M/I Homes Inc (MHO) 2004 Q3 法說會逐字稿

Welcome to your M/I Homes third-quarter conference call. (OPERATOR INSTRUCTIONS.)

It is my pleasure to turn the floor over to Mr. Phil Creek. Sir, you may begin.

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

First, to address regulation and fair disclosure, 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.

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 risk and uncertainties that could cause actual results to differ materially from those in the forward-looking statement.

Please refer to our most recent 10K, 10Q, and earnings press release 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 of which will be available on our website through October of 2005. And, 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 onto the M/I Homes website at www.mihomes.com, clicking on the Investor Relations section of our site and selecting Non-GAAP Financial Information Reconciliation.

Now we'll turn the call over to Bob.

Thanks, Phil. Good day, everyone. We are very pleased to report that we had another record-setting quarter and that we are well on our way to our ninth consecutive record year. For the quarter, our diluted earnings per share reached a record $1.57, up 20 percent over 2003's third quarter and revenue and net income were up 18 percent and 16 percent, respectively, over the comparable period from a year ago.

As stated in our press release, these results reflect and take into account a 21-cent charge as a result of the early repayment of our subordinated debt. We're very pleased with having repaid that debt and we feel it's very important in terms of the improvement of our capital structure going forward. Excluding that 21-cent charge, however, our diluted EPS would have been up nearly 36 percent for the quarter. All in all, a very, very strong financial performance for us.

Homes delivered in the third quarter was 1,135, an 8 percent increase over 2003's level. And for the 9 months ended September 30, we delivered a record 3,103 homes, up 10 percent from 2003.

Our gross and operating margins for the third quarter were also at a record level, the gross margins increasing 20 basis points to 24.7 percent and third quarter operating margins increasing 50 basis points over the '03 levels to 12.8 percent.

In terms of backlog, the backlog of homes at the end of the quarter was at 2,966 homes, with a sales value of $866 million, average sale price per home of $292,000. The sales value and average sale price are records for this period. Backlog of homes at September 30, 2003, was 3,123 units, with a sales value of 789 million.

In terms of sales, new contracts for 2004's third quarter stood at 971, representing a 14 percent decline from 2003's record third quarter performance of 1,127 sales. For the first 9 months of this year, our sales stood at 3,411, a 6 percent decrease over the first 9 months of 2003.

On the other hand, our new contracts for the month of September increased 11 percent over 2003 September, while new contracts in July and August were down 29 percent, 20 percent, respectively.

To take a minute to elaborate on this, conditions in the Midwest continue to be challenging. It's well documented. The little, if any, job growth -- in fact, in many -- in some of our Midwestern markets, the job growth is negative today and these conditions continue to pose challenges for homebuilders.

Having said that, we did see some improvement during the month of September and we're continuing to see that improvement as we open up a number of new communities in the Midwest that were slated to open earlier this year that are now just getting open.

The hurricanes in Florida and in North Carolina, with some of the collateral damage from those hurricanes, did have some impact on our business. Having said that, in Florida, our business is very strong. We are in the process of getting a number of new subdivisions open, the opening for which have been delayed for reasons beyond our control, regulatory delays and so forth.

And our business in North Carolina and Washington, D.C., continues to outpace 2003 levels significantly. And in particular, for the 9 months ended September 30 of '04, our sales in Florida were up 14 percent compared to a year ago. And in North Carolina and Washington, D.C., our sales were up 31 percent compared to a year ago. And we expect to see that same level of improvement going forward.

Community count, I talked about regulatory delays in opening up new communities. Our community count stood at 130 communities at the end of the quarter versus 140 a year ago, below expected levels. While it continues to take additional time to get subdivisions open during regulatory delays, this problem is not unique to us. The delays, in virtually every instance, are beyond our control and ultimately, these jobs will come open and when they do, these are projects that we're very excited to open up for sale.

For the year, our original plan was to open up 59 new communities with our expectation being that the majority of them would be opening during the second half of the year. We now estimate that we will be opening 50 new communities this year. About half of the shortfall will occur in Florida, although the communities that are delayed will be open very quickly after the first of the year, in the early part of '05.

