Meritage Homes Corp (MTH) 2002 Q1 法說會逐字稿

Good day, everyone, and welcome to the teleconference of Meritage Earnings to discuss financial results for the first quarter ended March 31, 2002. Participating on the call today from the company's management are Steve Hilton and John Landon, co-chairmen and co-chief executive officers; and Larry [Say], chief financial officer. But first a housekeeping matter. I'd like to remind everyone that during the course of this conference call, certain projections and forward-looking statements may be made regarding the future events for the future financial performance of the company. We refer you to the disclosures of the company files with the Securities and Exchange Commission, specifically those contained in the company's most recently filed 10-K and 10-Q. These documents describe important factors that may cause actual results to differ materially from those contained in any projections or forward-looking statements made during this conference call. I would now like to turn the call over to Steve Hilton. Steve.

Thank you for joining us this morning to discuss Meritage's first quarter results. Our format will follow patterns we've used in the past. First I'll recap our record performance. Next John will address market trends and outlooks for the remainder of 2002. Larry will then provide details about our balance sheet and other financial information. As you know, 2001 was our 14th consecutive year of record revenues and profits. We're now on what we believe to be our 15th record year. Net earnings reached a first quarter record of $8.6 million or $1.43 per diluted share. The company once again set new quarterly records for home sales revenues, new orders, closings, and backlogs. Our home sales revenue grew to $169.7 million from $116.1 million in 2001, an increase of 46 percent. The dollar value reached an all-time high of $293.1, posting a solid 66 percent over the prior year's first quarter. Dollar value in order backlog was up 34 percent. Sales were particularly strong in northern California as a result of an increase in number of new communities open there from in eight prior year's quarter to twelve currently open. And strong to rebound demands in the more strong rebound demand in more moderately priced Sacramento and San Francisco East Bay, Central Valley markets would be served. Our gross margin in the quarter was 18.6 percent of revenue compared to 20.3 percent in last year's first quarter. Closing books of the quarter generally consist of homes that are ordered in the second half of 2001. The quarter only the margins were impacted by the slower economic condition that existed at that time, including increased sales incentives. Also, SG&A costs for the quarter were up approximately .7 percent over last year, generally reflecting higher marketing costs which we were experiencing at the time. We anticipate the current quarter's sales will generate slightly higher margins when they begin to close through the second half of the year, although we do not anticipate the levels reaching the peak record levels posted last year. We are pleased with our record [inaudible] performance from the first quarter of 2002, because our firms are distinct in the historically successful approach to the home building business. And they service well even though the oceanic uncertainty of the recent past, we believe will continue to serve us in the future. Our strategy of being the right market reflecting appropriate additions in those markets, and offering the right prices and products has enabled us to perform consistently well over time, as evidenced by the results announced today. John Landon will now cover expectations for the remainder of 2002. John?

Thank you, Steve, and good morning, everyone. As Steve pointed out, we are start 2002 on exceptionally strong footing. As remarkable as last year was for Meritage, this year promised to even be better as the upward trends we now see remain in place. When we last resulted results, we noted for you some very positive signs in our industry. New housing that remains affordable, we've got inventories in balance and mortgage rates that are still at or near historic lows. We said that any economic improvements bodes well for our business, and it is certainly evidenced by the results we're recording today. We ended the first quarter of 2002 with another record backlog. 2,0O4 homes with a sales value of $498 million. That's a 36 percent increase in homes and a 34 percent increase in sales value over a backlog at the end of the first quarter of 2001. So we continue to be optimistic that 2002 will be another record year for meritage, assuming improvements we're seeing in the economy continue. Looking at the rest of 2002, based on current economic conditions and sales rates, we anticipate the top line growth of approximately 20 to 25 percent over 2001 to about $900-950 million, and this growth estimate excludes in any impact of any acquisition which continues to be a high priority for us. We are currently estimating the earnings per share were approximately $4.75 to $5 this year after giving effect to the recently announced two-for-one stock split. Our subdivision count has continued to grow at the end of the first quarter. We were actively selling in 77 communities. That's about a 4 percent increase over the prior year quarter end, and it's a 35 percent increase over the count at the end of last year's first quarter. We continue to actively pursue acquisitions outside of our current market areas, and areas that continue to be of particular interest are southern California, Nevada, Colorado, Georgia, and Florida, all southern markets, and we continue to make the completion of an acquisition a top priority in 2002. In summary, our optimism for 2002 remains in place, and we look forward to reporting our progress to you of the second quarter in July. Now I'd like Larry [Say] to comment briefly with a financial update. Larry? LARRY [SAY]: Thanks, John. At quarter end, the company had approximately $210 in notes payable consisting of $55 million in senior notes with balance comprised of its bank facilities. Following our typical seasonal buildup in inventory for a stronger second half closing rate, our debt-to-capital ratio at quarter end is expected to increase to 50 -- approximately 53 percent. In excluding the effects of an acquisition, we expect that should increase modestly for the next quarter or so and then decrease to a year-end number below the 50 percent range. Our liquidity remains strong with approximately $85 million in immediately available and undrawn reserves under credit facility. After a consideration of the most restrictive debt covenants, this higher amount would be available to borrow. Eba docks] for the quarter was $18.7 million, a 25 percent increase over $14.9 million a year ago. Our two-for-one stock split is effective at the start of trading tomorrow. At that time the number of Meritage shares will double to approximately $11.1 million. Due to the split, all of our previously reported per-share amounts will be retroactively restated, effectively cutting them in half. Accordingly, the first quarter's diluted sharing earnings amount will be adjusted to 72 cents.

