M/I Homes Inc (MHO) 2012 Q2 法說會逐字稿

Good afternoon. My name is Bonnie, and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes' Second Quarter Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Mr. Creek. Please go ahead, sir.

Thank you. Joining me on the call today from Columbus, Ohio is Bob Schottenstein, our CEO and President; Tom Mason, our EVP; Paul Rosen, President of our Mortgage Company; Ann Marie Hunker, our VP, Corporate Controller; and Kevin Hake, our Senior VP.

First, to address regulation Fair Disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant non-public items with you directly. And as to forward-looking statements, want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also, be advised that the Company undertakes no obligation to update any forward-looking statements made during this call.

With that, I'll now turn the call over to Bob.

Thanks, Phil, and good afternoon, everyone. Thanks for joining us for our second quarter results conference call.

We are very pleased to report net income of $3.2 million for the second quarter, as well as net income for the first half of the year. As noted in our release posted this morning, our results represent a major step forward for us as we remain intensely focused on profitability.

For the past five or so years, we and all other homebuilders have faced significant headwinds operating in what has generally been referred to as the toughest housing conditions in modern history.

Since the beginning of this year, conditions have been improving in nearly all of our markets as more and more consumers are entering the market, taking advantage of the combination of record low interest rates, housing affordability, and the higher quality and improved efficiency of new home construction. These improving conditions are underscored by our results.

The year-over-year material improvement in profit that we enjoyed was primarily a result of the 280-basis-point increase in our gross margin from last year's second quarter, and the 19.8% gross margins we achieved in this quarter represented a 170-basis-point sequential improvement over 2012's Q1 margins.

Additionally, our SG&A ratio improved to 15.6% of revenues from 17.1% in the second quarter of last year.

We also closed more homes during the quarter, with deliveries up 6% over last year and revenues up 24% as our average sale price of $259,000 per house represented a substantial increase from a year ago.

In terms of closings, it's also important to note that during the first half of this year, nearly 70% of our deliveries came from new communities. As we've stated during prior calls, we define a new community as a community that we've opened since January of 2009.

Our margins on these new communities continue to be in the 19% to 20% range and represent a very important part of our path to profitability.

The nearly 70% of closings coming from new communities during the first six months of this year compares to just under 50% of closings coming from new communities during the first half of 2011 and 23% of closings coming from new communities during the first half of 2010.

We were also very pleased with our sales. Year over year, our sales improved by 30% and our sales for this first six months of 2012 are at their highest level since 2007.

Our strong sales and improving average sale price have also resulted in our units in backlog and backlog value improving 40% and 50%, respectively, over last year. Currently, our backlog value stands at $320 million, the highest it's been since the third quarter of 2007.

I'd now like to briefly discuss our markets before making a final comment or two and then turning things back over to Phil Creek for a more thorough review of our financial results.

First, in the Midwest region. The Midwest continues to be our largest region, with 255 closings in the second quarter, representing 41% of our total. However, this ratio has declined notably from 53% of closings in 2009 as we have been strategically expanding our investment and volumes towards the Mid-Atlantic and Southern regions for several years now.

Our deliveries in the Midwest decreased 7% during the second quarter compared with last year, while new contracts in the Midwest were also down for the quarter, down 3%.

We ended the quarter with 53 active communities, a 9% decrease from the June quarter last year. Despite this decline, however, our backlog was up 29% from the prior year in terms of dollars.

The Columbus market has generally been steady and showing some signs of improvement, with permits up over 24% for the first six months of this year.

In Chicago, our performance continues to be very strong despite a difficult local housing market there, and we continue to grow and expand our presence in Chicago as we are firmly entrenched as one of the top five builders in that market.

We're also performing quite well in Indianapolis.

Cincinnati continues to be a challenge for us, both with respect to sales and margins, largely as a result of the difficult and weak conditions in that market.

The Southern region is comprised of Florida and Texas. We delivered 187 homes in this region for the second quarter, which represented a 21% increase from last year. We had 34 communities in our Southern region at the end of the quarter, which includes 18 in Texas. We are very excited about the growth of our operations in both Houston and San Antonio, the two Texas markets in which we operate.