We currently estimate that at year end, we will have 130 communities, on a net basis, open, compared to 135 a year ago.

When I mentioned our sluggishness in the Midwest, I want to elaborate also -- elaborate further by also pointing out that we'd expected to open up 10 new communities in the Midwest during the second quarter -- or 10 new communities, I should say, during the second quarter, 5 of which were in the Midwest. Let me clarify that again. We expected to open 5 new communities in the Midwest during the second quarter, some of which are just now getting open. That contributed to our down sales in the Midwest, although the primary contributor was clearly the slowdown caused by the lack of job growth and overall challenging market conditions.

Cancellations, our percentage for the third quarter was 21 percent, slightly down from 23 percent a year ago. As previously stated in virtually all our prior calls, the majority of our cancellations occur with our entry-level product. Virtually all of these cancellations result from financing issues and most occur prior to commencement of construction. We are not a spec builder. We build primarily to contract. At the end of September, we had, in the total Company, 181 specs in various stages of construction, representing about a $20 million investment.

Just a few comments on our outlook before I talk about the markets in particular. The challenging market conditions in the Midwest, we expect to continue, frankly, at least for the next several quarters and perhaps beyond.

Having said that, as we have begun to open some of our new communities, which we think are some of the best we've ever had, in Columbus, Indianapolis, and Cincinnati, we're seeing some very, very good results with these newer jobs. As far as Florida and Washington, D.C., the demand is very strong and our business continues to improve in North Carolina.

As indicated in our press release, we will undertake record land purchases this year of nearly $300 million worth of ground, compared with land purchases last year, which at the time, were a record, $220 million worth of ground. By design and by strategic initiative, 70 percent of these land purchases will be occurring outside the Midwest, which is where we expect, on a go-forward basis, most of our growth to occur.

We -- in terms of sales, as I said, we were pleased that for the month of September, our sales outpaced last year's level and we expect to see continued sales improvement in our operations through the fourth quarter of this year.

This will be a record year for M/I Homes in terms of closings. Our goal initially was to close 4,500 homes. Because of the impact of the Florida hurricanes,or largely, I should say, because of the impact of the Florida hurricanes, we're going to drop some closings in Florida in the fourth quarter. We will pick them up right after the first of the year. And largely, as a consequence of that, we expect to close somewhere between 4,350 and 4,400 homes, representing a minimum 5 percent increase over last year. We still expect to exceed our original target income and as a result, have maintained our earnings guidance.

Moreover, as we indicated in our press release, with the strength of our business in Florida and in Washington and the continued improvement in North Carolina, we fully expect to increase units by a minimum of 15, that's 1-5, percent in each of the next 3 years.

Let me just briefly go through the markets and then I'll turn it back over to Phil for a more detailed discussion of our results.

Columbus, we have very strong margins and strong results, although, as I have mentioned several times during this call already, challenging sales conditions. Our sales were down 20 percent from '03's record third quarter. However, during September, our sales increased 25 percent over last year as we begin to open some of these exciting new communities that I referred to.

We continue to focus on our product offering. Our land position's very strong. We're being much more selective in our land transactions going forward, for the reasons that I articulated earlier in terms of the market. And we fully expect 2004 to be another record year for M/I Homes in Columbus.

Cincinnati, our sales for the quarter were down, but for the year, were still up 25 percent over last year's level. That market also was challenged, although the opening of some new communities have really spurred our business there. We anticipate closing around 300 homes this year, comparable to last year's level and, for the year, should have a very solidlyprofitable year in Cincinnati.

Indianapolis, another challenged market in the Midwest. Our backlog is down about 25 percent from a year ago. We expect to deliver about 300 homes. This will be our third best year in Indianapolis in the face of what are some difficult conditions and all in all, we're pleased with our performance there.

Moving to Florida, Tampa will have a record year in '04, with closings up about 10 percent from last year. We had hoped to have a few new communities open at this point, but we have encountered delays with permitting and also delays associated with closings due to the impact of the hurricanes, and the inability to get subcontractors and inspectors to do what's necessary to complete, properly, homes.

