M/I Homes Inc (MHO) 2004 Q2 法說會逐字稿

Welcome to the M/I Homes second-quarter 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. (OPERATOR INSTRUCTIONS) 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. Joining me on the call today is Bob Schottenstein, our Chief Executive Officer and President, and Steven Schottenstein, our Chief Operating Officer.

First to address regulation for disclosure. We encourage you to ask any questions regarding issues that you consider being material during this call. Because, as you know, we are prohibited from discussing significant nonpublic items with you directly. We provided our 2004 earnings guidance in our press release.

And as to forward-looking statements, this presentation includes forward-looking statements as characterized in the Private Securities Litigation Reform Act of 1995. Any statements that are not historical in nature are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Please refer to our most recent 10-K, 10-Q and earnings press releases for other factors that could cause results to differ. Be advised that the Company undertakes no obligation to update any forward-looking statements made during this call, the audio which will be available on our website through July 2005.

As noted in our press release 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 SEC regulation G is posted on our website. This information can be accessed by logging on to the M/I Homes website at www.M/IHomes.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 Bob.

Thanks, Phil, and good afternoon, everyone. It was a great quarter for M/I Homes and we're very pleased to report and announce the best quarterly financial results in the 28 year history of our company. We achieved record results on many fronts including income, backlog of homes, gross margins, operating margins, revenues and closings.

In terms of closings we had record second-quarter closings, increasing from 961 homes delivered in the second quarter of '03 to 1,097 delivered in this year's second quarter, a 14 percent increase. For the 6 months ended June 30th homes delivered rose 12 percent from 2003's level. In terms of margins, our margins were at the high level of any time in the Company history with gross margins increasing 180 basis points to 27.6 percent, up from 25.8 percent in '03. Second-quarter operating margins also reached record levels increasing also 180 basis points to 15.3 percent, up from the levels in 2003 of 13.5 percent.

In terms of income, pre-tax income of $41.1 million generated or resulted in second-quarter record net income of 24.9 million, a 27 percent increase over last year's second quarter. Diluted earnings per share were up 31 percent, year to date our net income was up 19 percent over a year ago to $44.4 million.

In terms of backlog, our backlog units and our sales value of our backlog as of June 30, '04 represent the highest amounts in our 28 year history. Units reached 3,130 with a sales value of $887 million, corresponding to an average selling price of $283,000.

While backlog, closing, income and margins all reached record levels, we did experience a 16 percent decline in second quarter new contracts or sales with those levels falling from last year's 1,343 new contracts this year to 1,128. Year to date our sales for the first 6 months are off 2 percent from last year. There are a number of reasons for this decline and I thought I would take a minute to mention the most significant.

First and perhaps foremost, '03 presented and continues to present some very difficult comps for us. '03 was a record sales year for M/I Homes and in particular last year's second quarter was the strongest quarter of '03. Secondly, we experienced very strong sales in the first quarter which, in some respects, impacted our second-quarter business. By that I mean there are a number of communities in a number of our cities where are strong first-quarter sales tended to eat into what we would have expected to sell in the second quarter, thus resulting in the year to date sales being off only 2 percent.

Third, and perhaps equally significant, we have seen -- and we're not alone in this -- but we have seen a slowdown in our Midwest operations. Year to date our sales in our 3 Midwestern cities, Columbus, Cincinnati and Indianapolis, are down 17 percent from a year ago. The minimal job growth in these 3 markets is a major contributor to the slowdown in Midwestern operations. In addition, increased interest rates have had an impact particularly on entry-level buyers. There's no question we've seen a sluggishness and a slowdown in the pace of sales particularly at the entry-level.

Somewhat related to this, we've also seen an increase in the cancellation rates, again, most notably with our entry-level buyers all of which here in the Midwest has had an impact on total company operations. The other item which has contributed to our sales decline for the quarter and year to date has to do with what we would call regulatory delays which we have, despite our best efforts, experienced as it relates to the opening of new communities. In particular we had expected 10 new communities to open up during the second quarter and contribute to sales, the opening of which has been delayed and in virtually every case these communities still aren't open. Many will not open until later this year.

Of the 10 new communities whose delay has been impacted by zoning and other regulations, 5 of them or half are in the Midwest. We believe that these communities opened as planned, while we still would have experienced a decrease in sales in the Midwest, rather than seeing our sales down being 17 percent in the Midwest for the year to date we believe the decline would have been less than 10 percent. So while sales have slowed, the opening -- or the delay of the opening of new communities has exacerbated what would otherwise appear to be a more severe market slowdown.

And I should note that, as I mentioned a few minutes ago, these delays and the opening of new communities will impact our third-quarter sales as well, although once we hit the fourth quarter, it's our hope that we'll be running at full steam.

