M/I Homes Inc (MHO) 2005 Q2 法說會逐字稿

Good afternoon and welcome to the M/I Homes Second Quarter Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions following the presentation. It's now my pleasure to turn the floor over to your host, Mr. Phill Creek. Sir, the floor is yours.

Thank you very much, and thank you for joining us on our call today from Columbus, Ohio. Joining me is Bob Schottenstein, our CEO and President, and Steven Schottenstein, Chief Operating Officer. First to address regulation per 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 me directly. We provided our 2005 earnings guidance in our press release and as the 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 statements. Please refer to our most recent 10-K,10-Q and earnings press releases for other factors that could cause results to differ. We advise 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 of 2006. It should also be noted that certain information related to the use of non-GAAP financial measures required by SEC regulations G is posted on our website. This information can be accessed by logging on to the M/I Homes website at www.mihomes.com in clicking on the Investor Relations section of the site and selecting non-GAAP financial information reconciliation. Now, I would turn the call over to Bob.

Thanks Phil and good afternoon everyone. Overall, we were pleased with our second quarter results as they were in line with expectations and reflect representations made earlier this year. We feel very good about the overall strength of our business and remain quite confident that second half results will be strong and that 2005 will be our tenth consecutive record year. With deliveries of approximately 4600 homes for the year, record sales and record earnings in the range of $6.75 and $6.95 per share as set forth in today's release.

Our record backlog of $1 billion plus gives us clear visibility towards future results and our year-to-date gross and operating margins of 25% and 12% respectively are very solid. We anticipate new contracts, homes delivered, and net income all to reach record levels in the second half of '05 based on our backlog and also based on our community count increasing as planned to approximately 150 active communities by year end from 127 communities at the end of Q2. Virtually all of the new communities will be at Florida, D.C., and North Carolina markets where demand remains strong and profit levels are very high. We're also pleased to have completed our first ever acquisition in early July when we acquired the home building operations of Shamrock Homes a privately held Lake County, Florida, homebuilder. Lake County is adjacent to and northwest of Orlando and the acquisition represents a great strategic fit for our Orlando operation. Shamrock owned approximately 1200 lots, so the acquisition will greatly complement our existing operations in the fast growing and dynamic Orlando market.

As we have previously stated, we set out a little over a year ago to strategically reposition the Company. So that we were less dependent on the mid-west and more geographically diversified towards Florida, North Carolina, and the Washington market. At the same time, we're focused on growing the Company in the units by approximately 15% per year over each of the next 2 to 3 years. Our execution of that strategy is on track. By next year we expect to close over 5000 units with 40% of the closings coming from Florida, 40% from the Midwest, and the balance from our DC and North Carolina operations. As we look further ahead to 2007, the trend should continue, as we see 40 to 45% of closings coming from Florida, 20 to 25% from DC and North Carolina, and the balance of 30 to 40% of closing units coming from the Midwest. All the while growing our units by approximately 15% per year.

Now to review our markets, first Columbus. Our second quarter new contracts were about even compared to 2004, we have reduced our head counts in Columbus and are focusing on our investment levels, we will probably deliver about 1800 to 1900 homes in Columbus this year compared 2200 last year. Although business is down our profits remain solid. Cincinnati, sales for the second quarter were soft, backlog units and sales value are both down nearly 30% from a year ago. We currently estimate that we will deliver around 275 homes in the greater Cincinnati market this year, which will be flat with a year ago. Indianapolis continues to be our most affordable market from an average sales-price standpoint, conditions there remain soft as well. We expect to deliver about 300 homes in Indianapolis this year, slightly above last year. Overall, our margins in the Midwest -- our new orders today continue to be in the 20 to 22% range, down 100 to 200 basis points from levels of approximately 18 months ago. As we look ahead and forecast our operations and continue with diversifying our business as I previously discussed, we fully expect that our Midwest business will remain at current levels over the next couple of years, and not deteriorate any further than it already has.

Moving to Florida, Tampa continues to shine with another outstanding quarter. We project calendar year 2005 to be our best year ever in Tampa. Our margins and returns in Tampa are very strong. Sales for the second quarter were up over 25%, units in backlog are up over 50% from a year ago. We have a very strong land position in Tampa and plan to open approximately 10 new communities there this year. We anticipate closing approximately 675 homes in Tampa in calendar year 2005 with significant growth plan for Tampa in 2006.