We will probably be off about 50-or-so closings from our plan in Tampa, but all of these should be picked up right after the first of the year. Our margins and our returns in Tampa are superb. Average sale price of backlog is about $250,000. Land position, very strong. Very excited about our future in Tampa, expect a minimum 20 percent year-over-year unit growth in Tampa for the next 2 to 3 years.

Orlando will also have a record year, despite closing delays caused by the hurricanes. Similar to Tampa, we expect to be down somewhere around 50 closings, but again, should pick all of these up right after the first of the year. We have had very strong sales in the third quarter, up almost 75 percent from last year's third quarter. In backlog, our units are almost double from what they were a year ago. Our average selling price in backlog is right around $260,000 with very strong margins and expect record results. Our land position in Orlando is also very strong and we expect a minimum 20 percent year-over-year unit growth in Orlando for the next 2 to 3 years.

West Palm Beach, we will have a record year in '04. While our sales for the quarter were down, due to fewer open communities, sales for the year, up over 10 percent. Our backlog is up almost 40 percent from a year ago. And while land continues to be a real challenge for all homebuilders in West Palm, we have improved our land position and we're very excited about a number of new communities that we are in the process of getting open. Our margins in West Palm Beach are the strongest in the Company. We will close around 100 homes this year and should close over 200 homes next year in the Greater West Palm Beach market.

Charlotte, year-to-date, our sales in this market, rather, I should say, are up over 20 percent from the third quarter of '03. Backlog units are up 15 percent from a year ago. We expect much improved results in '04 from where we were in '03 and we also expect to see continued improvement in Charlotte in '05, with significant improvement in '06.

Raleigh, we have worked hard and have been successful in improving our land position. We are particularly excited about a couple of recent parcels that we have tied up that could significantly increase our unit deliveries in Raleigh, commencing about 12 to 18 months out. Our closings are up 10 percent from a year ago. We expect to deliver slightly in excess of 200 homes this year in Raleigh, with very significant improvement beginning in early '06.

Washington, D.C., sales are up over 30 percent year-to-date. Our units of backlog are up over 30 percent year-to-date. The average selling price of backlog stands at around $600,000 a house. Closings were up over 20 percent in the third quarter from a year ago. Very strong margins, very strong operating results. We have meaningfully increased our land position in the Greater Washington market. Very excited about our prospects here. We have already purchased over $50 million worth of ground in the Washington market thus far in '04. We continue to see excellent market conditions, expect a minimum 20 percent year-over-year unit growth in the Washington, D.C. market for each of the next 3 years. With that, I will turn this over to Phil.

Thanks, Bob. Revenue increased 18 percent and 15 percent for the third quarter in 9 months ended 9/30, versus the same period of '03, reaching record levels and homes delivered in '04's third quarter were 1,135, compared to 1,048 for 2003's third quarter. Homes delivered in 2004's first 9 months were 3,103 , compared to 2,809 for last year's first 9 months. This is a 10 percent increase in units delivered year-to-date.

Average sale price for the third quarter was 271,000, up from 246,000 for last year's third quarter. And for the first 9 months, the average sale price was 257,000 versus 242,000 in '03.

Gross profit dollars increased 12.2 million in the third quarter of '04 and 33.4 million for the first 9 months over '03.

Outside land sales gross profit was 241,000 in '04's third quarter, compared to 87,000 in last year's third quarter. Year-to-date, we have had 919,000 of profit from outside land sales, versus 3.9 million last year.

Despite increases in warranty costs and inclusion of certain costs associated with the Florida hurricanes, gross margin still increased by 20 basis points in the third quarter and 80 basis points for the first 9 months of '04, to 24.7 for the third quarter and 26.3 for the first 9 months. Our gross margins have been very strong in our 3 Florida markets and in Washington, D.C.

