M/I Homes Inc (MHO) 2014 Q4 法說會逐字稿

Good afternoon. My name is Sharra, and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes year-end conference call.

(Operator Instructions)

Thank you. Mr. Phil Creek, you may begin your conference.

Thank you for joining us on our call today. With me is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Paul Rosen, President of our Mortgage Company; Ann Marie Hunker, VP Corporate Controller; and Kevin Hake, Senior VP.

First, to address regulation and [ferry] 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.

What that, I will turn the call over to Bob.

Thanks, Phil, and thank you all for joining us today.

As stated in our release, we are pleased with our fourth-quarter and full-year results, highlighted by earning $69.7 million of pretax income, which represents a 69% increase over 2013. For the fourth quarter, our pretax profits increased to $19.7 million, from $15.3 million a year ago, which is a 29% improvement. There were a number of factors that contributed to our improved profitability.

We delivered 1,105 homes in the fourth quarter, and 3,721 homes for the year. The yearly closing total was a 7% increase over 2013.

Our average sale price on homes delivered was $313,000, this being a 10% increase over the average selling price in 2013. Revenues increased for the year by 17%, to nearly $1.2 billion. And we improved our margins, with gross margins increasing by 90 basis points, and our SG&A ratio decreasing by 30 basis points.

More specifically for the quarter, we lowered our SG&A ratio to 13.7%. This represents a 60 basis point reduction from last year's fourth quarter. I'll remind everyone that we remain very focused on managing our expenses, and expect to further improve our SG&A ratio in 2015.

Our average sale price in backlog also increased in 2014, resulting in a year-end backlog sales value of $425 million, 4% better than the end of 2013, and the highest year-end backlog level since 2006. Our financial services segment also posted very strong results in 2014. Shortly, Paul Rosen, the Head of our Mortgage operation, will discuss this in more detail.

Beginning n 2010, when we first opened in Houston, and for each of the next three years, we opened a new market in Texas. We now operate in Houston, San Antonio, Austin, and Dallas. I'm pleased to report that in 2014, our expansion into Texas began to contribute positively to our financial results.

We delivered over 200 homes in both Houston and San Antonio in 2014. And we were pleased to close our first homes in both Austin and Dallas. We are expecting significant growth in Texas in 2015, as well as meaningful contribution to our 2015 financial results.

From a sale standpoint, the pace of growing our business slowed in 2014, as we were definitely impacted by substantial delays in getting many of our new communities timely opened. As a result, the number of net communities open for sale at the end of 2014 was 4% less, when compared to the end of 2013. And our new contracts posted a 3% decline, both for the fourth quarter and the full year.

For 2015, we expect to open a significant number of new communities, thereby growing our community count by more than 15% over 2014. Phil will talk more about this in a few minutes.

In so doing, we look to get back on track with growing our business. You may recall that in each of 2012 and 2013, we grew our annual new contracts by more than 25%.

Housing conditions in 2014 were clearly choppy, as we experienced inconsistent and uneven demand in most of our markets throughout the year. As we begin 2015, the combination of low interest rates, improving consumer confidence, improving employment levels, along with recent announcements by FHA that should approve mortgage availability, all bode well for our industry. And suggest to us that housing conditions will improve, and nationwide new home sales will increase in 2015.

Over the past couple of weeks, as other builders have released their results, much has been said, and questions have been asked, about the ability to grow sales in the direction of gross margins. While no one can be certain as to future sales and margin trends, we are optimistic about our business. We feel good about the markets in which we operate.

We believe we have solid growth opportunities in Texas, as I previously mentioned. And we believe we have solid growth opportunities on our other markets. We feel good about the quality of our existing communities, and are particularly excited about the quality of the significant number of new communities we expect to open in 2015.

From a sales standpoint, we are off to a good start, as our January new contracts increased by 8% over last year. On the other hand, our year-end margins and backlog were down slightly from a year ago. In sum, providing housing markets continue as expected, M/I Homes is positioned to grow its top line in 2015. We are positioned to sell and close more homes in 2015, and we are positioned to increase our profits and strengthen our returns.