Orlando, our business in Orlando also continues to be outstanding with very strong margins and very strong returns. Our land position in Orlando is excellent. In 2005, we plan to deliver a record over 500 homes in this market with further significant growth expected in 2006. Those numbers exclude the impact of the Shamrock acquisition. With respect to Shamrock as I said earlier, we are very excited about the acquisition. It will be accretive to earnings this year. Shamrock has a very strong land position controlling approximately 1200 lots in the growing Lake County market.

West Palm Beach, our backlog is about double from a year ago. Sales increased over 85% in Q2 of '05 compared to last year's second quarter. We anticipate closing nearly 200 homes in West Palm Beach or in our West Palm Beach division in calendar year 2005 and expects significant growth there in '06. All in all, as we look at our total Florida operations, in 2004 we delivered 1000 homes in Florida. This year we expect to deliver approximately 1500 homes in the state of Florida with further growth in 2006 to exceed over 2000 homes delivered. Today, we have over 10,000 lots under control in the state of Florida, and we feel this positions M/I in great shape. Shortly in North Carolina our community township continue to increase, our business in Charlotte is improving, closings and sales are expected to increase about 40% this year compared with 2004. We have the best land position in Charlotte we've ever had. We have ever had, and we expect further growth in Charlotte in 2006. While these sales are about even for the quarter and for the first six months compared to last year, we anticipate closing as a result about the same number of homes in 2005 and as we did in 2004, however, as we have strengthened our land position this year, and expect to see an increase in community count in Raleigh, we expect to produce significantly higher sales, significantly higher closings, and significantly higher profits in Raleigh, in calendar year 2006.

Washington D.C., our closings were up over 40% your-to-date 2005 compared to last year. We have a very strong land position in the Greater Washington Market. We continue to see very strong market conditions there. We closed 200 homes in our Washington division in 2004, expect to close approximately 275 homes this year, with closings expected to reach over 400 homes in calendar year '06.

I'll now turn things over to Phill who will review our financial highlights.

Thanks Bob, Our 2005 second quarter new contracts were up 4% from last year's 11.28. For the quarter traffic increase 13%, and our cancellation rate was 19% compared to 22% cancellation rate in last year's second quarter. Our sales were up 3% in April while traffic was at 9%. Sales were up 10% in May with traffic at 21%, and our sales were down 1% in June while traffic was at 10%. We continue to expect the second quarter trend of hiring new contracts versus last year to continue in the second half of the year. And as Bob stated our goal is to increase new orders by 15% annually. Our community count was 127 at June 30, below 5 versus 135 a year ago. Our current projection is that at the end of September we will have a 145 communities open with 90 in the mid-west, 25 in Florida, and 30 in North Carolina, and DC

By year-end we expect to have around 85 in the Mid-West, 35 in Florida, and 30 in North Carolina and DC for a total of 150. These projected community counts include our acquisition of Shamrock Homes. Homes delivered in the second quarter were 853 compared to 1097 for 2004s record setting second quarter. We have been incurring some delays in our Florida markets due primarily to the very strong market conditions and shortages in certain items such as roof tiles and cabinets, which had been slowing our production efforts somewhat. Homes delivered in this year's first six months were 1628 compared to 1968 for '04's first 6 months.

We currently estimate to close, as Bob stated about 46,100 homes this year with approximately 1250 closings in the third quarter and approximately 1700 in the forth quarter. We expect the 2005 annual breakdown to be about 2400 deliveries in the mid-west, 1500 in Florida, and around 700 in North Carolina and DC, and the 4600 estimated deliveries include about 100 from Shamrock Homes. Revenue decreased 5.4% in the second quarter and 0.5% form the first six months compared to same period in '04. The impact from the declined in homes delivered was partially offset by a 16% increase in average sales price from 255,000 to 295,000 in the second quarter, and a 13% increase in average sale price from 254,000 to 287,000 for the first six months, and as you know our backlog average sales price is 318,000.

