M/I Homes Inc (MHO) 2014 Q1 法說會逐字稿

Good afternoon. My name is Tony and I will be your conference operator today. At this time I would like to welcome everyone to the M/I Homes first-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). Thank you.

Phil Creek, you may begin your conference.

Thank you for joining us. On the call is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Paul Rosen, President of our Mortgage Company; Anne Marie Hunker, VP, Corporate Controller; and Kevin Hake, 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, I 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 will now turn the call over to Bob.

Thanks, Phil. Good afternoon, everyone, thanks for joining us today on our call to review our first-quarter results.

We had a very solid first quarter highlighted by an 18% increase in homes delivered closing 737 homes in the quarter compared to 627 homes last year. We also had a 23% growth in revenue due to both the increase in deliveries that I just mentioned as well as an increase in our average sale price.

Our pretax income more than doubled, increasing by 156%, growing from $4.8 million a year ago to $12.6 million for the first quarter.

We also saw continued improvement in both our margins and operating leverage. Specifically, our gross margins for the quarter increased to 21.7% compared to 20.1% a year ago and 19.8% in 2013's fourth-quarter.

Our gross margins of 21.7% for the first quarter reached their highest level since 2005. Additionally, our SG&A expense ratio declined by nearly 70 basis points year-over-year, and as Phil will explain in more detail later in the call, our SG&A ratio equaled 14.6% for the quarter.

At quarter's end, our backlog equaled 1525 homes, 10% more than a year ago and the sales value of our backlog equaled $496 million, up 24% over last year. The average selling price of homes in backlog equaled $326,000 compared to $290,000 last year.

During the quarter, we were also successful in continuing to grow our community count. Compared to last year, our quarter-end community count increased by 17% going from 135 communities at the end of last year's first quarter to 158 active communities today. During the quarter, we opened 13 new communities; however, many of these new community openings occurred very late in the first quarter.

New contracts for the quarter declined by 6% going from 1047 homes sold in 2013's first quarter to 982 home sold in the first quarter of this year. As noted in our release, there were a number of factors contributing to our 6% decline in sales.

One, the unusually harsh winter weather conditions particularly in our Midwest and mid-Atlantic regions clearly impacted traffic and sales as well as contributed to a delay in the opening of our new communities.

In addition, while we continue to believe that housing is in the early stages of a multi-year recovery, the spring selling season has gotten off to a slower than expected start. Last year our first-quarter sales were up nearly 40% and in this particular quarter, we were also dealing with a somewhat significantly challenging sales comp.

At this time I would like to take a few minutes to review our regions. First, the Midwest region where we have operations in Columbus, Cincinnati, Indianapolis, and Chicago. The Midwest had 259 closings during the first quarter or 35% of total homes closed. This ratio has declined from 55% of closings in 2010 as we have successfully and strategically expanded and shifted our geographic footprint over the last five years.

Our deliveries increased 12% in the Midwest quarter-over-quarter compared with last year and new contracts in this region were up 7% for the quarter despite the challenging selling conditions.

Our sales backlog in the Midwest was up 45% from the end of the first quarter last year in dollar value and our total controlled lot position in the Midwest is flat year-over-year. We ended the quarter with 67 active communities in the Midwest which is 10% over March of last year.

We have clearly seen improvement in our Midwest markets with Chicago continuing to be one of our best performing markets. Columbus market is showing signs of improvement and Indianapolis is a good market for us and even the Cincinnati market has begun to pick up both in terms of margins and sales pace.

Next is our Southern region, where we have operations in Tampa and Orlando, Florida as well as Houston, San Antonio and Austin, Texas and soon Dallas, Texas. We delivered 275 homes in the Southern region for the first quarter. This was a 44% increase from a year ago, 37% of total volume. The dollar value of our sales backlog at the end of the quarter was nearly 15% higher than a year ago. We increased our controlled lot position in the Southern region by more than 2600 lots, an increase of nearly 41% from a year ago.

We are excited about our operation in the Southern region. We had 52 communities in the Southern region at the end of the quarter which represents a 33% increase from the prior year. Despite our strong financial performance in this region, our sales in the Southern region actually declined 11% for the quarter in part frankly due to choppy selling conditions in Tampa, Florida. We expect to open for sale in Dallas during the second quarter as planned and are very excited about this.