Now let me take a moment to talk about our various regions, beginning with the Southern region, where we operate in Tampa and Orlando, Florida, as well as the aforementioned Texas markets: Houston, San Antonio, Austin, and Dallas.

Our Texas expansion is contributing to our growth, as I said. And our new contracts in the Southern region increased 24% during the quarter.

We're also achieving very solid results in our two Florida markets. And we have been growing our position in both Orlando and Tampa. Sales in Orlando were strong throughout the year, while sales in the Tampa market fell off a bit during the spring of last year, compared with a very strong selling pace in Tampa during the spring of 2013. We have seen a pickup in sales again in Tampa over the past few months.

The Southern region had 383 deliveries for the fourth quarter. And for the year, deliveries totaled 1,332, or 36% of our total business.

Our fourth-quarter deliveries in the Southern region were up 13% for the full year, and the dollar value of our sales backlog at year's end was up 11% from the beginning of the year in the Southern region. Finally, in the Southern region, we controlled our -- we increased our controlled lot position by nearly 980 lots, which represents an 11% increase from a year ago, and had 50 communities in the Southern region at year's end, unchanged from a year earlier.

Next, the Midwest region, where we operate in Columbus, Cincinnati, Indianapolis and Chicago. We had 445 deliveries in the fourth quarter, and 1,376 deliveries for the year, or 37% of the total. I want to note that this ratio of deliveries has declined from 53% of total Company deliveries in 2009, to now 37% today, as we have intentionally, and we believe successfully, expanded and shifted our geographic footprint.

Our deliveries increased 11% in the Midwest for the fourth quarter compared with last year, while our new contracts in the Midwest region were down 20% in the quarter. Sales backlog was up 4% from the start of the year, and our controlled lot position in the Midwest decreased 6% compared to a year ago. We ended the year with 62 active communities, a decrease of 11% from a year ago.

Chicago had a very solid year for us, and continues to be one of our best-performing markets. Indianapolis and Cincinnati both continued to improve with respect to closings and margins, and achieved good results for the year. And our Columbus market has clearly improved in profitability, even with less communities open, and thus a lower volume of deliveries.

Lastly, the mid-Atlantic region, where we have operations in Charlotte and Raleigh, North Carolina, as well as DC. In the mid-Atlantic, new contracts were down 9% for the fourth quarter, compared with 2013. And our backlog value was down 6% at year's end from the beginning of the year.

We delivered 1,013 homes during the year, or 27% of the total. Our Raleigh operation had a very strong year, while Charlotte and Washington DC deliveries fell off slightly, as we wound down in some of our better performing communities, and our newer replacement communities were not yet contributing fully. We expect Charlotte to perform quite well in 2015, as our new communities come online and we also expect improvement in DC.

We ended the year with 38 active communities in the mid-Atlantic region, up about 3% from the beginning of the year. And our controlled lot position in the mid-Atlantic region increased 6% from last year.

Before turning things over to Phil, let me just say this. We ended the year with a very solid balance sheet, which positions us for continued growth. We have $544 million of shareholders' equity, $243 million of availability under our $300 million unsecured revolving credit facility, and a healthy 47% ratio of net debt to capital. As we begin 2015, we will continue to focus on growing the business, and improving our profitability and strengthening our returns.

Phil?

Thanks, Bob. As far as financial results, new contracts for the fourth quarter decreased 3%, to 773. Our tracker for the quarter was down 3%, and our community count was down 4%.

We were up against tough comparisons, as last year's fourth quarter sales were up 18%, and our community count was up 20%. Our new contracts were down 2% in October, down 12% in November, and up 8% in December. As to our buyer profile, about 40% of our sales continue to be first-time buyers, and about 50% of our sales continue to be inventory homes.

Our active communities were 150 at the end of 2014. The breakdown by region is 62 in the Midwest, 50 in the South, and 38 in the mid-Atlantic. During the quarter, we opened 19 new communities, while closing 16. And for the year, we opened 56 new communities and closed 63.