Gross profit decreased 9.9 million in the second quarter of '05, and 10.3 million for the first six months of '04. Margin percentage decreased by 210 basis points in the second quarter and 190 basis points for the first six months of '05, to 25.5% for the second quarter and 25.3 for the first six months. Land Gross profit was 2.6 million in '05 second quarter compared to 940,000 in last year's second quarter. And for the first six months of '05, gross profit was 4.7 million and was 3.3 million for '04. Our overall gross margins were 25.2% and 25.5% in the first and second quarters of this year respectively. We currently estimate that our full-year gross profit percentage will be approximately 25%, which will be about 50 basis points below 2004's full year of 25.5. Our G&A cost in '05 second quarter increased 792,000 to 6.7% of revenue from 6.1% of revenue for the prior year quarter. Year-to-date, G&A cost were 6.4 versus 5.6 for the same period of '04. While G&A expenses have risen as a percent of revenue for the second quarter and year-to-date, we do anticipate that this percentage will be more in line with '04's percentage by year-end as our closings catch up with our fixed cost.

Selling expenses for the quarter and year-to-date as a percent of revenue increased 50 and 40 basis points respectively to 6.8 and 6.9. These increases are primarily due to an increase in the number of our closings with (indiscernible) involvement also contributing to the increased spending -- spending on models as we work on getting our new communities open. Overall, our SG&A expense increased to 13.5% of revenue in the second quarter and 13.3% of revenue for the first six months of '05 compared to 12.4 for the second quarter and 12.1 for the first six months of '04. We do anticipate this to normalize and decline as a percent of revenue in the second half of the year as we increased our closings. In 2004, our SG&A percentage was 11.9%, our lowest ever. Our current estimate is that we will be slightly higher than that. We expect to be in the low-12% plus area for the full year of 2005.

Operating income in the second quarter of '05 was 12% of revenue, and for the first six months of '05 was 12.1% revenue compared to 15.3 for the second quarter of last year and 15.1 for the first six months of '04. The decline reflects all the factors we previously discussed including increased land related costs, timing of cost associated with our growth initiatives and expenses associated with our Midwest sales efforts. Interest expense increased to 1.1 million for the second quarter and 1.2 million for the first six months of '05 compared to the same periods in '04. The increase in the second quarter was primarily due to an increase in weighted average borrowings during the second quarter from 254 million in 2004 to 394 million in 2005. This increase was partially offset by 1.1 million increase in capitalized interest as we have more land under development when compared to last year, and the weighted-average borrowing rates for the quarter was 6.3 compared to 6.2% last year. We had 16.7 million in capitalized interest on our balance sheet at June 30, '05 compared to 15.6 million at June 30, of '04, and 15.3 million at 2004 year-end. This amount remained at less than 2% of our total assets. And our effective income tax rate for both the second quarter and first six months of '05 is 39% compared to 39.5 for the same periods in '04. This reflects the impact of the 2004 Jobs Creation Act and the impact of the change in the state tax law in Ohio on our net deferred tax assets as is required under financial accounting standards.

For the second quarter, net income was 17.6 million, down 29% from 2004's record second quarter of 24.9 million. Net income for the first six months decreased 23% to 34.4 million for '05, and diluted earnings per share for the second quarter decreased to a $21 for the quarter and to 237 for the first six months. Now to address M/I financials, which also includes our title operations, our more recent title operations pretax income decreased from 8 million in 2004 second quarter to 3.4 million in the same period this year. The most significant reasons for the change in income were decrease of 27% and loans originated from 823 loans in 2004 to 600 in 2005. In addition, our mortgage product mix yielded lower gain amounts. Our loan-to-value on our second, mortgages for the second quarter was 81% in '05 compared to 84% in '04. And for the quarter, 88% of our allowances were conventional with 12% being FHAVA. This compares to 78% and 22% respectively for 2004 same period. The FHA maximum mortgage limits in this market, and the markets we operate in, range from a 172,004 to North Carolina to 313,000 in Virginia. Also approximately, 46% of our second quarter closings were adjustable rate mortgages. This compares to 39% in the second quarter of '04 and 45% of our first and second quarter '05 applications were adjustable rate mortgages. And the mortgages closed during the second quarter 27% were interest-only volumes. This compares to 29% in 2005 first quarter.

