Meritage Homes Corp (MTH) 2002 Q4 法說會逐字稿

Good day, everyone. Welcome to the Meritage Q4 and year end 2002 earnings results conference call. Today's call is being recorded. At this time, for opening remarks and introductions I would like to turn the conference over to Mr. Alan [Osheiky]. Please go ahead sir.

Good morning and welcome to the Meritage Corporation conference call to discuss operating results for the Q4 and year ended December 31, 2002. Participating on the call today from the Company's management are John Landon and Steve Hilton Co-Chairmen and Co-CEO's and Larry Seay Chief Financial Officer.

Before we start, I would like to remind everyone that during the course of this conference call, certain projections and other forward-looking statements may be made regarding future events, or the future financial performance of the company. We refer you to the disclosures that the company files with the Securities and Exchange Commission specifically those contained in the company's most recently filed form 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 call. I would like to turn the call now over to John Landon. John?

Thank you for joining us to discuss Meritage's fourth quarter and year end results. We will be following the format we used in the past. First I will recap our record-setting performance. Next Steve will address market trends and our outlook for 2003. Larry will then provide details about our balance sheet and other financial information.

The fourth quarter of 2002 was a strong finish to our 15th consecutive year of record revenue and profits. It was another highly successful year and one in which our results affirmed the fundamental merits of the strategy that we followed consistently over the years being a top builder in leading markets, carefully targeting product offerings to specific buyer segments, maintaining conservative land acquisition and development policies, maximizing profitability, for each community, selectively acquiring quality companies and managing our business for the long term.

Net earnings for the fourth quarter reached $24 million. A 51% increase over last year's quarter. Net earnings per diluted share increased to $1.72, a 27% increase over the same period in 2001. These levels set all-time records for the Company. In addition, the company set new records during the Q4 for home sales, revenue, and backlog. Our home sales revenue grew to 368 million from 245 million in 2001. An increase of 50%.

New orders reached 267 million, posting a solid 43% over the prior year's fourth quarter while year end backlog was 538 million, up 43% over last year. Our full-year results were also record-setting. Net income for the year reached 69.9 million, a 37% increase over 2001. Net earnings per share increased to $5.31, a 23% increase over last year. Home sales revenue surpassed the billion dollar mark from 1.1 billion from 743 million, a 50% increase while new orders were almost 1.2 billion, a 66% increase. Revenue was up significantly for the year. And SG&A as a percent of revenue improved 78 basis points, the result of expanding revenue while holding down growth and overhead expenses. The writeup of certain assets in the purchase accounting for Hammonds and Perma built acquisitions increased cost of sales and reduced gross profit by approximately 5.5 million, or approximately 50 basis points.

Our pretax margin for 2002 was 10.2%, compared to 11.2% in 2001. In both years, Meritage exceeded our historical and continuing target of a 10% pretax margin. We are satisfied that our pretax margin for 2002 is in line with our long-term goals, and we expect to meet or exceed this target again in 2003.

We are very proud of our performance in 2002, and believe it continues it demonstrate that we have a distinct and historically successful approach to the home building business. Our strategies are supported by our unique corporate culture that stresses adaptability as well as accountability. And by our conservative financial philosophy, particularly as it relates to land acquisition and development policies. Our approach to the business is disciplined, focused, entrepreneurial and results driven which helps us to thrive under varying economic conditions.

I will now hand the call over to Steve Hilton who will cover our near-term expectations for the year 2003. Steve?

Thank you, John. Good morning, everyone. As Jim pointed out 2002 was certainly another record breaking year for Meritage. We expect to do well in 2003, given a continuation of current economic conditions and demand for our homes. In addition to our strong position going into 2003, we continue to see very positive signs in our industry. New housing remains affordable, inventories are in balance and mortgage rates are still at historic lows. As in the past, any economic improvement bodes well for our business.

We entered 2003 with a record backlog of 2,070 homes with a sales value of $538 million, that is a 43% increase in sales value over our backlog at the end of 2001. Furthermore, 2003 started extremely strong, with new orders of 530 homes in the month of January. An increase of 60% over last year's January. New orders in Texas were particularly strong with Legacy homes selling 165 homes for a 20% increase over Legacy's January 2002 orders. And our recent Hammonds home acquisition produced an additional 112 orders.

Hancock Communities Meritage homes in Phoenix received 102 orders a 19% increase over last year's number. In January 2003. Mainly the result of several new communities opening. In addition, our Perma Built operation in Las Vegas contributed 55 new orders to total company results in January. The growth without Hammonds or Perma Built was 10%. Robust orders results achieved in January provides another indication that 2003 will be another good year for Meritage.

Looking into 2003, based on current economic conditions and sales rates, we anticipate topline growth of approximately 20 to 25% revenues for approximately 1.3 to 1.4 billion. Regarding earnings per share we are comfortable in a range of 85 to 90 cents per share for the first quarter of 2003 and for the full year 2003 we are still comfortable with our prior earnings guidance of $5.90 to $6.10 per share. These exclude the impact of any acquisitions. Our community count continues to grow at the end of 2002. We are actively selling at 128 communities, a 9% increase over the prior quarter end, and a 73% increase over the count at the end of last year. During 2002, our new orders received per average of our beginning in the actively selling community count remains strong at 45, and in-line with last year's number. In addition, the number of lots that are in our control has grown. At the end of 2002, we had 25,394 lots under control. A 69% increase over the prior year number.

We continue to maintain the strategy of building homes on lots in premium community locations. We believe that premium locations provide for more stable order rates in both good and bad times. We anticipate moderate growth in the number of communities open for sale as well as the number of lots under control during 2003. And we believe our communities are well-positioned competitively for 2003. We continue to consider acquisitions outside of our current market areas, areas of particular interest are southern California, Colorado, and the southeastern U.S.