On the other hand, moving away from the Midwest but still talking about sales, we're very pleased with the strength of our business in Florida, North Carolina and Washington D.C. Second-quarter new contracts in Florida were up 33 percent compared with last year's second quarter which was a strong quarter in Florida for us. So despite the difficult comps in Florida, our business was still up 33 percent. Our North Carolina and Washington D.C. markets for the second quarter saw their sales increase 46 percent over '03 levels. We believe these increases compare very favorably, if not reflect us out competing the results which other builders have recorded in the Florida, North Carolina and Washington D.C. markets. So as it relates to that part of our business we're very pleased.

Overall cancellation percentage in the second quarter, as I indicated, we have experienced an increase in that, was 22 percent compared to 18 percent last year. As we have stated in previous calls, the overwhelming majority of our cancellations occur with entry-level product and in that -- with that the overwhelming majority of those results from financing and most occur prior to the commencement of construction. We are not a spec builder. Our spec inventory has not in any respect been meaningfully impacted by these cancellations.

It's clear we would rather not have them; we would rather report the sales. But the fact is as it relates to our spec business, at the end of June we had 162 specs in the total company in various stages of construction, representing $16 million of investment which we feel is a very manageable level and one that does not concern us in any way. Community count, I talked about the inability to open communities. It was down 5 percent to 135 communities at June 30th of '04, compared to 142 at June 30th of '03. Our budget this year was to open 59 new communities, 26 in the first half of the year, 33 in the second half. We actually opened 18 in the first half and still plan to open 60 for the full year. But as I stated, most of these will not be opening until the fourth quarter, and at that time we will be, as we would like to put it, running at full steam.

A few other comments about sales as it relates to July new orders and what we would like to discuss in terms of our outlook for the future. Last year's July and August were record sales months for us. In fact, we had a record third quarter of sales last year, and they posed very difficult comps. While we believe we will continue to see a slowdown in market conditions in the Midwest, primarily caused by what I referred to earlier as nominal job growth, we believe that condition will continue, particularly as it relates to entry-level purchasers. Entry-level business for us in the Midwest represents about 40 percent of our business. So when the slowdown affects the entry level, it has a meaningful impact on us.

Our current estimate is that our Ohio and Indiana sales activity will be off somewhere between 30 and 35 percent in July. By the way, that number would be closer to 20 percent if the new communities which we hoped to have open today were open. But we do believe that our Ohio and Indiana sales activity will be off for the month of July approximately 35 percent. Companywide for July, all of our operations, we expect our July sales to be down from a year ago, again a difficult comp, and we expect that when compared to July of '03's record level, which was 24 percent ahead of '02, that our July of '04 sales will be off approximately 24, 25, 26 percent, somewhere in there.

Our Florida new orders will also be down in the month of July, due largely to fewer active communities, primarily in Tampa where will be opening up a number of communities later this year, but the results will not be felt until the fourth quarter. In that respect, we anticipate a very strong fourth quarter of sales versus last year, due to these additional communities being open and more favorable comparisons.

As mentioned in our press release we fully expect and our goal is that 2004 will be a 9th consecutive record earnings year for M/I, closing approximately 3500 homes, which would be a very good year for us. In terms of 2005, it is our goal and our hope that that will be a 10th consecutive record earnings year for us, based upon our current backlog and what we see as our sales activity for the balance of this year, particularly in the fourth quarter. It is still our hope to sell and close at or near 5000 homes in calendar year '05.

We have significant land purchases planned for this year. Many have already taken place. By year-end, we hope to have purchased over $300 million worth of ground. It's important to recognize or at least to point out that 3 years ago, in terms of our total companywide land purchases, approximately half occurred in our 3 Midwestern cities. For calendar year '04, the $300 million worth of ground, 70 percent approximately of that ground will occurred in Florida, Washington and North Carolina. So that the percentage of land being purchased in the Midwest, and this is by strategic design, will be going from over 50 percent 3 years ago to approximately 30 percent of land purchases this year, and we are very comfortable with that strategy. We still fill there is ample business at very probable levels in the Midwest for M/I Homes, but we feel more bullish about the strength of our business in Florida, Washington and North Carolina.

Our company's net worth has grown from $200 million five years ago to more than $440 million today, and our financial position has never been stronger as we're poised for our 9th consecutive record year. I'll briefly review the 9 markets in which we operate, and then turn the call back over to Phil who will more thoroughly review our financial results. In terms of Columbus, Ohio, I mentioned the sluggish conditions in the Midwest. Notwithstanding, we're experiencing very strong margins and expect record results in our home base of Columbus.

Cincinnati, our sales were very strong in the first quarter. They've trailed off in the second quarter, again largely due to weakening demand, the impact that we believe largely by the little, if any, job growth in the Cincinnati market. Nonetheless, 2004 will be a very profitable and solid year for us in Cincinnati.

Indianapolis, we expect to deliver about 300 homes in Indianapolis this year, less than we had hoped for in the beginning of the year. Like Columbus, like Cincinnati, Indianapolis market is impacted by the current economic situations there. And even though business is difficult there, from a profit standpoint this should be the second best year we've ever had and we hope to have a better year next year.