Overall, our average mortgage balance was 226,000 in '05 second quarter. The average bar over credit score are mortgages originated by M/I Financial with 712 in the second quarter of '05 compared to 726 in '05's first quarter. And these scores compare to 716 in 2004 second quarter and 704 in 2004's first quarter. The percentage of customers that receive down payment assistance in the second quarter decreased to 7% versus 11% in '04. And in the second quarter, the average mortgage balance on these down payment assisted originations was a 167,000 compared to 168 last year. The majority of these customers are in our Indianapolis and Columbus market 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. This year we have not repurchased any loans.

Our mortgage operation captured about 82% of our business in the second quarter, a decline when we compare it to last year's 85%. We believe this decline is due to increased competition in the mortgage business. We constantly focus on our capture rate as M/I Financial only serves M/I Home customers.

And overall, our mortgage entitled business has produced a 11% of our operating income during the second quarter and 14% year-to-date. That compares to 19% and 18% from last year's period. As far as our balance sheet, our homebuilding inventories at June 30 increased 25% from a year ago, due primarily to our increased backlog in our land activities. Compared to a year ago, raw land increased about 4%. Land under development increased about 60% and finished unsold lot increased 50%.

At June 30 in '05, we had $269 million of raw land, 201 million of land under development and 108 million of finished unsold lots. Our total unsold land investment at June 30 of '05 is 578 million, which compares to 455 million at June 30 of '04. We constantly focus on our land investment. We currently plan on purchasing about $380 million of land this year, slightly above our original budget at $360 million. The 2005 breakdown of these land investments is projected to be 16% in Ohio and Indiana, 52% in Florida, and 32% in North Carolina, and Washington D.C. Year-to-date we have purchased $150 million of land. We own 16,900 lots at June 30, and have an additional 11,500 under our control. In total today, we only three-year supply and control about a six-year supply of lots for a total under control of 28,400. This is about 3,300 more lots than we had a year ago. The breakdown by region of our total lots under control is 14,000 in the Mid-West, 9,700 in Florida and 4,700 in Washington D.C. and North Carolina. And by percentages, that's 49% Mid-West, 34% Florida, and 17% North Carolina and D.C. These amounts do not include the Shamrock acquisition, which gave us control of an additional over 1,200 lots effective July. At the end of the quarter, we had 287 specs in various stages of construction with $31 million in investment. This compares to 162 specs a year ago with 16 million of investment. Today's level translates into about specs per community. This is an increase in our levels from the prior year and reflects our decision to try to stimulate sales and older sub divisions, meet customer demands in our mid west markets and also to build and showcase new product line in certain of our market. And even with this increases, we still believe we have one of the lowest spec levels in the industry.

During the second quarter of this year, we closed demand on offering of 50 million to our six and seven, eight senior notes for a total outstanding balance of 200 million the senior notes provide us with seven-year fund at a fixed rate. And at June 30 of '05, there was strong 32 million outstanding under our revolving credit facility. We currently have $600 million of capacity under this facility, which matures in 2008 and cordiant (ph) feature is also available, which could increase the capacity to 750 million. We currently project our bank lines to be in 2005 at approximately 350 million during our fourth quarter. Our long-term debt at June 30 of totaled 450 million, compared to 291 million at June 30 of '04. Our home building debt to equities was 83 percentage at June 30 of '05 versus 62% a year ago and our home building debt-to-cap was 45% versus 38% a year ago. Our current estimate is that our debt-to-cap will peak at about 51% during the third quarter of this year.

Our interest coverage for the quarter remained very strong at nine time EBITDA. EBITDA for the quarter 33.3 million, interest incurred for the quarter was 6.2 million, which compares to 3.9 million in last year's second quarter. And at June 30 of '05, our equity was 526 million with a book value per share of $37. We did not repurchase any stock in 2005 second quarter, at quarter end, we had 3.3 million shares in treasury at an average price of $16 with approximately 15 million available to repurchase from our current Board approval. The acquisition of Shamrock Homes was in cash with the repurchase price being left in 5% of our network. And with our purchase accounting, Shamrock will add to M/I earnings in the first half of '06.

