M/I Homes Inc (MHO) 2004 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the M/I Homes First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode.

Today, 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 introduce your host for today's conference, Mr. Phil Creek.

Mr. Creek, you may begin.

Thank you very much for joining us today. Joining me on the call from Columbus, Ohio, Bob Schottenstein, our CEO and President, and Steven Schottenstein, our Chief Operating Officer.

First to address regulation per disclosure, we encourage you to ask any questions regarding issues you consider to be material during this call because as you know, we are prohibited from discussing significant non-public items with you directly.

We provided our 2004 earnings guidance in our press release, and as to forward looking statements, please not the section in our release regarding forward looking statements, and the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 filed in our annual report on Form 10-K for the year ended 12/31/03. 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 April of 2005. Please note that certain 2003 information has been reclassified to conform to 2004's presentation. It should also be noted that certain information related to the use of non-GAAP financial measures required by the 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, clicking on the investor relations section of the site, and selecting non-GAAP financial disclosure reconciliation. Now I'd like to turn the call over to Bob Schottenstein.

Thanks Phil and good day everyone. We've had a great beginning to what we full expect and hope will be our ninth consecutive record year. Our business is the best it's every been, 2004's first quarter produced a whole host of company records, revenues, margins, net income, backlog among them. First, with respect to income, as reported this morning, our pre-tax income of $32.3 million for the first quarter resulted in record net income of $19.5 million, up nine percent from a year ago, diluted EPS of $1.35 a share was up 13% over last year's repory (ph).

One thing to note, with regard to our first quarter performance, and I think this is important so that comparisons are apples to apples. In 2003's first quarter, we actually recorded positive income of $2.7 million worth of land sales, which resulted almost exclusively from our exiting of the Phoenix market. These sales no longer exist, and we had only $500,000 of land sale profit in 2004's first quarter, a much more consistent number.

The exiting from Phoenix has been concluded, and was concluded last year. If you exclude the land sale profits, our first quarter pre-tax income was actually up nearly 20% from a year ago. In terms of margins, our gross and operating margins were at record setting levels. Gross margins increased 20 basis points to 26.7%, up from 26.5% a year ago. Operating margins increased from 14.7% in '03, to 14.9% first quarter of '04.

As with all other homebuilders, we have been dealing with a number of cost increases, most notably lumber. We do not expect our margins to decrease significantly despite of these increases, although it's possible that they could decrease slightly. And I want to underscore the word slightly. I think we've been successful, and can continue to be successful in offsetting these increases through pricing practices, improved operating efficiencies, and additional savings from national account relationships.

Sales for the first quarter were very strong, up 15% from the amount recorded in the first quarter of '03. By month, sales were up 23% in January, 13% in February, and 12% in March. Our cancellation percentage was about the same as last year, perhaps down ever so slightly, but let's be clear on cancellations. Virtually all of them occur in our entry-level product, which is about, our entry-level product was about 30 to 35% of our total company business.

And the majority of the cancellations that occur with our entry level product result rather from financing issues, in some cases, some customers just change their mind. But if there is good news, the cancellations occur before we begin construction. We are not a spec builder, we build almost exclusively to contract. At the end of March, we had 110 specs in the entire company in various phases of construction, representing an aggregate investment of around $12 million.

This compares to 94 specs a year ago with an almost identical investment level. In terms of closings or deliveries, we had record first quarter closings of 871, up nine percent over last year. The increase in deliveries, along with a six percent increase in average sales price drove our record first quarter revenues to $229 million, a 10% increase over 2003's first quarter of revenues.

The strong increase in new contract or sales also has resulted in record backlog levels in terms of units, sales value and average selling price. Units, backlog reached 3,099 homes, with a sales value of $840 million, and an average sale price of $271,000 per house. In terms of units, it's 437 units higher than a year ago, or 16%. And in terms of sales value, it's 28% higher than a year ago, representing about $183 million. Our backlog was very strong, and our margins and backlog are very strong.