Our current estimate for 2015 is to open about 65 new communities, and increase our 2015 end of the year community count by 15%. The majority of our new communities are opening in the second half of 2015. We delivered 1,105 homes in 2014's fourth quarter, delivering 71% of our backlog, compared to 70% a year ago.

Revenue increased 9% for the fourth quarter, and increased 17% for the year, compared to the same periods of 2013. Our average closing price for the fourth quarter was $322,000, a 10% increase over last year's $292,000. And our backlog sales price is $348,000, up 9% from a year ago.

We recorded pretax charges of $2 million and $3.5 million in the fourth quarter and for the year, related to our Midwest legacy assets. We believe we now have addressed all of our legacy communities. Our building cycle time for homes were about the same in the fourth quarter as the third quarter. Certain markets continue to have challenges.

Our construction and land development cost increased slightly, when compared to the fourth quarter of last year. Our gross margin was 20% for the quarter, versus 19.9% a year ago. And for the full year of 2014, our gross margin was 20.8%, up 90 basis points from prior year.

Land gross profit was $834,000 in 2014's fourth quarter, and $3.6 million for the full year of 2014. This compares to $518,000 in 2013's fourth quarter, and $3.8 million for the full year of 2013.

Our fourth-quarter SG&A expenses were 13.7% of revenue, improving 60 basis points, compared to 14.3% a year ago. And for the year, our SG&A expense ratio improved 30 basis points, to 14.0%.

SG&A expense in 2014 included $1.4 million and $2.7 million of expense, for deposits and other costs associated with land deals that we walked away from for the fourth quarter and the year. Excluding these costs, our fourth-quarter SG&A percentage was 13.3, and our full year was 13.8. We expect to continue to gain SG&A efficiency in 2015. Interest expense increased slightly for the quarter, and decreased $2.6 million for the 12 months of 2014, when compared to last year. This reflects higher capitalization for the year, due to higher land development activity.

We have $15 million in capitalized interest on our balance sheet, compared to $14 million a year ago. This is about 1% of our total assets.

We continue to focus on improving our profitability and our returns. In the fourth quarter, our pretax income increased 29% on revenue growth of 9%, and our pretax income percentage increased to 5.4%, from 4.6% a year ago. Our effective tax rate was 27% for the year and 44% in 2014's fourth quarter.

For the year, our tax rate benefited from the $9.3 million reversal of our state deferred tax asset valuation allowance. And our fourth-quarter rate was higher, due to the impact of state tax rate changes on our deferred state tax assets, and also changes in our state-apportionment factors. We estimate that our 2015 effective tax rate will approximate 38%.

Our earnings per diluted share for the quarter was $0.36. This per share amount reflects $1.2 million of dividends paid to our preferred shareholders during the quarter. Excluding our impairment, and using our expected 2015 38% tax rate, our diluted EPS would have been $0.41 per share.

Now, Paul Rosen will cover our mortgage company results.

Thanks, Phil. Our mortgage and title operations pretax income increased from $2 million in 2013's fourth quarter to $3 million in the same period of 2014. Our fourth-quarter results include a decrease in loans originated from 815 to 771, and an increase in the average mortgage amount. For the quarter, we experienced an increase in the margins on the loans sold and contained servicing.

The loan to value on our first mortgages for the fourth quarter was 86% in 2014, compared to 85% in 2013's fourth quarter. We continued to see a shift towards conventional financing. 73% of the loans closed were conventional, and 27% were FHA/VA. This compares to 71% and 29%, respectively, for 2013's same period.

Overall, our average mortgage amount increased 9%, to $269,000 in 2014's fourth-quarter, compared to $246,000 in 2013's fourth quarter. The average borrower credit score of our mortgages originated by M/I Financial was 736 in the fourth quarter of 2014, and 740 in 2014's third quarter. Our mortgage operation captured approximately 80% of our business in the fourth quarter, compared to 2013's 84%.