Thank you, Larry. That ends our formal comments. Now we'll open it up for questions. The conference call operator will provide you with instructions on how to register your questions.

Today's question-answer session will be conducted electronically. If you'd like to ask a question, you may do so by pressing the star key followed by the digit 1 on your touch tone telephone. Once again, if you'd like to ask a question, that's star 1 on your touch tone telephone. And we'll pause just a minute to check our roster. And we have our first question from Robert Manowicz [phonetic] With UBS Warburg [phonetic].

Hi, good afternoon. You'd mentioned acquisition several times in your opening comments. How would you guide us to expect an acquisition in terms of timing?

I don't think we can give you a specific timetable. We're out actively pursuing many opportunities, but we don't want to comment on a specific timetable. It is a top priority for us, thought.

Okay. Secondly, have you had any talks with your banks about bringing your revolver to an unsecured basis?

Larry, do you want to take that? LARRY [SAY]: Sure. It is something we are seriously considering. It would be premature to talk about it at this time, but it is something we think the company should pursue going forward. It's just a matter of taking the right time to execute that.

Would the timing be coordinated with any sort of acquisition? Is that the intent?

It could well be. It won't necessarily be -- it won't necessarily occur concurrently with an acquisition, but it's something that might make sense to coordinate if an acquisition was coming up and it might lead to great opportunity to switch concurrently, but it's not a guarantee that it would happen concurrently.

Okay. And just to get to your [even day] Number, could you give us the interest amortized and the depreciation amortization?

Yeah, for the quarter the interest incurred was about $5.6 million and the interest amortized to cost of sales was -- let me find the right number -- is $3.4 million.

Okay. And that $3.4 includes depreciation and amortization?

No, that's just interest. Depreciation amortization would be another -- of the amortization of bond costs and the depreciation by another $1.2 million on top of those numbers.

1.2. Great. Thank you very much.

We'll go next to Matthew Moyer, AG Edwards.

Great quarter. I wanted to ask you about the other income line first. If you could tell me what's in there, what caused it to come up a little bit.

Larry? LARRY [SAY]: Could you repeat the question again?

The other income line was up quite a bit more than I was expecting, double over last year. Could you tell me what's in that and what drove that? LARRY [SAY]: Well, we have our mortgage operations in there, and I think we're seeing more income from that line item. There's a few other things at this point in time, I couldn't tell you the details, but I think the most significant would be this -- we're dealing more joint ventures and mortgage companies and mortgage company operations have been making money, so I guess that's the biggest increase.

Did Hancock have its own mortgage operations, and are integrate yours into them or what's happening? LARRY [SAY]: No, we're expanding a joint venture relations with a mortgage company to include other divisions within the company, and which is proving to be more profitable.

I see. Okay. Thank you on that. And would you also talk about your lot supply right now?

Yeah, lot supply is still running about 14,000 lots, and wherever we are, we've got a good supply. We are continuing to in our markets have the same network of people and developers and land owners looking at new deals to replace our existing land position, and currently it's in place to execute our plan for this year and primarily, I'd say 90 percent of lot we need for next year we've got either controlled or identified.

And what's the owned option ratio on those 14,000?

I think it's around -- it's about one-third owned, two-thirds options. Is that correct, Larry? LARRY [SAY]: It's been a higher than that the last few quarters. It's actually moving up. It's closer to 70 percent options. I think by the end of the quarter we're probably closer to 15,000 lots.