As mentioned in our press release, we anticipate purchasing over $300 million worth of land company wide in 2004, and increasing our deliveries by hopefully a minimum of 10% in calendar year '04. And then third, we also expect to increase our deliveries in calendar year '05 by a minimum of additional 10% to over 5,000 homes delivered in the year 2005.

In terms of our individual markets, I'll go through these quickly, and then turn this back over to Phil. Our Columbus market had excellent results, very strong margins. Backlog is strong, up 15% from a year ago. We anticipate another record year in Columbus in 2004. Our land position is very strong in Columbus. Cincinnati is off to a great start; sales were up significantly in the first quarter, nearly 50% from a year ago. Although last year's first quarter was not one of our best.

But nonetheless, our sales in Cincinnati today are very brisk and a very strong level. Our margins are strong in Cincinnati, we expect our community count to increase slightly this year, and we expect 2004 to be a very strong year for our Cincinnati division. Indianapolis is our most affordable market in terms of average selling price. The average sale price of an M/I Home in Indianapolis is just under $185,000.

Sales for the first quarter this year are about on par with the first quarter of last year. I believe this market continues to be spotty. We hear that from other builders, other builders who have reported results have so indicated. But we also believe that we're outperforming the Indianapolis market, and expect to have a very solid '04 with improved results in '05.

Moving to our three Florida markets, Tampa, sales are very strong, up about 15% from a year ago. Our average sale price as planned hovers around $230,000 a house. That's up about 10% per house from a year ago. Our margins and overall returns are superb. Our land position is very strong. We have very significant growth objectives in Tampa, and believe we will be successful in achieving them.

We anticipate that Tampa will close over 600 homes this year, and a significantly greater number in 2005. Orlando has had very strong sales, it's also an excellent market for us right now. Sales were up over 10% from our first quarter last year. Our backlog today is 40% higher than a year ago. Our margins are very strong, Orlando should have an outstanding year, and we're also looking to Orlando to continue to provide very significant growth for M/I Homes.

West Palm Beach, sales have also been very strong with the highest margins in our company being recorded in our West Palm Beach division. West Palm Beach should close about 125 homes this year. In that respect it's our smallest market in terms of units. Although, with the average selling price and backlog pushing $400,000, it will be a fairly significant revenue generator. The good news is in 2005, 125 closings should go up to, 125 closings this year should move to over 200 closings next year.

And while land is a challenge in West Palm, frankly it's a challenge in every market, a particular challenge however in West Palm. We have made great strides in improving our land position in Southeast Florida. Charlotte, our sales are up about 20% from the first quarter last year. Frankly, we brought on a lot better communities as part of our plan for repositioning.

And we've cleaned up or gotten out of some communities that were struggling. And that, it's taken a while to get to where we are, but now that we're here, I think the best is yet to come for M/I homes in Charlotte. We expect very good results in Charlotte this year, with closings increasing by more than 10% over a year ago, but we are looking for significant improvement in Charlotte in '05, and particularly in 2006.

Raleigh, sales were up 25% from a year ago. We expect to improve results as a result in '04. Our land position is not where we'd like it to be, but all in all, we expect to have good results in Raleigh this year. Finally, Washington D.C. market, sales are up over 40% from last year's first quarter. The backlog is up over 15% with a sales value in backlog up over 25%. Very strong margins, very strong results expected this year.

We've significantly strengthened our land position in this market as planned. We purchased a little more than $70 million worth of ground in the Washington market in '03, and we've already purchased an additional $40 million worth of ground there this year. Expect, rather, we continue to see very strong market conditions, and expect meaningful growth in the Washington market in both '05 and '06. And I'd now like to turn it back over to Phil to more thoroughly review our financial results.

Thanks Bob. Revenue increased 10% in the first quarter compared to last year. Average sales price for the first quarter was $252,000, up from $237,000 from last year's first quarter. Gross profit dollars increased $5.7 million in the quarter, overall margins increased to 26.7 from last year's 26.5. Our margins have been very strong in Columbus, our three Florida markets and Washington, D.C.