Our G&A costs in 2004's third quarter increased 2.4 million. However, as a percent of revenue, G&A cost decreased 10 basis points to 5.7 percent for the quarter from a year ago. This dollar increase came primarily from charges associated with the early prepayment of the Company's subordinated debt, offset in part by lower homeowner association fees related to fewer communities.

G&A costs increased 5.7 million for the first 9 months of '04 and remain constant at 5.6 percent as a percent of revenue. The dollar increase is a result of the charges mentioned earlier, along with increased incentive-relating costs, due to our record results, and increased professional fees resulting from the implementation of formal programs that are now required of public companies.

Selling expenses for the quarter increased 2.6 million. However, as a percent of revenue, selling expenses decreased 10 basis points to 6.3 percent. The dollar increase for the third quarter was primarily due to an increase in the number of homes delivered, the increase in average sales price, along with the slight increase in our percent of home closing through third-party realtors. About 2/3 of our homes closed through realtors. The co-op commissions accounted for approximately 1.1 million of the absolute increase and increased about 90 basis points as a percent of revenue. Also contributing to the dollar increase is a $900,000 increase in sales commissions when compared to the prior year, primarily due to our increased revenue.

Selling expenses increased 6.6 million for the first 9 months of '04. Co-op and sales commissions accounted for approximately 5.3 million of the increase, with the remainder primarily due to increased spending on media to induce sales in the Midwest. Overall, our SG&A expenses decreased to 11.9 percent of revenue in the third quarter and 12 percent of revenue for the first 9 months of '04, compared to 12.2 for the third quarter and 12.1 for the first 9 months of '03.

Operating income increased to a third-quarter record of 12.8 of revenue from 12.3 in '03's third quarter and to 14.2 of revenue for the first 9 months of '04, from 13.4 for the comparable period in '03. We are very pleased with these returns.

Interest expense increased 2.3 million for the third quarter and 3.9 million for the first 9 months of '04, compared to the same periods in '03, primarily due to increased expense from higher average borrowings, offset somewhat by a lower average effective borrowing rate. For the quarter, our average borrowings were 276 million, compared to the third quarter of '03's 166 million. We have also had significantly more raw ground this year than last, also contributing to additional interest expense, as we do not capitalize interest on raw ground.

We have 15.9 million in capitalized interest on our balance sheet at 9/30/04, compare to 14.4 million at 9/30/03 and 14.1 million at 2003's year end. This represents about 2 percent of our total assets. We continue to be very conservative in our capitalization policy, expensing interest when the land is raw and when lots are finished.

Our effective income tax rate for both the third quarter and first 9 months of '04 was 39.5 percent.

Net income increased 16.4 percent to a record 22.6 million for '04's third quarter and net income for the first 9 months increased 18 percent to 67 million for 2004 and represents the highest first 9 months in our history. And both periods, as Bob mentioned, include the previously reported 3 million net effects charge, or 21 cents per diluted share.

Diluted EPS for the third quarter increased 20 percent to a record $1.57 and 21 percent, to $4.55 per share for the first 9 months of '04. We are very pleased to deliver this increase to our shareholders.

M/I Financial, which includes our title operation, mortgage and title operation's pre-tax decreased from 6.1 million in '03 third quarter to 4.6 million in the same period of '04. This change occurred primarily because of increased expenses for the quarter relating to higher incentive-related costs, based on our mortgage operation's record performance, along with increased spending in our Midwest market to aid our sales effort and increased computer cost.

Additionally, a shift in closed loan mids (ph) from fixed-rate to adjustable-rate product led to a slight decline in revenue, as adjustable-rate products generally receive lower margins than fixed-rate products.

Loan-to-value on our first mortgages for the quarter was 83 percent in '04, compared to 87 percent in '03. And for the quarter, 81 percent of our loans were conventional, with 19 percent being FHA/VA. This compares to (66) (ph) percent and 34 percent, respectively, for '03's same period. The FHA maximum mortgage limits s in our markets that we operate in range from 160,000 in Florida to almost 290,000 in Virginia. Also, approximately 48 percent of our third quarter closings were adjustable-rate mortgages. This compares to 22 percent in the third quarter of '03. And 46 percent of our third quarter applications were adjustable-rate mortgages.