Tampa will be a record year for us. Business there is very strong, our backlog is strong, our margins are strong. We will deliver approximately 30 percent more homes in Tampa this year than a year ago. We have a very strong land position there. Extremely excited about our future in Tampa. We expect to open up 10 new communities by the end of this year in Tampa, Florida. Tampa will be a significant contributor to the future growth of our company. We will close over 600 homes in Tampa this year and more in '05.

Orlando, Florida is having a record year for us as well. Very strong sales in the second quarter. The sales pace continues to be very brisk. Our sales for the second quarter more than doubled from last year's second quarter. Margins are very strong there, we'll have record results. Very strong land position. Expect to grow our Orlando business between '04 and '05 by more than 30 percent.

West Palm Beach will have a record year for us as well. Our closings are up over 40 percent from a year ago. We have for many quarterly periods struggled with our land position, but we have taken steps and have -- and made strides in improving our land position. It continues to improve. We expect to double our business in West Palm Beach in '05. Our margins there are among the highest in the company.

Charlotte, our sales in that market are up over 50 percent from the second quarter of '03 as we have continued to reposition, open better communities and clean up some old issues as a result of our management change that occurred there about 18 months ago. We expect improved results in the Charlotte market in '04 and hope and expect our sales and closing in '05 to be up nearly 50 percent, that's 5-0 percent from where they were in '04.

Raleigh, our sales for the second quarter were up 25 percent from a year ago. We expect to deliver around 200 homes in Raleigh this year and to do even better next year.

Finally, our Washington, D.C. business is very strong. Our sales were up over 40 percent for the quarter and first 6 months. Very strong margins. Continue to see very strong demand. We've significantly strengthened our land position there. Expect the market conditions to continue to stay strong there. Our prospects for '05 are very good with sales and closings expected to increase 50 again, that's 5-0 percent over '04's levels as we look to '05. And now, Phil, I'll turn it over to you to more thoroughly review the financial results.

Thanks, Bob. Revenue increase 17 percent in the second quarter and 13 percent for the first 6 months compared to the same periods in '03. Homes delivered in 2004's second quarter were 1,097 compared to 961 for 2003's second quarter. And homes delivered in 2004's first 6 months were 1,968 compared to 1,761 for 2003's first 6 months. This is a 12 percent increase in the first half units delivered. Our backlog units were 15 percent higher going into this year than the prior year. And during the first half of 2004 we closed 74 percent of our year end backlog compared to 2003 where we closed 76 percent of our year end backlog during the first 6 months.

Average sales price for the second quarter was 245,000 up from 241,000 for last year's second quarter and for the first 6 months the average sales price was 248,000 versus 239,000 in 2003. Gross profit dollars increased 15.5 million in the second quarter of '04 and 21 million for the first 6 months over '03. Outside land sales gross profit was $200,000 in 2004's second quarter compared to 1.5 million in last year's second quarter. Year to date we have had 700,000 of from outside land sales versus 4.2 million last year.

Margin percentage increased by 180 basis points in the second quarter and 110 basis points for the first 6 months of 2004 to 27.64 for the second quarter and 27.2 for the first 6 months. Our gross margins have been very strong in Columbus, our 3 Florida markets and Washington D.C. Our margin percentages, the highest ever for this period, also reflect the favorable impact of M/I Financial's results.

Our G&A cost in 2004's second quarter increased 3.5 million to 6.1 percent of revenue from 5.6 percent of revenue in the prior year quarter. This dollar increase came primarily from increased incentive related cost. We are a very incentive driven company with bonuses driven primarily from income and customer service ratings. And we expense these items as the income is earned. And through June 30th our income is up 19 percent over last year. Additionally, we have incurred higher professional fees resulting primarily from implementation of programs that are now required of public companies.

Selling expenses increased 1.7 million; however, as a percent of revenues selling expenses decreased 30 basis points to 6.3 percent for the quarter. The increase for the second quarter was primarily due to an increase in the number of homes delivered, increased in average sales price along with a slight increase in our percent of homes closing through third party Realtors. About two-thirds of our homes close through Realtors.

The co-op commission accounted for approximately 1 million of the absolute dollar increase and increased about 40 basis points as a percent of revenue. For the quarter our co-op percentage on closings increased to 1.74 of revenue from last year's 1.70. Also contributing to the dollar increase is a $600,000 increase in sales commissions when compared to the prior year primarily due to our increased revenue. However, sales commissions declined 80 basis points as a percent of revenue when compared to last year's second quarter.

Selling expenses increased 4 million for the first 4 months of 2004, co-ops and sales commissions accounted for approximately $3 million of this increase with the remainder primarily due to increased spending on marketing and promotions due to our slowdown in Midwest sales. Overall our SG&A expense increased to 12.4 percent of revenue in the second quarter and 12.1 percent of revenue for the first 6 months of '04 compared to 12.2 for the second quarter and 12.1 for the first 6 months of 2003.

Operating income increased to a second quarter all-time high of 15.3 percent of revenue from 13.5 in 2003's second quarter and a 15.1 percent of revenue for the first 6 months of '04 from 14.1 for the comparable period in '03. We are very pleased with these returns.