Our margin percentage is the highest ever for this period, reflecting an effective increased average sales price, management focus on sales paid, and margins by sub division. The effects of leveraging our purchasing power, and a favorable impact of M/I financials results. Our general and administrative costs remain relatively constant from a dollar perspective, $11.3 million for the quarter, versus last year's $11.5, declining 60 basis points to 4.9% of revenue.

Selling expenses increased $2.3 million, an increase from $6.4 to $6.9 of revenue. The increase for the first quarter was primarily due to an increase in the number of homes delivered, an increase in the average sales price, along with a slight increase in our percentage of homes closing through third party realtors. About two thirds of our homes closed through realtors. The co-op commissions accounted for approximately $1 million of the absolute increase, and about 30 basis points the percentage increased.

Overall, our co-op percentage on closings increased to 1.7 of revenue to last year's 1.4, and sales commissions increased by $600,000 when compared to the prior year, primarily due to our increased revenue. The remainder of the selling expense increase is due to an increase in our advertising in both T.V. and radio when compared to the prior year period.

Overall, our SG&A expense decreased to 11.8% of revenue for the first quarter, compared to 11.9 of revenue in the prior year. And operating income increased to a first quarter record of 14.9% of revenue, from 14.7% in '03's first quarter. We are very pleased with our improved margins. Interest expense increased to $1.8 million in '04's first quarter when compared to $1.3 million in '03, with the effect of increased average borrowing of $111 million being offset by a lower average effective borrowing rate.

For the quarter, our average borrowings were $195 million compared to the first quarter of '03's $84 million. Additionally, we have capitalized more interest during this year than the prior year, due to higher inventories and a higher amount of land under development in '04 when compared to last year. And overall, the dollar amount of the increase in selling interest expenses were in line with our expectations.

We have $14.3 million in capitalized interest on our balance sheet at 3/31/04, compared to $11.9 million at March 31, 2003. This is about two percent of our total assets. We continue to be very conservative in our capitalization policy, expensing interest when land is raw and when lots are finished. Our effective income tax rate increased slightly for the quarter to 39.5 from 39%.

The increase in the rate primarily reflects an increase in state taxes due to a greater percentage of our profit being generated in higher tax states. And net income increased 9.3% to $19.5 million for '04's first quarter, an all time high quarter for our company. And diluted earnings per share for the first quarter increased 13% to a record $1.35 per share. We are very pleased to deliver this increase to our shareholders.

In my financial, which includes our title operation, revenue for the first quarter was $7.5 million, and increase of 12% from the $6.7 million reported during '03's first quarter. Revenue from the sale of loans during the first quarter remains constant at $4.2 million as long as originations were relatively constant. Revenue from loan origination fees increased 12% compared to the first quarter of '03.

This increase was a result of a 2% increase in the number of loans originated, and an increase in the average loan amount. The average loan amount for the first quarter was $209,000, compared to $190,000 in the first quarter of last year. And revenue from other sources, primarily loan application fees and title fees improved slightly for the quarter when compared to last year.

Loan to value on our first mortgages for the quarter was 86% in '04, compared to 87% in '03. And for the quarter, 74% of our loans were conventional, with 26% being FHAVA. And this compares to 66% and 34% respectively for '03's same period. The FHA maximum mortgage limit, and the market that we operate in range from $160,000 in Florida, to almost $290,000 in Virginia.

Also, approximately 33% of our first quarter closings were adjustable rate mortgages. This compares to 11% in the first quarter of '03. Pre tax income in the first quarter 2004 increased 6% when compared to last year. Overall, this increase is a result of increased revenue, partially offset with increased expenses due to increased activity levels when compared to last year.

And the percentage of customers that reach a down payment assistance in the first quarter decreased to 10% versus 19% when compared to '03. In the first quarter, the average mortgage balance, only down payment assisted originations was $175,000 compared to $169,000 in '03. The majority of these customers are in our Indianapolis and Columbus market, and buy our entry-level product.

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 not repurchased any loans. Our mortgage operation captured about 85% of our business in the first quarter, a slight decline when compared to last year's 90%.