Finally, the mid-Atlantic region where we have operations in Raleigh and Charlotte, North Carolina as well as Washington DC. Our new contracts in this region were down 15% for the quarter compared with last year while our backlog value is up nearly 10% at the quarter end. As it relates to sales in particular, selling conditions in the DC market are a bit soft.

Our deliveries were flat in the mid-Atlantic region for the first quarter compared to last year. Out of the 737 homes we delivered in the first quarter company-wide, the mid-Atlantic region accounted for 203 of these closings or 28% of the total.

In general, our Washington DC, Raleigh and Charlotte markets have all been performing well. We feel very good about our positions in these markets as well as our outlook there and we are opening new communities as we continue to grow our positions.

We ended the quarter with 39 active communities in the mid-Atlantic region which is up over 10% from last year and our total controlled lots in the mid-Atlantic region at quarter end increased by more than 1800 lots, a nearly 50% increase from a year ago.

Finally, let me just say that our balance sheet and liquidity remains strong. Our net debt to capital ratio equaled a healthy 39% at quarter's end and we continue to be optimistic both about our business and the outlook for housing.

With the strength of our backlog and planned community openings, we are very much looking forward to having a solid 2014. We will remain focused on continuing to improve and increase our profitability, growing our market share, and investing in attractive land and lot opportunities.

And with that, I will turn it over to you, Phil.

Thanks, Bob. New contracts for the first quarter decreased 6% and our traffic for the quarter was down 1%. Last year's first-quarter sales were strong, up 37% over 2012's first quarter. Our sales were up 1% in January, down 9% in February, and down 8% in March.

As to our buyer profile, 42% of our first-quarter sales were to first-time buyers compared to 41% in 2013's fourth quarter and about 46% of our first-quarter sales were inventory homes compared to 52% in the fourth quarter of 2013.

Our active communities increased 17% from 135 at the end of March last year to 158 this year. The break down by region is 67 in the Midwest, 52 in the South, and 39 in the mid-Atlantic. During the quarter, we opened 13 new communities while closing 12. Our current estimate is to end the year with about 5% to 10% higher community count than we began 2014 opening about 75 new communities with the majority of the new communities opening in the second half of 2014.

We expect that our Southern region led by our growth in our Texas markets will add the most new communities this year. We delivered 737 homes in the first quarter delivering 58% of our backlog compared to 65% a year ago, and we delivered our first homes in Austin, Texas during the first quarter.

Our building times have continued to increase slightly due primarily to shortages of qualified subcontractors and our average closing price for the first quarter was $299,000 compared to last year's first quarter of $284,000. Our backlog average sales price is $326,000.

Revenue increased 23% in the first quarter compared to last year as a result of both the increase in deliveries and the average closing price increase. Our gross margin was 21.7% for the quarter, up 160 basis points year-over-year and 180 basis points over last year's fourth quarter. And land gross profit was $1.3 million in 2014's first quarter compared to $1 million in last year's first quarter.

Our first-quarter SG&A expenses declined to 14.6% of revenue, a 70 basis point improvement from last year's first quarter. In dollars, our SG&A expenses increased 18% in the first quarter compared to last year. Interest expense decreased slightly for the quarter when compared to the same period last year and we have $14 million in capitalized interest on our balance sheet compared to $15 million a year ago, about 1% of our total assets.

With respect to income taxes during the quarter, we reversed an additional $5.3 million of our state deferred tax asset valuation allowance. Approximately $3 million of this reversal was due to a tax structure change which allowed us to utilize more of our state net operating loss carry forward while the remainder was due to a change in estimate based on our improved financial results. This reversal was offset by $5.2 million of current tax expense related to our current quarter earnings.

Excluding the reversal, our effective tax rate for the quarter was 41%. We expect our effective tax rate for the remainder of 2014 to approximate 38%. Our earnings per diluted share for the quarter was $0.41 per share. This per share amount reflects $1.2 million of dividends paid to our preferred shareholders.

Now Paul Rosen will cover our mortgage company results.