Of the mortgages closed during the third quarter of '04, 26 percent were interest-only loans. And this compares to 19 percent in 2004's second quarter. And overall, our average mortgage amount was 215,000 in 2004's second quarter.

The average credit score on the mortgages originated by M/I Financial was 718 in the third quarter of '04, compared to 716 in 2004's second quarter. These scores compare to 707 in 2003's third quarter and 703 in 2003's second quarter.

The percentage of customers that received down payment assistance in the third quarter decreased to 7 percent versus 18 percent in '03. And in the third quarter, the average mortgage balance on the down-payment-assisted originations was 172,000, compared to 166,000 last year. The majority of these customers are in our Indianapolis and Columbus markets and buy our entry-level products.

We continue to sell our mortgages, along with their servicing right. 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 84 percent of our business in the third quarter, a decline when compared to last year'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 Homes' customers.

Overall, our mortgage and title business produced 12 percent of our total operating income during the third quarter and 16 percent year-to-date and we are pleased with the record contribution of our mortgage company.

To address the balance sheet, homebuilding inventories at 9/30/04 increased 32 percent over last year levels and increased 38 percent from year-end, due to our higher backlog levels and our land purchasing activities. Compared to a year ago, raw land and land under development increased about 70 percent, while finished, unsold lots declined slightly. These changes are in line with our expectations.

At September 30 of '04, we had 248 million of raw land, 147 million of land under development, and 85 million of finished, unsold lots. Our total unsold land investment at 9/30/04 is 480 million, which compares to 313 million at last year's third quarter end. These increases are necessary as we focus, as Bob stated, on our 15 percent unit growth targets over the next few years.

We constantly focused on our land investment. We plan on purchasing about $300 million of land this year and we have purchased 200 million through September. We expect a 2004 breakdown of these land investments to be approximately 34 percent in Ohio and Indiana, 40 percent in Florida, and 26 percent in North Carolina and Washington, D.C.

We own 14,800 lots at 9/30/04 and have an additional 11,400 lots under our control. In total today, we own an approximate 3-year supply and control about a 6-year supply for a total under control at 9/30 of 26,200. And this is about 6,600 more lots than we had under control a year ago.

As previously announced, during the quarter, we entered into a new $500 million line of credit with an accordion feature that could increase availability to 750 million. We also repaid 50 million of our subordinated debt. We took these actions to support our strategic growth plan. Our new bank lines provide us with increased flexibility and improved pricing, while the sub debt we prepaid bore interest at an effective rate of 9.65 percent. Bank One continues to be our lead bank, with 15 banks in our line. Our line expires in 2008 and we have 236 million borrowed at the end of the quarter. We currently estimate that our peak 2004 homebuilding borrowings under this line, to be about 275 million.

Long-term debt at 9/30/04 totaled 287 million, compared to 187 million at 9/30/03. Homebuilding debt-to-cap was 37 percent at quarter end, versus 30 percent a year ago. We expect our debt-to-cap ratio to peak at 44 percent in our last quarter.

Our interest coverage for the quarter remained very strong at 11 times EBITDA. EBITDA for the quarter was 41.6 million, a third quarter record for us. And interest incurred for the quarter was 4.5 million, compared to 3.3 in 2003's third quarter.

And at September 30, '04, shareholders' equity was 461 million, with a book value per share of nearly $33.

And in the third quarter of '04, we repurchased 39,000 shares of Treasury stock at an average price of $36. At quarter end, we had 3.5 million shares in Treasury at an average price of $17 with approximately 15 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 better. Based on our record year-to-date results and our planned fourth-quarter deliveries, 2004 should be our ninth consecutive record year.

We currently estimate diluted earnings per share for '04 to be $6.15 to $6.30. This is an increase of over 10 percent from last year's record $5.51. And again, the 2004 guidance we're giving does include the 21-cent charge that we have for the prepayment of the sub debt.

And we will provide 2005 guidance when we release year-end information.

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

(OPERATOR INSTRUCTIONS.) Dennis McGill (ph) of Credit Suisse First Boston.