On April 1, we acquired the operations of a small builder in Houston known as Triumph Homes and at the time hired the founding principal to run our Houston operation as our area president. That individual has brought strong leadership and a good team to our growing operations in that market.

We closed the acquisition of our San Antonio operation at the start of the second quarter a year ago. That market also continues to grow for us, and we're excited about our future prospects there.

In Florida, market conditions and demand for new homes in both our Tampa and Orlando divisions have continued to show noticeable signs of improvement. We are having good success in both markets, with the opening of new communities in highly desirable locations.

Our sales in the Southern region increased 88% in the first -- in the second quarter compared with the prior year, and our backlog value at June 30 is nearly double the amount from last year's second quarter.

Finally, the Mid-Atlantic region. In that region, our sales were up 40% for the quarter compared with 2011, and our closings were up 12%. Our backlog value was up 52% at quarter's end from the prior year partly due to a 10% increase in average sale price.

We've had pricing power in a number of our Mid-Atlantic region divisions, most notably Raleigh and Charlotte. Raleigh is one of our better performing divisions, and Charlotte also continues to perform quite well for us.

The Washington, D.C. market is a healthy housing market overall, but candidly, we've experienced a tightening of demand there over the past six to nine months with increased competitive pressure on margins.

In our Mid-Atlantic region, we ended the quarter with 37 active communities, which represents a 12% increase from last year.

In closing, let me just say that our financial condition remains strong, and we will continue to utilize that strength to invest in new communities where it makes sense to do so. For 2012, our land expenditures will be quite a bit higher than in 2011, positioning us for future growth throughout most of our markets.

Looking ahead, though we are obviously encouraged and inspired by the improving conditions, we also recognize that macroeconomic uncertainties remain and that employment levels are still not where they need to be. That said, we are optimistic and believe that housing conditions will continue to improve, perhaps in uneven fashion, and we will thus manage accordingly, being prudent with our capital expenditures, watching our expenses closely, and focusing on the core business strategies that have served us well in the past and that will continue to serve us well in the future.

And with that, I'll turn things over to Phil to more thoroughly discuss our financial results.

Thanks, Bob.

New contracts for the second quarter increased 30% to 826, with a net absorption rate of 2.2 sales per community per month.

Our traffic for the quarter increased 24%. Our sales were up 9% in April, and traffic was up 33%. Our sales were up 36% in May, and traffic was up 5%. And our sales were up 52% in June, and traffic was up 37%.

Our aggregate communities increased 8% from 115 last year to 124 this year. The breakdown by region is 53 in the Midwest, 34 in the South, and 37 in the Mid-Atlantic.

During the quarter, we opened 12 new communities while closing 10. Our current estimate is to end the year with about 10% higher community count than we began this year.

We delivered 625 homes in 2012 second quarter, up 6% when compared to last year's 590 deliveries, and 71% of our second quarter deliveries were from new communities compared to 51% a year ago, and we delivered 67% of our backlog this quarter compared to 79% a year ago.

Third-party land sales revenue was $4.2 million in 2012's second quarter, resulting in $800,000 of income.

In the second quarter, we recorded pretax charges of $472,000 for impairments. This compares to $5.4 million in last year's second quarter. For the six months ending June 30, 2012, impairment charges were $567,000 compared to charges of $16.3 million in the first six months of 2011.

Our second quarter SG&A expense increased $3 million when compared to 2011 second quarter. However, as a percent of revenue, SG&A decreased to 15.6% from 17.1% a year ago.

Our G&A expenses for the quarter were $13.8 million, increasing 8% from last year, and our selling expenses for the quarter increased $2.1 million, up 19% from a year ago.

These expenses were up primarily as a result of the increase in homes delivered and an increase in our active communities.

Interest expense for the second quarter was flat with last year and increased by $570,000 for the first six months of this year when compared to the same period of 2011.

We are having a pretty bad storm in Columbus. That's the background.

Interest incurred was $5.6 million in the second quarter of 2012 compared to 2011's second quarter of $5.5 million.