At December 31, 2014, we had $70 million outstanding Under the M/I Financial credit agreement, which expires March 27, 2015. And $15 million outstanding under a separate repo facility, which expires November 3, 2015. Both facilities are typical 364-day mortgage warehouse facilities that we extend annually.

For the year ended December 31, our mortgage operation and title operations achieved pretax income of $14.2 million, compared to $14.4 million in 2013. We were able to obtain similar profit margins on loans sold and servicing retained transactions. That's from the previous year.

Now I'll 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 in new communities, while also managing our capital structure. Total home-building inventory at December 31, 2014 was $919 million, an increase of $228 million above December 31, 2013 levels. This increase is primarily due to higher investment in our backlog and increased land spend.

Our land investment at year end 2014 was up $470 million, a 39% increase compared to $339 million a year ago. At December 31, we had $246 million of raw land and land under development, and $224 million of finished unsold lots.

We owned 3,450 unsold finished lots, with an average cost of $65,000 per lot, and this average lot cost is 19% of our $348,000 backlog average sale price. The market breakdown of our $470 million of unsold land is $135 million in the Midwest, $196 million in the South, and $139 million in the mid-Atlantic. Lots owned and controlled as of December 31, 2014 totaled 20,725 lots, 55% of which were owned, and 45% under contract. Our owned and controlled lots are an increase of 5% versus a year ago.

We own 11,361 lots, of which 31% are in the Midwest, 44% from the South, and 25% is in the mid-Atlantic. We believe we have a very good, solid land position.

During 2014's fourth quarter, we spent $54 million on land purchases, and $51 million on land development, for a total of $105 million. And for 2014, we spent $382 million on land purchases and land development. And as to our 2014 land purchases, about 50% of our purchased amount was raw land.

Our estimate today for 2015, land purchased and development spending is $400 million to $450 million. At the end of the quarter, we had 460 completed inventory homes, 3 per community, and 979 total inventory homes. And of the total inventory homes, 362 were in the Midwest, 384 in the Southern region, and 233 in the mid-Atlantic.

At December 31, 2013, we had 321 completed inventory homes, and 798 total inventory homes. We believe we are well-positioned with our spec levels. Our financial condition continues to be strong, with $544 million at equity and net debt to cap ratio of 47%. At December 31, 2014, we had $30 million outstanding under our $300 million unsecured revolving credit facility.

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

(Operator Instructions)

Michael Rehaut, JPMorgan.

Thanks. Good afternoon, everyone. The first question I had was regarding gross margins. You had mentioned, in your prepared remarks, that the year-end margins and backlog were down slightly from a year ago. I was wondering if you could comment on how they compare to at 3Q end. And if you have any view of, given what you're expecting to open up, and potentially, certain mix might change as we get through the year, from the newer communities. If you have a view on whether 2015 gross margins can hold versus 2014? Or go up a little bit or go down a little bit?

That was a whole lot of questions, Michael. I think we pretty much said what we wanted to say. We've been working very hard on improving our margins. We were able to have pretty good improvement in 2014. As Bob says, there is a slight decrease in margins at backlog. We are opening a lot of new communities. We have high hopes for those communities. It hard to predict margins when about 50% of your sales are inventory homes. The cost pressures have not quite have been as much as they have been in the past. So we are hopeful that the margin line, it is obviously very important, but it's very hard to predict very far over your [skis], as far as what margins are going to be.

I think as -- Michael, the other thing, and I think you know this very well, and it's been worn out by what we've heard over the past few weeks, is that the ability to push pricing clearly moderated throughout 2014. And I think that that certainly was the case here. And that said, and we said this before -- and this doesn't address specifically your question about where we think our margins are going to be in 2015. We do know that in backlog, they are slightly lower. But we also believe that, in terms of the bottom line, in terms of our net operating margin, we're poised to produce results in 2015 with a stronger bottom line, in terms of returns.

And -- I appreciate that. I guess just, though, you said slightly down from a year ago. What about sequentially? That was, I guess, one of the couple questions I had in there.