In summary, we believe our financial performance in the second quarter was solid and our financial position remains strong based on quarter-end backlog over 1 billion and plan community openings, we anticipate at 2005, will be our tenth consecutive record year. And as we have stated, numerous times due to the challenging mid-west market conditions and the timing of our community openings 2005 is a very back-ended year for us. We fully realize the significant number of homes that we need to close and in the last half of 2005 to produce our desired results. We reiterate our previous diluted earnings per share guidance as 6.75 to 6.95 for the year, which represents a 6% to 9% increase over 2004, 635. We also expect 2006 could be over 11th consecutive record year, delivering over 5000 homes. This completes our formal presentation. We now open the call for any questions or comments.

Mike Kenter (ph), Citigroup.

Just wanted to still on a couple of the line items on interest on EBITDA wanted to get D&A and also interest in cost of goods sold in the quarter?

Okay, you want the interest and cost that gets over the quarter?

Yes, and the depreciation and amortization in the quarter?

And, depreciation and amortization?

Yes.

Let me see, I think that I have kept it somewhere. For the quarter, depreciation and amortization is about 700,000 and the interest and cost of sales was about 1.6 million for the quarter.

In terms of the revolver peak, you talked about the 350 million, is that -- you said that during the fourth quarter is that -- I assume the number would be much lower by time you get to year end, is that a correct assumption?

Yes, what we do Mike is that the best ones we expect it to be -- was the $350 million number that actually was during the fourth quarter. It actually does come down some at year-end.

[OPERATOR INSTRUCTIONS]. Greg Halter, Great Lakes Review.

Obviously, we know about the Shamrock acquisition, just wanted to know what your appetite is for any other acquisitions on a go-forward basis?

I would like to say that the chances that there would be -- would be one, but at this point we have nothing concrete to report. We will continue to look opportunistically. We particularly -- the thing we like particularly about Shamrock was that it was adjacent to and in effect complemented well one of our existing operations, which is something that isn't necessarily required, but would be the type of condition that would particularly encourage us to perceive something but thanks for your question. It's part of our planning strategy.

And then doing some research on Shamrock, looks like their community count was, I can't remember five or eight, but most of those were at a pretty well sold out phase. Are you looking to in that ten in Florida, looking to add any new Shamrock communities in that number of 35, I think you had referenced?

Greg, you are right. Right now today you know they do have five or so communities. We are expecting open a couple of communities there during the second half of the year. When I gave those land purchase numbers of the 380 for the year, there are some land purchases also in there for Shamrock. We are hoping to exceed, you know the 150 communities by year-end. We are trying to give conservative numbers as best we can. But yes, we did see Shamrock growing and as we said before our expectations are they will get about 100 closings from that transaction in the second half of this year, and our current expectation is Shamrock will be 250 plus closing for next year. Then again they brought to the table over 1200 lots under control.

And on the average selling price in the backlog, obviously it's being going up and what's driver there? Is it more expensive marble tops and so forth going into the homes or land?

It's mostly land -- the lion's share of it is land, land, and land. Escalating land prices, we have not materially change specs so in large size or alter the design in our construction elements of our homes. If there is some indirect escalation brought about by governmental impact season so forth. But, the bulk of it would be attributable to land. At least I would say two-thirds of the increase. This maybe even as high as 80%.

Definitely true from a cost standpoint but if you look, for instance, at Florida where in June 30 of last year our average sale price was about 265, our average sale pricing and backlog now in Florida is almost 310. Our margins are better today in Florida than they were a year ago. So, we are getting some improved pricing in Florida.

I guess the one thing I would say is that going forward they will be more attached town home for-sale units in our product offering mix. It could be as much as 15, 18% of our total units company wide. It could be attached town homes, which will help keep the price lower because they sell for less generally, on a per square foot basis, but that is a part of our strategic direction. We've also sold attached town homes. But if you go back five years it was probably less than 5% of our business, next year it will probably be 15 to 18%.

Okay, that sounds good. That's all I have at this point, thanks.

Thanks.

[OPERATOR INSTRUCTIONS] Greg Halter, Great Lakes Review.