We had $4 million of pretax income from operations for the second quarter compared to a $3.5 million operating loss during the second quarter of 2011. This improvement was the result of increased deliveries, gross margin improvement, profit from land sales, and a net purchase accounting gain of $800,000 related to our purchase of a small Houston builder in April. We expect the purchase accounting gain to substantially reverse in the next six quarters as our business continues to grow in Houston.

We generated our 12th consecutive quarter of positive EBITDA, producing $13 million of EBITDA and covering interest 1.5 times for the trailing four quarters.

We have $18 million in capitalized interest on our balance sheet compared to $20 million a year ago, which is about 3% of our total assets, and we reported a non-cash after-tax benefit of $1.3 million in the second quarter for a valuation allowance related to our deferred tax assets.

At June 30, 2012, our gross deferred tax asset is $141 million, and it is fully reserved.

Now, Paul Rosen will address our Mortgage Company results.

Thank you, Phil.

Our Mortgage and Title operations' pretax income increased from $1.4 million in 2011 second quarter to $1.9 million in the same period of 2012. The main reason for the increase is that loans originated increased 17%, from 448 in 2011 to 522 in 2012.

Our second quarter results included increased income attributable to higher loan amounts, higher margins, in addition to our refinance business.

We continue to see a shift towards conventional financing. 52% of the loans closed were conventional, and 48% were FHA/VA. This compares to 47% and 53%, respectively, for 2011 same period. The loan to value on our first mortgages for the second quarter was 87% in 2012 compared to 88% in 2011's second quarter.

Overall, our average mortgage amount was $228,000 in 2012's second quarter, a 10% increase compared to $208,000 in 2011's second quarter.

The average borrower credit score on mortgages originated by M/I Financial was 737 in the second quarter of 2012 compared to 738 in 2012's first quarter.

Our mortgage operations captured approximately 84% of our business in the second quarter compared to 2011's 85%. At June 30, 2012, M/I Financial had $46 million outstanding under the credit agreement. The M/I Financial credit agreement expires March 30, 2013 and provides for $70 million in borrowing availability.

In the normal course of business, we receive inquiries concerning underwriting matters on specific mortgages our investors have purchased from us. We thoroughly review and respond to each inquiry, and even though we are not required to do so, we routinely engage an independent third party to review the files and information related to the origination of each mortgage.

Our reserve at June 30, 2012 with respect to these matters was $2.2 million, compared to $2.3 million at December 31, 2011. M/I Financial has not repurchased any loans this year.

Now, I will turn the call back over to Phil.

Thanks, Paul.

As far as the balance sheet, we continue to manage our balance sheet carefully, focusing on investing carefully in new communities while also managing our capital structure.

Total homebuilding inventory at June 30, 2012 was $522 million, an increase of $59 million above last year's levels, primarily due to higher investment in our backlog.

Our unsold land investment at June 30, 2012 is $234 million, a 6% decrease compared to $249 million a year ago.

Compared to a year ago, raw land and land under development decreased 14% and finished unsold lots increased 1%. At June 30, we had $104 million of raw land and land under development and $129 million of finished unsold lots.

Our unsold finished lots totaled 2,600 lots with an average cost of $50,000 per lot, and this $50,000 average lot cost is 18% of our $274,000 backlog average sale price. And the market breakdown of our $234 million of unsold land is $90 million in the Midwest, $42 million in the South, and $102 million in the Mid-Atlantic.

Lots owned and controlled at June 30 totaled 10,600 lots, 61% of which were owned and 39% under contract. We owned 6,500 lots, of which 50% are in the Midwest, 21%'s in the South, and 29% in the Mid-Atlantic.

During the 2012 second quarter, we spent $27 million on land and $10 million on land development for a total of $37 million. Year to date, we have spent $67 million on land purchases and land development. About 8% of our land purchases were in the Midwest, 45% in the South, and 47% in the Mid-Atlantic.

And as to the type of our 2012 land purchases year to date, about 82% were finished lot pick-ups, 12% have been bulk finished lot purchases, and 6% were raw land transactions.

Our estimate today for 2012 land spend is higher than last year's $117 million as we plan to increase our homes delivered in 2012. Our sales and market conditions will also impact our spending.