I don't really have any comment on that, as far as December 31, 2014 versus September 30, 2014 backlog, that type thing. I don't have any comment on that. As we did state, also, the majority of our new communities in 2015 are opening in the last two quarters of this year. So we're hopeful it is going to be a strong spring selling season.

Okay. Also, just a modeling question, Phil. Interest expense for the year totaled about $13.5 million, down from nearly $16 million in 2013. Can you give us a sense of what to expect for 2015?

We are borrowing from the banks now. So when you start looking at interest incurred, chances are the interest incurred number is going to be higher in 2015 than it was in 2014. As far as what hits the bottom line, again, that's dependent on the amount of interest capitalized, and so forth. Having said all that, our expectation would be that interest expense for the year probably will be higher.

That's directly expensed in that line item?

That's true, yes.

Okay. Can I just sneak in one more? Sales pace, you had a nice improvement in orders, in December and January, up 8%. It didn't seem like there was a dramatic change in community count, year-over-year, in terms of the year-over-year. So it would seem that perhaps sales pace was the driver there. I'm wondering if that's the case? And if so, whether there's any particular regions that drove that improvement?

I think that what we've seen as much as anything is improvement in traffic in most of our divisions. There's no particular -- I could not single out any specific region that distinguishes itself. I think it's pretty much across the board.

Great. Thanks, guys.

Adam Rudiger, Wells Fargo Securities.

You noted in your release, in your remarks, and I think in past calls, as well, that you've had some delays in opening communities. And so I was wondering if the guidance that you've given is conservative in taking into account those kind of delays? Or if not, do you think those delays are behind you, and things have normalized?

I don't know if things have normalized, but last year, we were more confident about our ability to get communities open, as well. About 60% of our operation was unusually, and very materially, impacted by a very severe weather -- winter weather, in the early part of last winter. So -- but as we sit here today, and say what we expect to happen, I think we're much more measured, and it's what we believe. We think we will get them open, and it will be -- a majority of them will be back half loaded, as Phil mentioned. But we think we can get them open, and we've dealt with and managed around most of the delays that we were dealing with before.

Okay. Thank you. And the second question was, in the prepared remarks, you talked about Texas, I think, you said should have -- I think the words used were, meaningful contribution this year. Can you discuss where -- is that going to be just a revenue impact? Or could you also talk about what any SG&A leverage, and what gross margin impact, directionally, will be from that meaningful growth?

Phil can maybe add more to what I'm going to say, but we think it will be in all areas, as we continue to grow in all four markets. We expect significant growth, in the aggregate, for the four markets. Our first sales and closings were in Houston in 2010, San Antonio in 2011, Austin, first sales in 2013, first closings in early 2014, and Dallas, first sales and closings in 2014. So we had two, three, four, relative start-ups that are beginning, now, some more than other, to gain enough traction, to where they help all those items. And we think, this year, that they will have a meaningful contribution in a positive way.

Okay. Thank you.

Ivy Zelman, Zelman & Associates

It's Alan [Ratner] on for Ivy. Bob, just following on, on the Texas commentary. And obviously, you guys have been ramping growth there, and it sounds like you're excited about the communities you've got opening up. I think most other builders, even though they might not have seen an impact yet from lower oil prices, it seems like they've taken a more conservative tone, as far as the outlook for the year. So I was curious if you maybe could separate out the organic growth that you're seeing in the Company from Texas? Versus what you're seeing in the market, the trends there, given the lower oil prices? Just a little bit about the outlook in Texas in 2015?

I'm not sure I completely understand your question, but let me just say this. I think that the sentiments that have been expressed by other builders, I think have been well expressed. That yes, there's a little bit of caution. But to date, I don't think that we have seen anything significant or material. I think that the issues are probably more pronounced in Houston, and maybe to a lesser extent, San Antonio. Then certainly, Austin, and maybe to a slightly lesser extent, Dallas/Fort Worth. But was your question, do we expect to grow on our other markets, as well?

No. I guess I was just getting the fact that, do you think that absorption pace in the market is likely to show improvement or decline in 2015? And I guess, adding onto that, you have been investing a lot there. Are you ratcheting back that a little bit, and just focusing on opening other committees? Or do you still look to invest a lot in land in Texas, moving forward in 2015?