Interest expense increased 1.1 million for the second quarter and 1.7 million for the first 6 months of '04 compared to the same periods in '03 with the effect of increased average borrowings in the quarter of 141 million being offset by a lower average effective borrowing rate. For the quarter our average borrowings were 254 million compared to the second quarter of '03's 113 million. Additionally, we have capitalized more interest this year than the prior year due to higher inventory and a higher amount of land under development in '04 when compared to '03.

We had 16.6 million in capitalized interest on our balance sheet at June 30, '04, compared to 13.1 million last year and 14.1 million at 2003's year end. This is about 2 percent of 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 for both the second quarter and first 6 months of '04 is 39.5 percent compared to 39 percent for the same periods of last year. The increase in this rate primarily reflects an increase in state taxes due to a greater percentage of our profits being generated in higher tax states.

Net income increased 27.4 percent to a record 24.9 million for '04's second quarter. Net income for the first 6 months increased 18.8 percent to 44.4 million for 2004 and represents the highest first half of any year in our history. And diluted earnings per share for the second quarter increased 31 percent to a record $1.73 and 22 percent to $3.08 per share for the first 6 months of '04 compared to the same periods in '03. And we are very pleased to deliver this increase to our shareholders.

M/I Financial, which also includes our title operations, our mortgage and title operations revenue increased to 11.1 million in '04's second quarter compared to 5.6 million in last year's comparable period. The increase was due primarily to increased gains on mortgages and of servicing sales and an increase in the dollar volume of mortgages originated. We believe that due to our innovative mortgage products, along with our higher mortgage amount and the location of our mortgage products, we have been able to get higher prices for our mortgages.

Our loan to value on our first mortgages for the quarter was 84 percent in 2004, compared to 87 percent in '03. And for the quarter, 78 percent of our loans were conventional, with 22 percent being FHA/VA. This compares to 72 percent and 28 percent respectively for 2003's same period. The FHA maximum mortgage limits in the markets that we operate in range from 160,000 in Florida to almost 290,000 in Virginia. Also, approximately 39 percent of our second-quarter closings were adjustable rate mortgages. This compares to 11 percent in the second quarter of '03.

Our mortgage operations originated 19 percent interest only loans in 2004's second quarter. This compares to 13 percent in 2004's first quarter. Also, 60 percent of our second-quarter applications were adjustable rate mortgages. The average credit score on mortgages originated by M/I financial was 716 in the second quarter of '04 compared to 704 in 2004's first quarter. These scores compare to 703 in 2003's second quarter and 702 in 2003's first quarter. The percentage of customers that received down-payment assistance in the second quarter decreased to 11 percent versus 19 percent when compared to '03. In the second quarter, the average mortgage balance on these down-payment assisted originations was 168,000 compared to 169 in '03. The majority of these customers are in Indianapolis and Columbus markets and buy our entry-level product.

We sell our mortgages along with our servicing rights. Our contingent repurchase obligation due to loan delinquency is primarily limited to the first couple of payments being made timely. In year-to-date, we have not repurchased any loans. Our mortgage operation captured about 85 percent of our business in the second quarter, a slight decline when compared to 2003's 90 percent. We believe this decline is due to increased competition as the mortgage business overall is slowing. We constantly focus on our capture rate as M/I Financial only serves M/I Home customers.

Pretax income in 2004's second quarter increased 4 million when compared to the same period in the prior year. The increase is the result of increased revenue items that I have discussed and partially offset with increased expenses. Expenses have increased due to increased volume, additional incentive expenses due to increased profitability, and marketing expenses in the Midwest. Overall, our mortgage and title businesses produced 19 percent of total operating income during the second quarter compared to last year's 12 percent. We were very pleased with our strong mortgage operations results.

On the balance sheet side, home-building inventories at June 30th, '04, increased 44 percent over last year and increased 32 percent from year-end due to our record backlog and our land activities. Compared to a year ago, raw land increased 148 percent, land under development increased 71 percent, and finished unsold lots decreased 16 percent. At June 30th of '04, we had 259 million of raw land, 130 million of land under development, and 72 million of finished unsold lots. As far as total dollars invested, these changes are in line with our expectations. We did, however, expect to have more land under development and more finished lots and less raw ground than we currently have. Our total unsold land investment at June 30th of '04 is 461 million, which compares to our 440 million of net worth. We always strive to finance our longer-term riskier assets with equity dollars.

We constantly focus on our land investment. As Bob mentioned, we plan on purchasing about 300 million of land this year. We have purchased 171 million of land through June. We expect the 2004 breakdown of these land investments to be approximately 35 percent in Ohio and Indiana, 32 percent in Florida, and 33 percent in North Carolina and Washington D.C. We own 14,500 lots at June 30th of '04, and have an additional 10,600 lots under our control. In total today, we own a 3-year supply and control about a 5-year supply of lots for a total under control of 25,100. This is about 5,700 more lots than we had a year ago.