At the end of the quarter, we had $68 million invested in specs, 196 specs that were completed, and 382 specs under construction. This translates into about 4.7 specs per community. And of the 578 total specs, 210 are in the Midwest, 190 are in the Southern region, and 178 are in the Mid-Atlantic. At June 30, 2011, we had 542 specs with an investment of $58 million.

We continually focus on cash and liquidity. We ended the quarter with $57 million of cash, which includes $44 million of unrestricted cash. During the quarter, we repaid the $41 million remaining balance of our 2012 senior notes. We also issued an additional $30 million of our 2018 senior notes in May of 2012, giving us $230 million of senior notes outstanding at quarter end.

At June 30, the Company had no borrowings under our $140 million credit facility, which matures December 31, 2014. Our borrowing availability under this facility, net of outstanding letters of credit, was $52 million at quarter end, based on the value of pledged assets.

This completes our presentation. We'll now open the call for any questions or comments.

(Operator Instructions)

Alex Barron, Housing Research Center.

Congratulations on the profitability. I guess the main thing that comes to mind is now that you're profitable, do you think it's reasonable to expect you to get your DTA back in 2013?

Phil?

You know, Alex, that's a tough question. There's a lot of rules around that. We're not making any new projections in that area. This is the first quarter we've had net income in a while, so that's something we discuss with our auditors on a quarterly basis, but again, we're not making any projections about that. We realize what's gone on in the industry with a couple of builders, but again, we're not making any projections on that.

What are some of the more important criteria, Phil, that the auditors are looking at to allow you to do that?

The number of quarters of profitability.

Okay, but they don't (inaudible).

They also look at your outlook for the business. They look at the amount of profitability versus what you've deferred. There's a lot of different factors that go into it, Alex.

Got it. Okay.

I assure you we will do all we can to recognize that $141 million asset as soon as we can. I assure you we keep an eye on that.

Right. I'm sure you do.

The second thing I wanted to ask you was with regards to margins. I guess we've seen a number of builders increasing prices in certain markets. We've also heard -- maybe you guys don't build in the Western markets, but it's more obvious over here. Some markets over here, we've seen cost increases.

So can you comment on to what extent your price increases are just covering any cost increases you're seeing? Or are you actually seeing margin improvement, you think, going forward?

Both, but I think it depends on the market. It's Bob Schottenstein, Alex. I mentioned in my comments at the beginning that we've -- I highlighted both Raleigh and Charlotte, where, candidly, we've had pricing power in both of those almost across the board, which have more than offset in some cases some of the price increases. We've begun to see some pricing power, frankly, in Columbus and Indianapolis, not in every community, and we've also seen a little bit of it in Florida.

Our Houston and San Antonio operations, we're relatively new to each market. As a consequence, since we've opened, we weren't necessarily encumbered by conditions that would allow us to make significant comparisons.

But if traffic continues to improve and demand continues to increase, I'm certain that we'll also see some -- and some of it's needed, frankly -- some increase in material costs for subcontractor expenses.

All right. Okay, thanks.

(Operator Instructions)

Ivy Zelman, Zelman and Associates.

Hi, guys. It's actually Kevin on for Ivy.

You spoke about your strategic shift away from the Midwest, but with news coming out about anticipated job growth in Eastern Ohio due to the shale gas production, are you seeing any strength recently in your Ohio markets, or is that just a prospect -- or is the prospect of these jobs coming to your area at all causing you to devote more capital, or is there -- or kind of relative to your other markets?

You know, a really good question. We've got very long-term -- we've had a very long-term presence in Columbus and Cincinnati, having been in the Columbus market since our company was started in 1976. We've been in Cincinnati since 1990, and we're well positioned in both markets.

As I indicated earlier, I just got a report this morning on the first six months of activity in the Columbus market where permits are up 24%. It's off of a low base.

I think that, yes, the economies -- the local economies and the statewide economy is improving, and I don't think that's going to have a material impact, though, on our strategy.

When we say we're shifting away, it's not that we're exiting; it's that we're shifting away. We're trying to take advantage of what we, frankly, think is more upside and more growth, not just in Texas but in the Carolinas, and that's nothing new. We've been talking about that for the last four years. It just continues to be more and more seen now that we're starting to see demand come back a little bit. And we also have a lot of opportunity for growth, frankly, and it's part of the Midwest, but in Chicago and Indianapolis.