Thanks, Phil. Our mortgage and title operations pretax income decreased from $5.1 million in 2013's first quarter to $4.7 million in the same period of 2014. Our first-quarter results include a slight decrease in loans originated from 497 to 493 and higher average loan amounts. While still strong, the margins on loans sold during this period were lower than we experienced in the first quarter of 2013.

We also saw a continued shift from FHA to conventional financing compared to 2013's same period. The 2014 income also included additional revenue from the reversal of reserves. The loan to value on our first mortgages for the first quarter was 85% compared to 87% in 2013's first quarter. We continued to see a shift toward conventional financing; 67% of the loans closed were conventional and 33% were FHA and VA compared to 61% and 39% respectively for 2013's same period.

Overall our average mortgage amount increased 3% to $252,000 in 2014's first quarter compared to $244,000 in 2013's first quarter.

The average borrower credit score on mortgages originated by M/I Financial was 736 in the first quarter of 2014 compared to 2013's fourth quarter.

Our mortgage operation captured approximately 76% of our business in the first quarter compared to 2013's 77%. On March 28, we increased our warehouse facility and extended the expiration date to March 27, 2015 on the MIF credit agreement. At March 31, 2014, we had $41 million outstanding under this facility and $11 million outstanding under our separate [$50] million repo facility which expires November 5, 2014. Both facilities are typical 364-day mortgage facilities as we extend annually.

Now I will turn the call back over to Phil.

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

Total home-building inventory at March 31, 2014 was $724 million, an increase of $146 million above prior year levels primarily due to higher investment in our backlog, higher community count and increased land investment. Our land investment at March 31, 2014 is $357 million, a 40% increase compared to $255 million a year ago.

At March 31, we had $216 million of raw land and land under development and $141 million of finished unsold lots. We own 2600 unsold finished lots with an average cost of $54,000 per lot and this average lot cost is 17% of our $326,000 backlog average sale price.

The market breakdown of our $357 million of unsold land is $107 million in the Midwest, $151 million in the South, and $99 million in the mid-Atlantic. Lots owned and controlled as of March 31, 2014, totaled 21,000 lots, 51% of which were owned and 49% under contract. Our owned and controlled lots of 21,000 is an increase of 28% versus a year ago.

We own 10,600 lots of which 33% are in the Midwest, 45% in the South, and 22% in the mid-Atlantic. We believe we have a very good solid land position. 29% of our owned controlled lots are in the Midwest, 44% of our land is in our Southern region, and 27% is in the mid-Atlantic.

During 2014's first quarter, we spent $53 million on land purchases and $18 million on land development for a total of $71 million. About 54% of the purchase amount was raw land. Our estimate today for 2014 land purchase and development spending is $400 million to $500 million including the $71 million we spent in our first quarter.

At the end of the quarter, we had 119 million in inventory homes, 305 that were completed, and 477 inventory homes under construction. This translates into about 4.9 inventory homes per community and of the 782 inventory homes, 253 are in the Midwest, 325 are in the Southern region, and 204 are in the mid-Atlantic. At March 31, 2013, we had 616 inventory homes with an investment of $76 million which was about 4.6 homes per community.

We believe we are positioned well with our inventory levels.

Our financial condition continues to be strong with $101 million of cash, $507 million in equity and a net debt to cap ratio of 39% and the Company had no borrowings under our $200 million unsecured credit facility.

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

(Operator Instructions). Michael Rehaut.

Good afternoon, everyone. Was hoping to get some incremental color on the sales pace. You mentioned that it declined if you look at just use the average community count, down about 21% year-over-year for the quarter overall. And I believe you kind of referred to the challenged weather but also some challenges in the Tampa market.

I was hoping by region to give us a sense of where perhaps weather hit you the hardest and your thoughts about to the extent that there is a thaw that might obviously is occurring or has occurred over the last few weeks, what your expectations are in terms of sales pace for 2Q versus a year ago? Thanks.

Thanks, Michael. It is Bob Schottenstein. Appreciate the question. Not going to get into any guidance on 2Q but let me just say a couple of things.

First, and I want to be really clear about this, and I think I said this in my comments and even knowing that I did, I still want to reiterate it. We continue to believe that we are in the early stages of a housing recovery that will last a number of years. We are optimistic not just about our business but we are optimistic about macro housing conditions. That said, we were coming off -- and these are not excuses, they are just facts.