We believe this decline is due to increased competition as the mortgage refinance business is slowing. We constantly focus on our capture rate as M/I Financial only serves M/I Homes customers. Overall, our mortgage entitled business has produced 16% of total operating income during the quarter, slightly lower than last year's 17%. And we were very pleased with our mortgage operations results.

Our balance sheet summary, we constantly focus on our land investment, and as stated in our press release, we plan on purchasing over $300 million of land in '04. This compares to $220 million we had purchased in '03. We are working very hard on getting additional quality subdivisions open. Homebuilding inventory is at 3/31/04 increased 38 percent from a year ago due to our record year-end backlog and our land purchasing activities. Compared to a year ago, raw land increased 200 percent, land under development more than doubled and finished, un-sold lots decreased 15 percent.

In March 31, '04, we had $200 million of raw land, $75 million of land under development and $100 million of finished lots, and these changes are in line with our expectations. Our total unsold land investment in March 31, '04 is $375 million, which compares to our $415 million of net worth. We always strive to finance our longer term, riskier assets with equity dollars.

We owned 12,100 lots at March 31, '04 and have an additional 13,700 lots under our control. In total, today we own a three-year supply and control about a five-year supply of lots for a total under control of 25,800. This is about 8,000 more lots than we had a year ago. We feel very good about our land position given our strategy of internal growth and a very competitive land environment. As previously mentioned, our backlog units are up 16 percent and backlog sale value is up 28 percent versus a year ago, reaching all-time records for the company.

From a financing standpoint, we have a $315 million line of credit with $132 million borrowed at the end of the quarter. We had our semi-annual bankers meeting in March and BankOne continues to be our lead bank with twelve banks in our line. Our lines expires in 2006. We currently estimate our peak 2004 homebuilding borrowings under this line of credit to be about $270 million. This borrowing projection includes $300 million of land purchases, with the purchases expected to be about one third in each of our regions.

Our bank line does have an accordion feature that allows us to borrow an additional $60 million if we desire. Long term debt, as of March 31, '04 totalled $239 million, compared to $99 million at the end of '03s first quarter, and all periods include $50 million of sub-debt that matures in 2006.

Homebuilding debt to equity was 53 percent at March 31, '04, versus 23 percent a year ago, and homebuilding debt to capital was 35 percent versus 19 percent a year ago. This increase were anticipated as we continue to grow. Our interest coverage for the quarter remained very strong, at 11 times EBITDA.

EBITDA for the quarter was $34.3 million, a first quarter record for us. Interest incurred for the quarter was $3.2 million compared to $2.7 million in '03 first quarter. In March 31, '04, shareholders' equity was $450 million, with a book value per share of over $29. In the first quarter of '04, we repurchased 260,200 treasury shares at an average price of $38. At quarter end we had 3.5 million shares in our treasury at an average price of $17 per share for $16 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. Based on our strong quarter-end backlog of $840 million and our land position, we anticipate that 2004 will be our ninth consecutive record year. We currently estimate diluted earnings per share for 2004 to be 6.05 to 6.20 per share. This is an increase from the 5.95 to 6.10 per share guidance we provided when we released 2003 year end results. We will update this range as we release quarterly earnings in '04 as we have in the past.

This completes our formal presentation, we will now open the call for any questions or comments.

Thank you. Ladies and gentlemen, if you have any questions at this time please press the 1 key on your touchtone telephone. If your question has been answered or if you wish to remove yourself from the queue, please press the pound key. Our first question comes from Heidi Zellman(ph) with Credit Suisse First.

Actually, this is Mark Hrbek (ph) on behalf of Heidi Zellman.

Hey, Mark.

Good afternoon, gentlemen. Great start to the year. I just have a couple of quick questions for you. First off, can you give me the (inaudible) orders and traffic trends in the first quarter by month, and then maybe a summary of how/why(ph) the second quarter is progressing.

As far as for the first quarter, our sales were up 23 percent in January, they were up 13 percent in February and 12 percent in March. As far as traffic, Mark, traffic was up 3 percent in January, 8 percent in February and March traffic was down 10 percent.