Looking at the community count, where it is now and where you expect it to go, what gives you the confidence that you can get there? Are you any further along with the governmental entities or bodies or whatever is the approval process to get those communities in place?

Yes, I mean where the confidence is -- is that absent something that is totally unforeseeable at this point they should be open, and we should get the closings that will produce the income that we are forecasting and then we should have the strong kind of second half sales that we believe we will have. We see nothing, as Phill said before, we always try to incorporate a certain amount of conservatism in our projections, but we -- absent something that that today is not anticipatable, we fully expect it to realize the community counts that we talked about.

Keep in mind Greg, when you start looking for instance at Florida, when you look at -- of course the land being purchased, we bought about $50 million of land in Florida in '03, we bought a $100 million of land in '04. Those are the communities now that we are putting the entrances, and we are putting the streets, and we are building the model to get open. So, we definably feel like those things are going to happen and that's where all of our increase is coming form, you know, from Florida and DC and Carolina, that is why we bought this land in the last year or two.

And I would presume that land has gone up in value as well, which should be reflected in your margins at some point.

Exactly, and again that's what we talked about, from a margin standpoint, -- we went into this year, our conservative view was that we saw for the full year or last year our overall margins were 25.5 (ph) we thought our margins could be down as much as 100 basis point. They have actually been down more than that in the first six months of the year. However, when we look at the second half we still think that our margins for the full year will be about 25% which would only be up about 50 basis points than where we were last year, plus our average sale price last year was about 270, and our current view is our average sale price is going to be fairly close to 300 for the year. So, we get 300 more deliveries this year from 4300 to 4600 as the average sales is up about 30,000 a park, and our margins are only 50 basis points lower, again that's where we see our sales getting some of the higher margins -- higher production. And then going in next year with even a stronger backlog with our community count ahead of a year ago, that's why this year is so much back-ended.

This year -- at the risk of repeating ourselves, we knew at the beginning of the year that 2005 was going to be a little bit of a roller coaster of a year for us because it was so back-ended, because of the repositioning that we setout to do a little over a year ago. When we realized the importance of diversification outside the Mid-West at the time we chose to do that quite candidly we didn't -- we would like to think we were good prognosticators, but we did not expect the Mid-West to be off 15 to 25% as it turns out it has been. In hindsight, you know, thank goodness we did, but we did, but we are now -- we are were we are because though the new communities opening in Florida and in DC and in North Carolina until they do the so-called offset from the Mid-West slow down won't be made up. We have talked about that at some length and I don't mean to be labor, so that is the fact.

All right. I think it is important and as I sit here and look at the other homebuilders and see what they are doing with just some phenomenal increases, I'd certainly applaud you in getting those communities open so that you can share and what they have been--

Well, exactly, I mean M/I is some what unique in that five years ago we were probably one of the only public builders that had over 75% of its business in the Mid-West and we were largely a Mid-West builder and we still are very a significant -- have a significant presence in the Mid-Western and want to continue to because we think all of these things move in cycles and we don't, but we just -- we were very, very excited about where our business is and more exciting and we appreciate everybody's patience hopefully long view.

And one last one. You talked about the cycle what would derail the cycle it's has been leading to such positive growth in Florida and Washington and may be some of the other areas as well including parts of North Carolina in your mind?

Well, you know, I don't know that you could paint every market with the same brush, but the same that we like so much about the markets that we were in is that there was a number of very strong fundamentals that underlie those markets. Number one, job growth, Tampa's got very strong numbers, so does Orlando, so does DC. There is also at the same time on a relative basis a very low amount of inventory on the ground, lot supplies are constrained, its true that there is some investor purchasing going on in these markets although we do everything we can to prohibit it within our organization. Some of that could possibly cause a little bit of a kick in in the operations of these markets, but we -- the markets that have strong fundamental job growth and strong household formations are going to see continued demand for housing. Whether housing will continue to appreciate at the same level that's hard to predict, but as long as there is healthy job growth there was going to be healthy demand.

[OPERATOR INSTRUCTIONS]. Sir, there appears to be no further questions at this time.

Thank you very much for joining us and we look forward to talking to again next quarter. Thanks.

This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.