Got it, thanks. That's very helpful.

And I guess just part of the acquisition in Houston, can you kind of quantify how much that that contributed to this quarter and, I guess, prospects on that going forward and kind of how do you see the Houston market continuing to grow, I guess?

Bob talked about the subdivision count in Texas. We're just getting started in Houston. When we did the acquisition, it brought about five communities to us in Houston in addition to the five we have, so it's not that significant at that time. Do we expect it to grow in the coming quarters? The answer is yes. It's our goal to be a meaningful player, to be a leading builder in those markets, but it's not anything significant right now, nor will it be in the near future.

Great. Thanks, guys.

Alex Barron, Housing Research Center.

Phil, I thought I heard you say you wanted to grow your community count 10% this year, but I'm not sure if I missed. Did you comment anything about 2013 or what you think is going to happen there?

Don't have any projections out there, Alex, but assuming that business continues to get better, we expect to get more than our fair share, but right now, our projection is 10% by the end of this year.

Okay. And as far as capital transactions, I know you guys just refinance the debt, but would you be open to maybe a raise in equity if the price is right?

This is Kevin. We don't have any specific plans. We're always looking at capital markets opportunities. We feel pretty comfortable with where our leverage is right now, and as Bob said, we have plans to spend more on land acquisitions this year. It helps our overall leverage by having some profitability so that we're earning part of our equity.

So we just look forward at our own estimates of our growth, and right now, we feel pretty comfortable with the amount of our leverage, but we do always consider equity possibilities. It's not just a matter of price; it's a matter of what our needs are and what level of leverage we're comfortable with. No current plans one way or the other.

Okay. Yes, I wasn't meaning so much from the leverage. I was thinking more because if the market continues to expand, I was thinking maybe at some point you might need some extra capital to take advantage of opportunities.

Well, I think you've got to look, Alex, at a couple of things. I mean as we talked about, we do own 2,600 finished lots. Behind that, we have about another 5,000 lots either raw or under development. We have $50 million of cash. We have $140 million bank line unused. So we feel like we have a fair amount of powder. We feel like we're in a pretty good land position right now, again, but that's something we always look at, as Kevin said. We think we're in pretty good shape.

Okay, great. Thanks.

Joel Locker, FBN Securities.

Nice job on the quarter. Actually making money.

Thanks, Joel.

Thank you.

And just was curious about the orders. In June, you saw much more strength than you did -- you know, obviously, April was a little weak and then May was in the middle, and June really came on. Was there any reason you can point to for June being -- was it easier comp or was -- you know, any kind of promotions or anything like that?

You know, a couple things. Our second quarter sales of 826 is actually the best second quarter we've had since 2005, and as you look at the 90-day period, the sales were fairly evenly balanced. And even within our markets, the mix was good and the absorption per community was good as we experienced steady quality traffic throughout most of our communities.

I think -- I'm not sure I can point to much more than that. We think we've got a great trained sales staff. We think we've got very solid locations, good product, energy-efficient product. We've got good competition amongst other builders in the markets, as well. But in most of our markets, our market share is growing, and we're very encouraged by that. We've been able to say that almost throughout this downturn.

Right. And how does July feel on an order front versus, say, a June (inaudible)?

Well, we've never -- we're not going to comment, and we haven't been for some time, on the current month (inaudible).

Right. And what about prices? How much did you raise them, say, on your average order from the second quarter versus the first quarter? Just like if you took -- you know, even the ones you didn't raise but just--.

That's a really hard question, Joel. I mean it depends on the location and the product and everything else. If you look at the average sale price in backlog, we kind of bottomed out the middle of '11 at $252,000, our average sale price in backlog. Every quarter since then, it's moved up a couple thousand, and now it's at 274.

So I think the short answer is it's just kind of gradual improvement in the market, some pricing power, but we're also trying to continue to work through legacy assets, so I think it's kind of just all those things, just things everywhere getting a little bit better.