From a financing standpoint, we have a $315 million line of credit with 189 million borrowed at the end of the quarter. BankOne continues to be our lead bank with 12 banks in our line, and our line expires in 2006. We currently estimate our peak 2004 home-building borrowings under this line of credit to be about 275 million. Our bank line does have an accordion feature that allows us to borrow an additional 60 million. Long-term debt at June 30th of 2004 totaled 291 million compared to 163 million at 2003, and all periods include $50 million of sub debt that matures in 2006's third quarter. Home-building debt to equity was 62 percent at June 30th of '04, versus 39 percent a year ago, and home-building debt to capital was 38 percent versus 28 percent a year ago. We expect our debt to capital ratio to peak at 44 percent in 2004's second half.

Our interest coverage for the court remained very strong at 12 times EBITDA. EBITDA for the quarter was 44.2 million, a second-quarter record for us. Interest incurred for the quarter was 3.9 million compared to 3 million in 2003's second quarter, and 50 million of our interest rate swaps expired in early July. This will reduce our interest expense on this 50 million of borrowing by approximately 400 basis points. At June 30th of '04, shareholders' equity was 440 million with a book value per share of over $31. In the second quarter of '04, we did not repurchase any outstanding shares. At quarter-end, we had 3.5 million shares in treasury at an average price of $17, with 16 million available to repurchase from our current Board approval. In July thus far, we have repurchased approximately 40,000 shares of stock.

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, we anticipate that 2004 will be our 9th consecutive record year. We currently estimate diluted earnings per share for 2004 to be 6.15 to 6.30 per share. This is an increase from the 6.05 to 6.20 per-share guidance we provided last quarter, and is an increase of over 10 percent from last year's record of 5.51 per share. We will update this range as we release earnings as we have in the past.

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

(OPERATOR INSTRUCTIONS) Ivy Zelman with Credit Suisse.

It's actually Carlos Ribeiro on behalf of Ivy. You guys did a pretty good job in giving us a lot of detail. Just a couple clean-up items. Bob, you mentioned your spec count at quarter-end of about 152 specs valued at about 16 million. Can you give us the comparison of what it was a year ago?

Yes, at June 30th of '03, Carlos, it was 105 units and 9 million of investment.

That increase, is it safe to say that the majority of that spec increase is in the Midwest, or is it easily spread out?

The majority is in the Midwest.

Phil, just a couple clean-up items on the balance sheet. What was your cash balance at the end of the quarter?

I'll have to grab that. Do you have another question on the balance sheet?

That is pretty much it, actually. Again, you guys did a pretty good job with all the detail. I appreciate it.

Looks like it was about $10 million, Carlos.

Great. guys. Thank you.

Elliott Schlang with the Great Lakes Review.

Good afternoon and good quarter. You've done a wonderful job over the years of showing the growth that you've had without making acquisitions. Now with some at least current disillusionment maybe in the Midwest, are you thinking of making any acquisitions or at least looking at acquisitions more aggressively to broaden into new geographic areas?

A couple of things on that. First of all, even though market conditions in the Midwest have weakened, we are not disillusioned with the Midwest and I'm not sure if that's what you meant anyway. But we still think the Midwest is a very, very sound place to do business. We're operating at very profitable levels in the Midwest, and even with the business where it is today, it's still at a very, very good level, and when we get all of our new communities open, we're very confident that the Midwest will continue to be a good place for us.

A couple of years ago, we strategically set out to grow the business not on the back of the Midwest but in addition to the Midwest, and hence, that's why between 65 and 70 percent of our land purchases are outside of the Midwest this year. We believe we have tremendous growth opportunity within our company to grow the business, hopefully a minimum of 10 percent per year, without moving into new markets or acquiring any other builders. Having said that, we always look, we continue to look, and this is not something -- if the right opportunity presented itself, hopefully we would have the wherewithal to pursue it.

It's something that we have from time to time looked at builders within markets that we're in, and occasionally we peak at builders of markets that we're not in. So our primary strategy is to grow internally. Our secondary strategy is to pursue and to continue to look at possible acquisitions.

Thank you.

(OPERATOR INSTRUCTIONS) Greg Halter with the Great Lakes Review.

I have a question for you about raw materials, specifically lumber, steel, copper; they have been soaring. I think lumber keeps on going up. Just wondering how that factors into your thoughts on the ASPs as well as margins?

First of all, lumber has stabilized recently, but lumber prices have actually dropped in a number of our markets since the beginning of the year. I missed the last part of your question, though.

I'm just wondering how those get passed on to the potential customers and what kind of impact, if any, that has on your margins?

Several things. Number 1, up until recently we've been very successful in passing increases on as we have had to absorb them, hence, the expansion of our margins. With business slowing down in the Midwest on a subdivision-by-subdivision or community-by- community basis, we're probably going to see a little bit of margin erosion in certain areas within the Midwest. And the other side of it is, I think we talked about this in the past as well, but I think it bears repeating, we go to great lengths to price protect our backlog. By that I mean we have long-term contracts with suppliers that fix price, set price, prevent price increases, to the extent we have a sold house behind it.