We were coming off a particularly different comp from a year ago. About 70% of our communities are located in our four Midwest and three mid-Atlantic divisions which relative, our footprint is what it is but when you think about it that way, the weather was particularly impactful. Perhaps no city received more of an impact from it than Indianapolis where we have really ramped up our growth projections and there is no question that they were hard-hit by the winter weather.

The other thing is that the weather contributed even though we opened in 13 new communities, a number of communities that we had hoped to open earlier in the quarter frankly did not get open or opened late in the quarter.

The other thing I would add is that in our judgment while the spring selling season is not quite as good as it was a year ago, it doesn't mean it is bad. It means it wasn't quite as good as a year ago. A year ago it was very, very robust and conditions are good. They are just not as good as they were a year ago and conditions as I mentioned before, one of our other markets that we have a very strong operation in and that does very meaningful volume for us is Tampa and conditions in Tampa have been uneven. And I don't believe just for us. In fact I know not just for us.

And then of course, you also look at DC and I think the conditions have been a little bit choppy there as well. So you throw it all of that up into a bag and you shake it and you come out with your sales just off slightly from a year ago where you had a pretty difficult comp.

I think over the course of time, our communities and our subdivision performance has been good and I believe it will continue to be in the future.

One other thing, Michael, Bob talked about the tough comp last year, up 37% in the first quarter, also last year we had a very strong second quarter, we were up 31%. We also said when we talk about new communities being open this year, last year we opened about 65 new communities. This year we are hoping to open about 75. The majority of the 75 this year also are in the second half. And as Bob said, the first-quarter was impacted by communities we thought would open in January opened in March. Maybe we thought the models would be open in February and the models are just opening now. So that has also impacted our sales.

I appreciate that. I guess the second question just on the gross margins, another builder earlier today was able to give a rough estimate or idea of what weather might have impacted in terms of basis points or dollars gross margin or the quarter just given how the challenges of weather either from a construction standpoint, etc. either delayed or created additional costs in the system. I was wondering if perhaps you had a sense of how that might have played out for yourself?

More broadly if you can give us any thoughts in terms of -- you have been pretty steady on the gross margin line for the last three quarters now in the low 20% range, if that is something that makes sense for us to think is sustainable at least for the rest of this year? Thanks.

We definitely were impacted in the first quarter due to the bad weather. Not going to give any type of specific as far as the number but there was an impact there. We have been working very hard on improving our margins and our margins improved pretty significantly in the first quarter and again, we don't provide any margin guidance but we are hoping to continue to have better margins. Not giving any projection or anything, but that is just very, very key to us. Our average sale price now is back up to over 325 and if we continue to push these margins up and continue to get some SG&A leverage, as Bob said, we are focused very much on improving our profitability.

The only thing I would add to that is that I think it was the last call, the fourth-quarter call from last year, it might have been the third-quarter call but I think it was the fourth, where there was a lot of attention paid to will margins improve next year, that being this year. And we feel good about our margins now. We feel good about the improvement in the first quarter and we feel good about them going forward.

Thank you.

Ivy Zelman.

I think you did a great job just now, Bob, of articulating your view in the market and I think you answered most of my questions by presenting your case the way you did.

I guess if you drill in a little bit more, you talk about Tampa being spotty. Thinking about markets where you're not getting absorption maybe as easily as you might have or would expect to, what type of strategy would you implement in terms of incentives? And thinking about pricing overall with respect to 2014 versus 4013, do you expect to hold price and see some bumps throughout the portfolio?

Maybe talk about incentives in general but just give us some perspective but where there is spottiness or lumpiness and you are not seeing absorptions and ex the weather which certainly had a negative impact, how strategically you position yourself. I know you guys don't have a lot of spec at least you haven't historically and with all of the new communities you are bringing online, we would love to understand your strategy on pricing as you are not seeing absorptions or you don't get them.

First of all, Ivy, thanks for your comments. The short answer to that question is that we have not yet seen the need to do much incentivizing and I don't think there is any reason to panic. I think conditions are getting better. Sometimes it is not as noticeable but we do believe conditions are going to continue to be good for housing. And in select communities, you know we may do a little bit here and there but we haven't done anything in any material way to promote sales.