I'm wondering if I could touch on some comments that Franklin Raines made of Fannie Mae in the last couple days in respect to the use of interest-only loans potentially in certain markets, pushing price a little bit farther than would be justified, possibly creating some inflation in prices there. And wondering what you guys are seeing in your markets where these are being used quite a bit and if there's any risk of that and, in general, what your thoughts are regarding those comments?

Dennis, I think at this time, it's a little too early to tell. There's been a fair amount of discussion of this area the last couple of quarters, especially. I just think it's kind of too early to tell. But the president of our mortgage company is at the convention right now in San Francisco and I just think it's a little too early to tell, as far as what that impact will be.

Are the buyers that are using these typically requesting them up front? Is it something that's necessary because of the price of the home or can you give us an idea of how the buyers end up in an interest-only?

Of the interest-only product?

Sure.

As we said, when you look at what closed in the third quarter, it was 26 percent interest-only. That is up slightly. The second quarter was 19 percent. There are qualification requirements for people, you know, to go through that. We kind of went through the same conversation, I think, a while back with down payment assistance and that product has significantly decreased.

You know , some of those products are very hot for certain periods of time. It's really hard to tell about how many people are taking that as products of choice, as opposed to what they're required to take. And I'd hate to get into the guessing or the projection business about that, Dennis.

We always believe when we used to talk about this in relation to zero-down, Dennis, that for our customers, it was largely a product of choice. The reason we believed it was because even though about a third of our business caters to the entry-level purchaser, our entry-level price span is actually a notch above what represents the entry-level demand in most markets.

So we felt -- and we didn't have a lot of science to prove it, but we always felt, as it related to the zero-down, that it was more of a product of choice, rather than necessity. We've seen that since borne out. I don't know that we can comment on the interest-only though, but that's something we could look into more further --

Our average mortgage amount is higher. It's 215,000 now and our down payment assistance today is 172. It's just kind of hard to project what's going to be the impact of all that, Dennis.

Of ARMs in general, do you see the use more in the entry-level or in the move-up product or is there much difference at all?

The use of interest-only?

Or ARMs in general.

I don't think it's really significantly different from what we see.

Okay.

I think it just happens to depend on where the yield curve is and what's happening to rates and so forth with people.

Okay. The only -- the other thing I was hoping you guys could go into a little bit more is when you -- you've talked about some of your markets even looking at your growth rates 2 or 3 years out. And I imagine most of this starts down from the community level, maybe from your local guys, of knowing which communities are hopefully going to be open at which time and assuming some sort of average selling rate going into those communities, and then I would assume aggregating that up. But I just want to get a sense of kind of how you guys plan longer term.

That's pretty close. We love the land part of the business. And as you may know, we develop about 90 percent of the lots upon which we build houses, which is at the higher percentage amongst the public home builders.

We do it for a number of reasons. One, we think we're good at it. And secondly, we think that the development process is as much a part of the merchandizing, the selling of homes, as building a model itself; in other words, the look and feel and the planning of a community.

Because we're so intimately involved on the land side and we know the deals that we're looking at now that we think we'll make next year and the year after and so forth, we're able to sort of drill down and then drill back up. Knowing where we're buying, when things are expected to come on, what their projected absorption rates are, what their projected average selling price and what we honestly believe would -- frankly, it's a fairly conservative view -- the margin projections are in a subdivision-by-subdivision basis. And just going through all that, we feel that we can make the projections we've made.

And if you just look at the 14,800 lots we have on our books at 9/30, we project out in detail on a quarterly basis, you know, when we expect those communities to open for sale, what we think the sale and closing rate will be there and we project those out for the next couple of years.

So if you just lay those 14,800 lots out, assuming the markets stay pretty much where they are, it's our belief that we can get that 15 percent increase in our units the next couple of years.

Let's be clear on it though. You didn't ask this, but I want to offer it up anyway. We are not expecting any growth whatsoever in Cincinnati, Columbus, and Indianapolis.