So, having said all that, there are times, however, where there is movement, and if we can't price protect, historically we've been able to pass it on. But I suspect we see a little bit of margin erosion going forward in the Midwest. I don't think there's much question about it. But on the other hand, we continue to see margin expansion in Florida, in Washington, in North Carolina. The extent to which one will offset the other remains to be seen. We also have a very aggressive national account program where we have various relationships with more than 40 different national vendors who provide products and materials to us where we seek to get best pricing. But I hope that answers your question. I'm not sure if it does.

Yes, that's fine. There's a company out there called Universal Forest Products that's, I guess, doing some training type work. Is that the type of situation that you're entered into now with someone like that, or look at?

I'm not familiar with that. If you want to send us information (indiscernible), we could look at it, but it's not something we're familiar with.

What we do in our bigger markets like Columbus, for instance, Greg, is that we do have a partnering relationship where we get together with our vendors periodically, and that person does the majority of our business. However, we don't put all of our eggs in one basket. We work very close together. And as Bob says, we try to stay price protected and make sure we right-size what the demand is with our business. But we've been doing that for a little while and that seems to be working very, very well.

And that relationship Phil is referring to actually is even more macro than just Columbus. It extends to both Indianapolis and Cincinnati where we have sort of a regional relationship with a framing and lumber supply company and, as a result of that, hopefully we're getting best pricing, and we also get rebates on a quarterly or periodic basis, depending upon what happens with lumber prices.

Along those same lines, your ASP was about 244, I think you said. In the backlog it's 283. I presume we can expect to see a higher ASP in the homes sold as we go forward?

Yes, I think you will see that, Greg. I think with rates still being historically low, you have consumers still selecting a number of options, but we are working very hard on keeping our prices affordable. But in the short term, you will see that average sale price going up.

I think the other thing, and it's a really good point, Greg, is the sluggishness in sales has occurred largely at the entry level in the Midwest, which is not the majority of our business, but it's still a slice, a decent slice of it. And as that business weakens off or weakens and the other parts of our business stay strong or perhaps even get stronger as we're seeing outside of the Midwest, I think that can begin to distort the average selling price a little, but whether that's a short term or long-term situation remains to be seen.

I know in the past you've commented on traffic levels by month. Do you have those same sort of data points?

Yes, I have that. When you look at traffic in April, traffic was down 11 percent, and in May traffic was down 26 percent, and in June traffic was down 28 percent. That's companywide. Now, in the Midwest, traffic in general was down about a third.

Okay. If I could bother you for some other financial stats from the balance sheet. The first one isn't. Do you have cash flow from operations for the quarter, Phil?

I don't have that handy, Greg. I think it was about a -70 million because of our inventory purchases, because we had bought this land this year of about 170 million for the first 6 months. We'll call you back off-line and give you that data.

Okay, that would be great, and there are some other balance sheet items as well that you may not have in front of you also, that I can ask.

We'll give you a call on that.

Okay, great. Thanks.

Stephen Kim with Smith Barney.

Good job here with a pretty thorough rundown, but I had a couple of questions for you. First of all, one of the things that we've heard builders talk about is that in times when things get a little bit tougher, their increased scale and sort of dominance in the local markets plays to their advantages. It would seem that perhaps if things are slowing a bit in the Midwest, this might be a time when you might be sort of calling around to some of your friends. In that regard, I was wondering, can you talk about your options that you have negotiated in some of those markets that our seeing some difficulty, let's say, in Ohio? Are you pretty happy with sort of the rates that you've negotiated on those options? Are you perhaps -- have you walked away from any of those options? Are you perhaps renegotiating some of those options? Can you talk about that a bit?

The short answer to your question is, this is a time of opportunity, we believe, and it's also a time to be very prudent, particularly in the Midwest. Most of our deals are structured as options, as you have pointed out. There have been a few deals that we could -- not yet, we haven't yet, but that we could and we may cancel, just because of the market if we're not able to negotiate an appropriate modification. We're starting to see other builders very candidly cancel or walk away or change their mind on what they were committed or had indicated they were going to do. We're seeing it on a few deals in Indianapolis. We're certainly seeing it on some deals here in Columbus, and we're starting to see it on a deal or two in Cincinnati.

So I think these things tend to come in in phases, and I think that we're in a little bit of a phase pace like that. The short answer is we're going to be very, very prudent. The good news is on the planned land purchases for the Midwest, for the most part we're in the driver's seat. It would be my hope that we would make 90 percent of them, because I think they're in the long-term excellent transactions for our company.

The Midwest is not closing up the door and going out of business. I think sometime all of us tend to overreact to both good news and bad. But we're evaluating it, and there probably will be a deal or two that we will cancel. I don't know if that really answers your question. But I like the position that we're in because they are options, as you say, and the option is ours, not someone else's.

