we have a $315 million line of credit, with $106 million borrowed at quarter end. Bank One continues to be our lead bank, with 12 banks in our line. And our line matures in 2006. We currently estimate our peak 2003 home building borrowing under this line of credit to be about $130 million, leaving us with net availability after letters of credit of about $150 million. Long-term debt at 9/30/2003 totals $187 million, compared to $91 million at year-end 2002, and $137 million at 9/30/2002.

And all periods include $50 million of matures in 2006's third quarter. Home building debt to equity was 43% in September 30, 2003, versus 33% a year ago. And homebuilding debt to cap was 30% at 9/30/2003, versus 25% a year ago. Our interest coverage for the quarter remains very strong at 11 times EBITDA. EBITDA for the quarter was $34.5 million, a record for us. Interest incurred for the quarter was $3.3 million, compared to $3.1 million in 2002's third quarter.

At September 30 of 2003, shareholders equity was $386 million with the book value per share of nearly $27. In the third quarter of 2003, we did not repurchase any outstanding shares. We had $3.2 million shares in treasury currently with an average price of $14.00. And we had $34 million available to repurchase from our current board approval. In summary we are very pleased with our financial performance and our financial position has never been stronger. And based on our results so far, and projected strong fourth quarter deliveries, 2003 should be another year of outstanding results, and our eighth consecutive record year.

We currently estimate diluted earnings per share of between $5.15 and $5.30 for the year, an increase to our previously forecasted amount of $5.05 to $5.20. An approximate 20% increase over 2002's prior record of $4.30 per diluted share. This completes our formal presentation, we now will open the call for questions and comments.

Thank you, if you have a question at this time, please press the one key on your touchtone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the pound key. Again, to ask a question, press the one key. One moment for questions.

And I'm showing no question in the queue. Pardon me, Ivy Zellman with CSFB has queued up.

Good afternoon, gentlemen, it's actually Carlos on behalf of Ivy.

Carlos, how are you doing?

Good sir, how are you doing? Congratulations on the strong quarter.

Thanks, Carlos.

Quick question, your gross margin, I know your total gross margin was up year over year, but if you kind of back out your financial services and your landfills, it was down marginally year over year 10 to 20 basis points, and down sequentially, a bit bigger in magnitude. Was a sequential decline a function of mix or was there something else there?

Carlos, it was down just a little bit, just from a pure housing standpoint, you're right. Part of that also were the bad weather type expenses, we had to pump out a lot of foundations and do those types of things as far as weather type expenses. And also mix was a little bit of it, but of course they were still very strong.

Right, okay. So can you comment on perhaps current trends? I know your orders were down a little bit in September. Has that trend continued in October or have we in reversal there?

It's a little too early, believe it or not, it might be a little bit too early to tell, there's still a few more days left in the month. It's a little mixed from market to market. Our Florida business continues to be very strong, Washington, the demand is very good, Carolinas continue to be a little bit spotty, and in Columbus, portions of our business are very, very strong. Other portions are a little spotty, so we expect to have a solid October, but we'll know a little more in a few days.

Okay, that's fair.

And another thing we're trying to do also is that as we have had very strong sales in our backlog, it's extremely strong. We're trying to make sure that we focus on margins and that we get the best return we can out of the land we have.

Okay, you gave us an order breakdown on a monthly basis. Can you give us, perhaps, your traffic trend on a monthly basis for the quarter?

Yeah, that's no problem. Carlos, July's traffic was flat, August traffic was down 12%, and our September traffic was down 14%.

Okay, did you guys have a difficult comparison in September?

From a sales standpoint?

From a sales standpoint, correct.

September sales last year were actually pretty good, Carlos, yes.

Okay.

I think that's part of it but I also think that maybe some of September moved up to July and August.

Fair enough.

It's just so hard to predict that kind of thing.

No, I just think a lot of the builders last year had a pretty strong September, September 2001 was a pretty easy comp given what happened with 9/11.

Exactly. Actually, our September in 2002 was the second best September in our history, so it was a pretty good comp for us.

You gave us your current spec units at 117 specs. What was the spec level a year ago?

About 102. The investment was $11 million and the investment today is around $14 million.

Okay, and just lastly any thoughts or prospect for perhaps community count at year-end for 2004?

2004?

Yes.

Well, we're really hoping this year our target was to be more at 150 by the end of this year and really that hasn't happened for two reasons. One thing, our sales have been so strong and second thing, the wet weather has also slowed down some of our subdivision development. So we would definitely like to be at that 150 plus level as we get into next year.

All right guys, thank you very much.

Thank you.

Thanks Carlos.

Again ladies and gentlemen, if you would like to ask a question at this time, please press the one key. One moment for questions. And again, I am showing no further questions.

Thank you very much for participating and we look forward to talking to you with our year-end results. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference; you may now disconnect, and have a good day.