Right. And your gross margin, if you exclude the financial service segment, I guess it went up around 150 or 160 basis points, which is a nice jump. Was there any -- I mean is that sustainable, or do you expect a further expansion, you know, if it's 18.8% or so excluding the financial service and any impairment?

Hard to say. I think that the real key to the growth in margins for us in addition to slowly but nonetheless noticeable improvement in demand has been the mix of closings coming from what we call new communities.

As I said, during the first half of this year, nearly 70% of our closings came from the new communities, and the margins in the new communities are running 19 to 20 and often closer to 20 than 19, whereas the legacy stuff is just that, and it's around the 15% range.

So in 2010, we had about 23% of our first-half closings coming from new communities, increasing to nearly 50% a year ago, increasing to 70% in this most recent first half, and I think that as much as anything, that has been the real key.

Obviously, we underwrote all those new communities and invested our assets, intending and expecting them to produce those kinds of -- that kind of accretive result, and we're pleased to report that it appears to be doing so.

Right. But if the mix doesn't get much toward -- maybe it levels out around 75% new or 80%, then gross margins may flatten out unless you get the price increases.

I think that's a fair statement.

Yes, we do still have a few legacy issues in the Midwest, so that does tend to drag the overall margins down.

As you said, our Mortgage Company had a very, very strong quarter. We also talked about -- we had a land sale profit of $800,000. We also had $800,000 from purchase accounting. So we did have a couple things helping us a little bit, but obviously, we're focused on that margin line very much.

All right. And anything else you can do on the SG&A front? I mean it was a little better than I expected, but is there, you know--?

You know, Joel, we have added a few people due to getting more volume in Texas. We've also added a few people due to increased volume. So we're trying to spend that money carefully. Also, growing community count 10% is also taking a few dollars.

So we know the dollars are going up. We're working on getting as much leverage as we can. We're trying to get more volume in the cities we're in -- job one -- so we're working on all those things. The short answer is, no, there's nothing dramatic in that area that's going to help that line.

Right. And just the last question on the community count. How many do you expect to open in the third quarter and in the fourth quarter?

You're getting specific on questions there, Joel. As far as --

Keep you on your toes.

No problem. As the third quarter -- in the second quarter, we opened about three more than we closed. Our best guess right now was we'd probably be opening in the 10 to 15 range in the third quarter and then also open 10 to 15 range in the fourth quarter.

And then as far as closings, we'd probably be closing, again depending on sales pace, 7 to 10 in the third and fourth quarter, and again, that would have me end the year about 10% higher than going into this year with 122. So our thought process is in that 135 range is kind of our best guess.

Right.

Again, that's our best guess of where we'll be.

Right. All right. Thanks a lot, guys.

Thank you.

Ivy Zelman, Zelman and Associates.

Just one more follow-up. Can you just talk a little bit about what you're seeing on the land side, maybe specific markets that you're finding it harder to purchase finished lot deals or on the other side of the coin, maybe easier than you were expecting just in terms of availability?

I don't know that it's easier than expected anywhere. I think that this is a big challenge going forward for all builders.

Assuming that we continue to experience improving conditions, the ability to tie up the good pieces is going to be something that is -- some time it will be a race to the finish line.

But, look, we're planning on spending considerably more this year on land acquisition than last year, and we're planning on that based on the deals that we know about right now today because we've seen deals, frankly, fairly evenly spread throughout our markets that give us very legitimate reason to believe that we can hit our minimum hurdle rates.

Ideally, no surprise, we would like all of them to be finished lot deals with little deposit and little risk, but that's increasingly not the case.

Accordingly, the underwriting is a little bit more severe when you take more risk. We have different hurdle rates depending on whether it's a finished lot deal or a developed or combination developed finish lot deal. We try to balance risk with return.

I don't know if that answers your question. We feel very good about, as I said in my closing comments, that utilizing our financial condition to take advantage of the fact that there have been opportunities for us to acquire new locations that will allow us to continue to grow in our markets.

All right. Thanks a lot.

Thank you.

At this time, there are no further questions.

Thank you very much for joining us. Look forward to talking to you next quarter.

Thank you. This concludes today's conference call. You may now disconnect.