Right. And that's a key point. With respect to labor rates, in many parts of the country we've seen builders that have been unable to sort of keep pace with the strong demand and so you see backlogs burgeoning and so forth and has resulted in delivery times getting extended. I would think that perhaps with things going the way they are in the Midwest, that's another area where you could perhaps find yourself in actually a competitively advantaged position. Are you seeing an ability -- are you seeing labor freeing up a bit? And how quickly do you think that might translate itself into perhaps more favorable terms on the cost of goods side?

It might be a little too early to tell. I do think though that with what has been reported by other public builders as it relates to their Midwest business, the national results of that is going to be seen in a number of areas and one of the earliest is going to be in a weakening of the demand for land development. One area where I think there's been significant inflation is on the cost to develop raw ground. And it is our hope, it's something that we're working on literally right now, that we're going to see hopefully a little bit of a fallback in pricing on pipe and bid work and so forth to create communities and install streets and water and sewer lines.

As far as framing and plumbing and electric and so forth, it's a little too early to tell. There's rumors out there, but I'm not sure that it would be imprudent to comment on whether or not any of them are going to happen or not. I don't know that we have any hard reliable information.

In your opening remarks you had talked about regulatory delays also being a factor as well as (indiscernible) in the Midwest which we already knew about. Can you quantify the impact of the regulatory delays in any way?

Yes, I can. First of all it's hard. Had we been open how many units would we have sold? You never quite known for sure. But I really believe that we have clearly 10 communities whose opening was scheduled for the second quarter, many of which are still not open yet and many of which will not even open until late this year. Had the -- 5 of them are in the Midwest, had these communities been open, while I believe we still would have seen down sales in the second quarter, rather than a 16 percent decrease I think the number would have been somewhere between 8 and 11 -- 8 percent, 9 percent, 10 percent. And in fact, I think year to date our sales would have been up over a year ago. Not significantly, but slightly. Year to date our sales are only down 2 percent from a year ago.

And I think we'll continue to see that in the third quarter as well. I don't know if it's somewhere between 50 and 70 sales that will probably be taken off of our books in the second quarter as a result of these delays. That would be my number, maybe 60. And it's hard to know. We have two very large communities that we're very bullish on, that happen to be here both in Columbus that we had fully intended to have open by now. And they're large master plan communities with multiple product lines and one won't open until late this year and the other one will open sometime mid third quarter. It's hard to know exactly what the true impact of that delay is, but it's probably somewhere, when you look at all 10 communities combined, somewhere between 50 and 70 sales for the second quarter.

If you were to look at some of those communities that you didn't bring on yet, are you seeing that -- are you expecting when you finally do open them, to bring them out at a price point which is lower than you had originally intended or do you believe -- or do you have reason to believe that demand at those particular communities will be sufficient that when you finally do open them up you're going to open them up roughly similarly in terms of pricing and amenities and so forth and incentive as you were going to this past quarter?

The one in Raleigh I think our margins will be higher; the three in Tampa I believe our margins will be higher; the one in Washington D.C., it's actually in Maryland, I believe when we do open up, which won't even be till next year frankly because of regulatory delays there, I believe there it will -- the delay will actually (indiscernible) to our long-term financial benefit. The five that are in Columbus, when they open -- they will open either at the scheduled price point with perhaps at maybe 1, 1.5 percent gross margin lower and that may be by our own design rather than cost increases. We may simply elect what our original target -- from where our original target margin was we may elect to open up at a slightly lower margin.

But 100 basis points you're saying off of the Company average of like 27.5 or something?

Yes. No, no, no, no, no, not the Company average of 27.5, probably the -- because the Midwestern average is a little bit lower than that.

(multiple speakers) when you're looking at 27 percent, you're looking at the benefit of M/I Financial and some other things. When you look at just the pure home building side in total you're looking at about 25 percent. So you take maybe 100 basis points off that and also, as we've said, we are spending a few more promotional dollars and those type things due to the slowdown. So that does bring the (indiscernible) down a little bit. But on the other hand we have been seeing increasing margins in all three of our Florida markets and Washington D.C. has stayed very strong and the Carolinas are improving. So we're still hoping that our margins overall will remain very strong. I'm not saying they're going to be as high as they are now, but we do think that we're doing a pretty good job in the other areas outside the Midwest.

Last question, and I know I'm taking up a lot of time, I apologize. Regarding that issue of increased promotional activity, SG&A I think you said was running around 12.4 this quarter. I guess -- that numbers seems a touch on the high side. And I know that a lot of the builders over the last few years with things being so strong have taken advantage of that to make some discretionary let's call it SG&A expenditures.

I guess my question is -- is there an opportunity to perhaps see SG&A, to see the company get a little more aggressive on SG&A? Because normally one would suppose that if you were just running steady as she goes, that if your volume slows that you're not going to have as much revenue to spread the overhead over. But in this case for the home builders I would expect that perhaps you might have some ability to sort of ratchet that SG&A down somewhat and so your overall SG&A rate might not be going up that much going forward.