I don't know if you have anything you want to add to that, Phil? I'm sorry, what, Ivy?

I'm sorry, I was just going to add for your big picture perspective on what you think pricing will do for the full-year with respect to a year ago, do you think you will old and improve pricing for the Company companywide and strategically maybe talk a little bit about mix but sorry, I'm asking more questions. You get me going, Bob.

I think when you look at us, our expectation is that we will continue to get back a little more to our sweet spot which is the first and second move up and a little bigger houses; hopefully the pricing will continue to improve. If you look at our backlog, average sale price is up about 12% from a year ago. Of course averages can always be a little bit misleading. When you look at our average sticks and bricks in the last year or so, it tends to be more in the 5%, 6%, 7% range so we are sure hopeful that our average sale price --

5%, 6%, 7% increase.

-- increase compared to the average sales price being over 10%. So we are hoping as we get more back to our sweet spot of first time move up, second time move up, hopefully things will continue to go the right direction as far as pricing and margins.

The only thing I would add to that too is knowing what we know today, and I think we have made the point that we feel good about things. But I don't see a lot of opportunity to push prices up in most instances. It doesn't mean they are coming down, it doesn't mean we are going to start incentivizing but we think our margins have improved. We feel good about our outlook there but I don't see a lot of opportunity for prices to jump meaningfully.

Got it. Bob, just in terms of the Company specific plan for the next three-year outlook with your sweet spot being the first time move up and recognizing there is a lot of concern about if you are not in the affordable market, you are not going to get to sort of a trajectory of growth, would you say that you guys are very comfortable in your sweet spot that you can realize your growth expectations that you have laid out?

Yes, and frankly over the history of our Company from time to time, we have been very successful when we thought the market was there to roll out what I would call 1200 to 1800 square foot houses, houses that were significantly smaller than first-time move up houses, predominantly three-bedroom homes for that first-time buyer, that new family or that person entering the housing market.

If in a lot of our markets we start -- if in some of our markets I should say we start to see an increasing demand for that, right now it is not meaningful enough at least in our view, we will react to it. Of course, you've got to find the communities for it as well and be able to produce the lot so you can get to the price.

Thank you, Bob.

Thank you.

(Operator Instructions). Will Randow.

Good afternoon and thank you for taking my question. I appreciated the detail on land costs as a percentage of backlog ASP. I guess when you are seeing trends in average selling prices as well as costs -- I don't know if it is per square foot -- what does that spread look like call it through the first quarter and where are you seeing that kind of pacing based on your newer land buys?

Well, I guess first from a stick and brick standpoint, we are not seeing the increases that we have seen in the last year or so. So they stick and brick costs don't seem to be quite as bad. Trying to focus on improving cycle time which has been a little slow especially in certain Texas markets with good subs and suppliers. As far as land costs, we feel really good about our land bank if you look at our average lot cost and we give you the finished lots every quarter, it has been inching up a little bit but nothing real significant.

But we continue from a --trying to focus on premier locations, we continue to buy at least half of our overall land and then you get into development costs and those type things so I guess the short answer is that things are not escalating as much as they have been but there is always a challenge to get premier locations.

Thanks for that. And then you mentioned in your Chicago market which was one of your best performers in the Midwest, are you seeing more competition there for land and sales given you guys (inaudible) a larger private stepping into that market and kind of what are you seeing there?

Probably not a whole lot different than most of the other markets we are in, they are all very competitive. All of the Texas markets are competitive, certainly Tampa and Orlando, Charlotte, Raleigh, they are all very competitive markets. Chicago is not a whole lot different. The Chicago market is starting to get better. It is one of our best performing markets. I wouldn't say there is anything particularly unusual there though.

I guess stated differently, a lot of builders have kind of stepped away from the Chicago market. Are you seeing them reenter the market as it is starting to get its legs back?

I don't know that I am aware of any major re-entrant or entrant into that market. So I guess the answer would be no, I am not aware of it.

Thank you for the time and good quarter.

Okay, thanks.

(Operator Instructions). There are no further questions at this time.

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

This concludes today's conference call. You may now disconnect your lines.