I guess also, on the one thing to remember, is that we -- a lot of our new communities that we open the last part of last year, and also planned for this year, are in Texas. So we're not saying that the Texas markets are going to be any great guns growth. But for us to be opening two communities in Dallas, and then be opening six communities in Dallas, and instead of closing three or four houses a month, to be closing ten houses a month, those have big impacts on us. Our comments are more based on where we are coming from and where we're going to, with our expectation that all four of our Texas markets -- it is our plan and hope that all four of our Texas markets will have significant growth.

And again, that's more based on where we are, the new committees we have recently opened or planned to open. (multiple speakers) As far as pace overall, we would like to think that pace will be a little better in 2015 than in 2014. Bob made comments about the market in general. We're hoping the markets in general are a little better. We'd like to think that communities that we're opening are a little better well located, a little better product, a little better price points, those type things. So all of those things make us optimistic that things are going to be a little bit better in 2015.

Got it. That's helpful. And if I could just change gears quickly. On the balance sheet, this is the lowest cash balance sheet you guys have operated at in quite a while. And you mentioned that you're going to be borrowing from the banks. So presumably, you're comfortable with using the revolver to fund the growth in 2015. I would imagine, with the community count growth you're looking at, you would expect to be a cash user again next year. So just curious, longer-term, is that something you're comfortable with maintaining a balance on the revolvers? Or perhaps looking more towards the longer-term debt market to fund that?

Alan, this is Kevin. We are comfortable. We've been borrowing, actually, since April or May, on and off. We had outstandings at the end of September. We have outstandings again at the end of the year. This year, we would expect (technical difficulty) with our growth, that we will continue to make use of the revolver. As you're aware, we looked, and went very far down the road for refinancing of our existing senior notes in October. And the market wasn't receptive where we wanted it to be.

Those notes aren't due until 2018. We will continue to look at high-yield markets for opportunities, but don't feel, at all, any kind of a need to do anything of value in a public debt market. We're comfortable with our group of banks, and that's the reason we took the facility up from $200 million to $300 million in October, and are very comfortable with -- and we took the maturity out. And we're comfortable making use of it. We don't expect to get to a level of -- very high with the usage, where we would be uncomfortable.

Great. Thanks a lot, guys. Good luck.

Alex Barron, Housing Research.

Can you hear me okay?

Yes.

I was hoping you could talk a little bit about your spec homes. It seems like they're up a little bit, year-over-year. Wondering if that's a change in strategy? Or was that intentional or unintentional? Or where do you guys see that -- your spec strategy moving in 2015?

Alex, we feel, really, pretty comfortable where we are, having three completed specs for a community, realize that's up a little bit. This time last year, we were a little over two. But where the markets are, et cetera, we feel pretty good about that. Not really a change in strategy. As far as our expectation, we would probably think over time, in 2015, that would probably come down a little bit. But again, we feel really good about where we are.

Okay. Sounds good. And then, I guess, going back to Texas. You mentioned that a couple of the cities are now delivering over 200 units. And I guess you need some scale to start showing profits. I'm just wondering if you could give us a better sense of what -- how many homes did you get in Texas in 2014? And maybe what percentage of your pretax income came from Texas?

We don't disclose that type of detailed information. Of course, you can look at our website, and see the communities that have opened, and so forth. But it's our plan that Austin and Dallas will significantly improve their closings in 2015. Unsure if they'll get to that 200 type level. But again, a 200 type level, for us, starts producing pretty good financial results, even after our internal interest in allocation rates. And we also are hopeful that Houston and San Antonio will also grow from their 2014 performance. So again, we're expecting, as Bob said, to have continued improved results from all four of those operations.

Okay, got it. Thanks.

And there are no further questions at this time.

Okay. We appreciate you joining us, and look forward to talking to you at the end of the first quarter. Thank you.

Thank you for joining today's teleconference. You may now disconnect your lines.