Yes, and if you look at me the last 5 years, I was below 12 percent in 2000. When you look at '01 through now I've been running a little higher than that. I think there are some opportunities there. But one thing we have been hit with, all public companies, we're probably going to spend this year $1 to $2 million, I would say, on the Sarbanes-Oxley 404 public company type work which we're required to do as a public company. And there's also some other fees and expenses there. And it's markets that closed. I think I would have had a really good chance to be below 12 percent this year, with our budget to be below 12 percent this year. However, having spent a few more promotional dollars in the Midwest we haven't been able to do that, but I do think there are some opportunities there, I agree with you.

I guess what I was addressing was if 2005 volumes, closing volumes are down, let's call it 5, 10 percent or whatever, might there be a reason to expect that versus '04 your SG&A rate as a percentage of sales might not necessarily be up much?

One thing we've been looking at for a month or two already is that with our Midwest business down we are actively looking at rightsizing our expenses to those run rates.

You know that we will.

And that's something we want to get implemented this year so we can get the benefit of that rightsizing for next year.

The expenses will follow the revenues, and if the Midwest revenues drop then there will be an adjustment of expenses. By the same token, we're expecting very significant unit growth outside the Midwest. And we'll be -- the question is whether -- how the whole thing shakes out in Dallas. If there's slight margin erosion in the Midwest will that be made up with margin accretion in Florida and Washington and so forth? If there are layoffs and reduction in SG&A in the Midwest, will that be offset by increased staffing as a result of significantly more business in Orlando, significantly more business in Tampa? I think our operation is going to come -- be up at least 50 percent in Washington D.C. next year, it's going to take more people. It's a little too early to know how it's all going to shakeout because there's still a lot of the story to be told.

But, as Bob just stated, this year we're going to close over 600 in Tampa, next year we expect to be over 700. In Orlando this year we're going to close 400, next year we expect to be over 500. Palm Beach we expect to basically double our business from a little over 100 this year to over 200 next year. And we expect D.C. to be up 150 or 200 houses next year. So we expect to pick up 400, 500, 600 homes just based on the land positions we have. And the subdivisions opening we have planned, we expect to pick that up even if the Midwest does stay soft and hopefully there will be some stabilization, maybe even some improvement there.

We're still looking to sell and close somewhere hopefully near 5,000 homes next year.

Got it, great. Thanks very much, guys.

Adam Ingleberg (ph), Silvercrest.

I'm just wondering if you guys slow down the land purchases just a little bit, then you can probably generate some cash flow to repurchase a ton of stock at 6 times earnings and probably still purchase enough land to maintain everything, grow the franchise. And I'm wondering, how do you think about capital utilization in terms of basically a way to generate returns for shareholders with no operating risk whatsoever versus taking on market risk and operating risk by buying all of this land. Keeping in mind, of course, that you've been very successful historically, but it just seems that the returns or repurchase are so compelling here that maybe you'd want to split the funds?

That's a very good question. It's something we talk about constantly. And as I'm sure you know, the land we're looking at today tends to be land we buy 6 to 18 months away and then that doesn't generate any closings for us for another 6 to 12 months. So you're making some long-term decisions there. And when you look at our land purchases, we basically purchased $90 million 2 years ago, 220 last year and 300 this year, knowing the plan was to continue to grow the business, as Bob said, hopefully at lease 5-10 percent a year in our existing markets.

And as we've conservatively grown the company with network doubling its 5 years, we've had the resources without leveraging the Company too much to make the land purchases. But also the last few years we've had a very, very active stock repurchase program. As we said, if you look today we have about 3.5 million shares in our treasury and we have bought some stock in July. Today with book value of about $31 a share and the stock trading only slightly higher than that, and about a 6 PE (ph) we definitely do feel the stock is undervalued. And we do have an active stock repurchase program.

But on the other hand, we have to make sure that we have adequate capital to fund our land purchases and also build our production houses. So that's something that we balance off, we talk about it every quarter with our Board. And we're very, very concerned about good returns. We've been fortunate enough to generate returns on equity exceeding 20 percent for the last number of years. And so we've just continue to look at that. But if you look at us right now with debt to cap of a little less than 40, getting to like 44 percent in the fourth quarter of this year, we just need to be very prudent, as Bob stated, about land purchases but we will consider and continue to look at stock repurchases.

The other thing on that and just to echo some of what Phil said, we believe our stock is undervalued, frankly we believe many of the builder stocks (indiscernible) the industry continues to be undervalued. And notwithstanding the fact that there appears to be recent reports by builders of a slowdown in some cases negative sales comps from a year ago, buying land remains extremely competitive. And it should not be taken out of context. Good sites are hard fought and there is tremendous competition in the marketplace for the so-called A and AA and AAA locations. And that continues. And we'd like to believe, time will tell, but we'd like to believe that all the deals we're working on are very strong land deals and we wouldn't have put them in the contract in the first instance had we not believed that. And we still remain very, very high on the land at least -- well over 90 percent of the land that we're under contract to acquire, or at least under option to acquire. So it's a constant -- it's a great question, it's a constant balance of the two.

Thank you very much.

I'm not showing any more questions at this time.

Well, we appreciate you joining us and we look forward to talking to you again the next quarter.

Thank you.

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