Trying to get in here. It's 15,000 and it's creeping up over 75 percent option.

Great. Thank you very much, guys.

And we'll take our next question from Jim Wilson with [Wilson] Merchant Partners.

Could you go over a little bit your thoughts on and maybe a little geographic color, if you could, on your new community rollout plans for the rest of the year and if you have any thoughts to '03 at this point?

Well, I'll start with California. California right now is just a challenge to replace what you have, sales clip, is such a quick pace. In Arizona it's about the same, although in the Hancock operation there are several new communities coming on line later in the year. John, do you want to elaborate on that?

Sure, our community count, both in Arizona and Texas will continue to increase. We've got some large communities that are coming up that are multiple product communities, both in Dallas and in Austin and Houston, and so those -- we were very positive. With everything we've got going on, we feel our position in the market places is as strong as it's ever been, and we've got the teams in place to execute all those communities, so we still feel very good that we can continue to grow our business in our existing markets for the foreseeable future.

Let me put it another way. Do you have an expectation at year end for how many active communities you might be selling out of?

Larry, do you have that count in front of you? LARRY [SAY]: We don't have a specific number, but I think you'll continue to see it increase during the year modestly.

80 to 85 might be a reasonable range, if you have 77 right now? LARRY [SAY]: Yeah, I think it might be a reasonable range.

I won't hold you to it. Just want to get a little flavor for it. Okay, that was my main question. Thanks.

Next up is Tony Campbell with [Mount] Partners.

Good morning, gentlemen, and congratulations on your numbers. My first question, the margins -- what impact was the Hancock acquisition on these margins, or is there any impact?

The Hancock acquisition did have a small impact on margins in that their margins have tended to be historically a little bit lower than the company's average. So that was one factor that decreased the margins to some extent. In addition, I think they're still seeing at the high-end Monterrey products have lower margins simply because that business has been a bit softer as well as the overall economic impact from the third quarter of last year.

Okay. And then can we go to GNA again? You have commissions and other sales costs, which I presume, you know, which is up, and I think I understand the reasons behind that, given 9-11, et cetera, but why is GNA up so much?

GNA as a percent of sales isn't up as much, but the main factor is selling costs. So if you pull out the selling costs component of that GNA, that's really the part that went up and it's mainly more marketing and marketing incentive type costs that we were offering.

And is that the entire reason?

Yes.

Okay. And then I'm just looking at your guidance. What kind of price -- pricing are you, if any, assuming in your forward guidance, and maybe if you could just sort of give us a flavor in your geographic areas what you're seeing in terms of pricing, price increases.

I think that in California, I'll talk about California a little bit and Arizona and turn it over to John. California, a lot of the incentives have gone away so the prices are stabilizing. Some of the incentives that we were offering last year, we certainly aren't offering now. We're about to increase prices again to a certain point, so expect a little bit of margin expansion there. But Phoenix continuing to be a very competitive market. I don't think we're raising prices in this market. We're still offering considerable incentives in the higher end product in Monterey and some small incentives in some of the lower priced product.

Sure. I would say that we're within the range of where we thought margins would be, and we don't see that margins are going down. As we say, margins are going to be going up marginally going up in this year. And one of the things that helps us is one of our strategies is to concentrate on a location and when you're in the locations you can typically have more strength in your margins, and that's one of our strategies and we feel really good. Here we are, we can definitely -- I think our margins are -- we're comfortable where they are I guess is the best thing to say. Last year we knew they were high at historical levels for us, and we're now in a range where we'll continue to be for the foreseeable future.

Okay. What about Texas?

Well, Texas, that's what I was talking. You've got Dallas margins, they're in a range of where they are right now, and with the community counts coming up and what we've got in backlog, we see the margins where they are right now, maybe going up slightly the second half of this year. Austin market which got very soft last year when Dell computers started layoffs. That market has rebounded. We're seeing margin improvement a little bit down there. And our business in Houston is a place we're growing rapidly, our margins, our sales rate has increased dramatically year over year down there and we see our margins staying about where they are. So we're not going to see any market erosion in Texas for the rest of the year.

Circling back to acquisitions, if I might, would we be looking at completely new states, potentially?

Yes.

Well, new states?

Yeah.

Maybe completely new markets, maybe some markets and states that we're not in. We're in northern California, we're not in southern, and there are other states that we're looking at that we're not doing business in, so a combination of both.

Okay. And what's your sense of valuation up there in the acquisition market?