OK, any indication on how April's coming along?

Well, it's not over and April's off to a pretty good start. I think that's about as much as we can say at this point. Our business for the most part is very strong in most of our markets and I don't know that we'll have a record April because the comps are pretty strong, but I think we'll have a very solid April, and obviously we'll know more in another week.

All right, thank you. One more quick one. Could I also get-you've already spoken about the total number of lobs(ph) at the quarter end. Do you have an expected community count by year end?

Mark, if you look right now, our community count is 140 compared to 143 a year ago. We hope our community count will continue, or will increase. If you look at our budgeted plans, our expectations it'll be in the 150 range by the end of the year.

OK, great. Thanks gentlemen.

Thanks Mark.

Thank you. (inaudible) if you have a question at this time, please press the 1 key on your touchtone telephone. Our next question comes from Greg Halter from LJR Great Lakes Revision(ph).

Good afternoon, guys. I think that's Great Lakes Review. I don't know what we're revising. Good quarter. Phil, wondered if you could provide some information on the restatements and whether or not they'll be data on a comparable basis going forward in '04 versus '03 so we can true-up our models, here?

Greg, there were a couple of minor changes and the '04 and '03 presentations are comparable. We did change '03 to match the '04 presentation. Bottom line, there was a reclass of some interest numbers from the interest line to the cost of sales line, and then the other change there was a netting, I think, of some numbers in the mortgage company segment, but again, they have been restated in there. But if you need anymore I'll be glad to have Anne Marie give you a call and they'll do that with you.

OK, then. Fine. And on your balance sheet, can you break out what your cash balance was at the end of the quarter?

Cash is never a whole item, always a net borrower, Greg. The cash number at the end of the quarter was less than $10 million.

OK. And in regards to total debt, including anything from M/I financial side, what would that number be in relation to the $99.3 million you had a year ago?

When you look at the $99 million a year ago, the mortgage company was 20 and when you look this year, the mortgage company number's about the same, it's 18.

OK.

The mortgage company line really is only used about the last week of the month and the first week of the next month until we get funded from all the mortgages.

Alright. And really that's all I have right now. Elliot has a question for you though.

Hey, let me just ride Greg's coattails and ask you, "In the past, at what point, as interest rates have gone up, have you started to feel the pressure in your business and why should this time be different or the same as it's been in the past?"

How are you doing Elliott?

Just fine, and you?

I'm doing fine.

Good. Congratulations on such a good quarter.

Thanks a lot. I'm not sure I can give you a real specific answer on that because to a certain extent the time that we're in right now is somewhat unprecedented. Interest rates are starting to go up but they're increasing from such a low base-if rates do continue to go up, which many believe they will, I think we share that view, as well, it will be as a result of an expanding economy, increased job growth and increased consumer confidence. The economy, with perhaps the possible exception of our industry, is not very strong right now and we actually believe, within limits that an increase in interest rate, if in fact influenced and supported these other economic conditions like job growth and consumer confidence, while we don't welcome an increase in rates, I'm not sure an increase in rates is really going to be a problem. You're seeing a shift now into ARMs and so forth from more fixed-rate instruments.

People have gotten very comfortable with historically low fixed-rate, or historically low interest rates. It's market by market, but certainly since the rates have started to creep up, in many of our cities we haven't even seen the least sign of a slowdown. In some markets, traffic has begun to slow down somewhat, so it's very hard for us to get a handle on right now, but by and large we expect this to be a very strong year for us. I don't know if that answers your question, but that's sort of the way we see it.

In your range of 6.05 to 6.20 for earnings this year, what type of interest rate environment are you assuming for the second half of the year?

Escalating.

To what?

We've got factored in, if rates go up 50-100 basis points, as Bob said, we don't think that will significantly hurt our business.

OK. Thank you.

Thanks a lot, Elliott.

Thank you. Once again, if you do have a question at this time, please press the 1 key on your touchtone telephone. We are not showing any more questions at this time.

Thank you very much for joining us and we look forward to talking to you again this July with our second quarter. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, you may now disconnect. Have a great day.