When you do look at the absorption rates, is it -- do you base that off of, I guess, kind of where you've been historically if I look back? It's been pretty consistent, maybe accelerated the last year or 2.

It's based on current market conditions and where we believe they're headed.

Okay. All right. Very good. Thank you, guys.

Thank you.

Thanks, Dennis.

(OPERATOR INSTRUCTIONS.)

Greg Halter of LJR Great Lakes.

Congratulations on a very good quarter. Relative to raw materials and the costs related, can you talk about those a bit, in terms of lumber and steel and so forth?

Well, yes . And let me just make one comment about it and then Phil, or perhaps Steven, can chime in here. Obviously, we've been dealing with cost increases and/or material shortages in a whole host of different areas. We think we do a good job of managing it.

M/I Homes has always had margins at or near the top of the industry and we believe we always will. And if we're unable to pass the increases on to our customers,- which we try to do all the time through our pricing agreements and so forth, national accounts, the longstanding relationships we have with our suppliers and subcontractors -- if we're able, where we're able to do it, we do. If pricing or the market conditions don't allow us to, we don't or we can't.

In terms of lumber and where it is today--

Lumber's actually come off a little bit the last couple of months. I think the best estimate is, in the last 12 months, on a 2,000-square-foot house, the numbers I've kind of heard tossed around are about 2,000 to 2,500.

Of course, in our 3 Florida markets and our D.C. marketplace, we still feel like we have a fair amount of pricing power. In the Midwest, as you know, Greg, we had better sales the first quarter than a year ago, but our second quarter and third quarter sales were off.

We have gotten more aggressive with our subs and suppliers from a cost standpoint in the Midwest. We've tried to go back and negotiate a few things down. Also, as we've said in the call, we have been spending those dollars trying to get our traffic levels up and improve our sales, which they have improved some lately. But there have definitely been some cost increases and we've tried to pass some of those on .

It's an area that never gets much attention, and again, you didn't ask this, but I'll offer this up -- is price appreciation in land development expenses, dirt moving, grading, pipe, so forth. And I think, frankly, there's been more inflation there than in maybe any area of our business.

Okay. And down in Florida, obviously, there's damage from the hurricanes and so forth, taking up a lot of time of the folks doing repairs, let alone trying to build new homes and so forth. Are you doing anything or can you do anything to bring people down there? I know it's on a sub basis, but how do you look at that?

We haven't needed to. Most of the problems that we have encountered -- we're going to have some very slight -- we're going to have a slight drop-off in the expected fourth quarter closings, which I mentioned during my remarks. We'll pick those up right after the first of the year.

We don't need -- bringing people down's not going to solve that. It's really the fact that the areas in these cities that have suffered damage -- not our areas, but I'm looking at the cities from a backward standpoint -- require the restoration of essential services and the requirements imposed on the staffs of the building departments. Their attention is just diverted to more important things for the near term. That's what's causing the delay. We could send an army of people down there, but it's not going to get homes inspected any quicker.

Having said that, we, like other builders, have probably had our fair share of warranty-related expenses from damage to landscaping and so forth, and that's something that we're able to handle within our current staff.

Okay. And Phil, I'm trying to get a handle on the charge, the $3 million after tax. I presume that equates to about $5 million on a pre-tax basis?

About 4.5, Greg.

Four and a half?

Yeah.

Is that all in the G&A lines?

It's (centered) (ph) a couple different places. Part of it was the right-off-the-load (ph) expenses, some of it's in interest, some of it's in G&A. It's a couple different places, Greg.

Okay. I'm just doing the simple math. That's $1 -- what did I come up with -- $1.78 in earnings per share adjusted for that?

Yeah, so the 21 cents plus the $1.57 gets you $1.78.

Yeah.

Our earnings would have been up 36 percent.

Okay. Nothing else at this time.

(CALLER INSTRUCTIONS.)

Gentlemen, we appear to have no further questions at this time.

Okay. We really appreciate you joining us. Thanks for all your support and we look forward to talking to you again at the end of the year.

This does conclude your teleconference. (CALLER INSTRUCTIONS.)