Generally trending up or down?

Up. Okay. That's what I thought. Thank you very much.

Thank you.

And now we'll have a question from John Stanley, [UBS Wilberg]?

Hey, gentlemen, a little slow on the trigger finger today. Getting old. Most of my questions have been answered, but a couple clean-up ones. How much did Hancock contribute to deliveries in the quarter?

32.5 million.

166 and closing is $32.5 million in revenue.

And relative to your expectations for its contribution to earnings when you first acquired it last year, would you say it's doing better or worse, the same, and then where do you kind of laid out for them?

I would say based upon the earnings that we've projected, it's going to be up a little bit from what we projected.

Good. In the current quarter, maybe you answered this, but is the impact of incentives and selling costs kind of starting to wane, or are we going to see that in the second quarter before margins trend back up again?

It's really a market-by-market driven deal. As Steve said, in California they've gone away.

I appreciate that, but as far as the P&L, since there's kind of a tail on that, is that -- is the improvement going to show up in the second quarter or the third?

I think the third because typically our from order to sale are typically around six to seven months, so you're going to see more in the third and fourth quarter. Would you agree with that, Steve?

Yes, absolutely.

You're up against a pretty tough margin comparison here in the second quarter, obviously the backlog is up a bit at a good delivery quarter in the second quarter last year, so I guess the real question is would you expect the second quarter to be somewhat less exciting, I guess, to put it nicely, than the first, third, and fourth quarters are going to look?

I guess you could say it that way. Compared to three and four, the second will be less exciting. We still think it's going to be a reasonably good comparison to last year, but it's going to be a flatter comparison to the third or fourth quarters.

It could be as exciting as the first quarter?

I'm talking about on the closing side, not on the order side. On the order side, we're still looking for some pretty good orders. April's shaping up to be a good month. To some areas per share level, looks like it will be a tougher comparison than the rest.

And lastly, just to fill in, you gave the lot number for this year. Does anybody have what it was this time last year?

I don't have that in front of me. I'm not in my office.

Thanks. I can track it down. Thank you.

Thank you.

Next up is Greg [inaudible] with [inaudible] Bank.

Thank you. Two quick questions. Are customers ordering more options or less options as a percentage of the base price this year as compared with last?

I think it's about the same.

And could you give us a dollar amount of what that is, approximately?

We'll have to get back with you. We don't think we have that here in front of us, Greg.

Okay. And also a follow-up on acquisitions, you mentioned northern California as a possibility. Are there particular prices points you feel you want to increase your presence in, or is it more of a geographically driven decision?

It's geographically, but I think it'd be safe to say we're working on move-up buyers, entry level move-up buyers, and we're tending to stay away from the higher end. But the first, second, third move-up and entry level is kind of where we're directing our prospects.

And just a follow-up to that, in terms of orders you experienced in the quarter and what you've seen marks the day in April, is the strength in the lower priced points, or are you beginning to see evidence of some of the higher price points or rebounding as well. How would you character the composition of orders?

I would think that other than the high luxury end, which is still soft, coming back a little bit, we're seeing strength in our entry level and all the way up to our third move-up, so across the board we're seeing very positive signs, really in all of our markets, like I said, other than the very, very high end.

And that very, very high end would represent what percent of your closings, traditionally?

10 to 15 percent.

I think this year it will be less than 10 percent.

Great. Okay. Thank you.

We'll now go to [Duane Carroll] with [Fidelity] and Company.

All my questions have been answered. Thank you.

We'll move along to Dennis Fitzgerald with [inaudible] Bank.

I too am a little slow on the trigger finger. All of my questions have been answered.

Once again, star 1 for a question. We'll go to [Alex Van] with [Franklin Templeton].

Congratulations. I just had a quick question. Did you buy back any shares this quarter and is that something you look forward to doing in the future?

At this price range, probably not, and we did not buy any back.

Okay. And then the real estate line, does that include the land options or is that a separate line item, and if so, what is that amount?

The land options is not an recorded on a balance sheet because it's just an option so it's not debt, and we don't track the aggregate dollar amount of that because it's a future purchase options, and it's not something we'd have to buy all at one time at any one point in time.

Okay. Thank you very much. Congratulations.

Thank you.

Gentlemen, at this time there appears to be no further questions. I'll turn it back over to you, Mr. Hilton, for any additional closing remarks.

Once again, we thank you for joining us. We're clearly excited about the future of Meritage. Should you have any further questions, we'll be glad to speak with you individually. We look forward to talking with you next quarter.