In summary, we remain steadfast in our a approach to our business. It has created exceptional value for our shareholders over the years in good and bad times. Larry Seay will comment briefly with a financial update.

The company's balance sheet drew stronger during the quarter and year. In December 2002, Meritage completed a new 250 million revolving credit facility having a three-year-term with extension provisions. Which we believe provides ample liquidity for Meritage to continue the growth objections. Our liquidity is strong with 86 million in immediately available but undrawn reserves under our bank credit facility. Subject to certain debt covenant limitations. After consideration of the most restricted debt covenants we could borrow this entire amount.

At year end, we had 265 in notes payable consisting of 150 million in senior notes with substantially all of its balance comprised of its bank credit facility. Year end our debt-to-capital although was 46% compared to 50% at the end of 2002. Excluding the effects of an acquisition our seasonal changes could have on our balance sheet we anticipate this ratio will continue to improve through 2003.

EBITDA for the year increased to 140 million. A 37% increase over last year's 102 million. For the quarter, EBITDA increased to 45 million, from 33 million in the prior year's quarter. Also an increase of 37%. Our interest coverage ratio for the last 12 months exceeded seven times, and our total debt represents only 11 -- or only 1.9 times EBITDA. During the quarter, we purchased 467,000 shares of the Company's stock, at an average price of $34.46, bringing the total shares purchased during the year to 500,000. Our inventory turn ratio was 2.2 times, in line with last year's number.

In regard to return on assets and return on equity, meritage continues to perform at or near the top of the industry with a 12.3% return on assets. A 39.6% return on beginning 2002 equity and a 28.3% return on average equity for 2002. All based on net income after-tax.

Thank you, Larry. In summary, Meritage achieved a number of outstanding milestones in 2002, in addition to its record-setting results. During the year, we completed two significant acquisitions. Hammond Homes which closed on July 1st, significantly expand him our presence in Houston and the rest of Texas. Effective October 1st, we closed on our acquisition of Perma Build homes providing us with an entry into the rapidly growing Las Vegas market. In June, Meritage completed an $85 million equity offering, strengthening our balance sheet and providing us with capital for future growth. In addition, in December, we completed a $250 million unsecured credit facility with a three-year term that we believe provides the Company with ample bank financing for the future. These accomplishments together with the Company's dual strategy of focusing on internal or organic growth, and highly selective acquisitions continue to reap awards for Meritage stockholders. Meritage achieved its 15th consecutive year of record home sales and revenue in 2002, and passed the $1 billion revenue mark for the first time in Company history. In fact, we believe that we can double the size of our business, all things remaining equal, sometime within the next four to five years.

That ends our formal comments and now we will open the floor to questions. The conference call operator will provide you with the instructions on how to register your questions. Operator?

Thank you. Today's question-and-answer session will be conducted electronically. If you would like to ask a question you may do so by pressing the star key followed by the digit one on your touch-tone telephone. Once again, ladies and gentlemen, star 1 for any questions. We will take our first question from Margaret Wheelen with UBS Warburg.

Good morning, everyone. Congratulations on the quarter. My first questions are on the income statement, would you give us an idea first of all that you did a very good job of keeping the SG&A down, what would be the sustainable rate you would forecast?

As SG&A as a percent of sales?

Or even an absolute number if you have it that way.

I think it will stay pretty close to where it has been this year. It may edge up a tad, but we have been pretty good about holding down SG&A and we think we can continue to keep it in line with where it has been this year.

Okay. And then secondly, the growth margins a bit lower than we were expecting. Was that mix or pricing was up some we didn't fully understand it.

Well, the gross margin was lower because of the Hammonds -- I'm sorry, the grossing up of the sales.

Yeah, the purchase accounting.

For Hammonds and for Perma Built. Hammond is a lower gross margin builder. As we are able to get in there and make some adjustments we will be able to increase their margins and that will have a significant impact on our overall margins. We continue to strive to maintain a 10% plus pretax net margin, and we don't see any reason why that will change.

Okay. And then the tax rate, was a little lower also.

Yeah, the tax rate changed because we are doing more business in Texas and Nevada which are states without state income tax. So you will probably continue to see a little lower effective tax rate going forward.

We should forecast for closer to --

Yeah, --

7%?

I would say, you know, I think we have been going at 39 our a hair below 39, I would probably be using 38 going forward.

Okay. And then just a second question. Your comment about doubling the business over the next five years implies topline growth, is that 15% a year, and can you just comment on current traffic levels and then your use of cash flow for '03?

Yeah, we said, you know, double in the next four to five years so in that range, and we have been saying that really now for five or six years, and we have been able to accomplish better than that. If that answers your first question, the traffic has been good. We are very encouraged that we came out of the blocks in January with a lot of traffic, we constrained a lot of those sales, so business feels good out there.

Okay, and then uses of cash, land versus share repurchasing dividends maybe, acquisitions?

We don't have any plans for any dividends at this point. We are going to continue to, you know, like for selective acquisitions when we find they are appropriate and they meet with our culture, and the price that we are willing to pay. And we are going to continue to use our cash internally to grow our business organically. And at prices that well see that are favorable, we will also continue to buy shares back. So I think we will be doing, you know, all that, that we have done over the last year.

Okay, thanks, congratulations.

Thanks Margaret.

The next call is from Jung Chao with UBS Warburg.

It is actually Robert Manowich. Could you talk about the inventory and taxes, when you had your lunch a few months ago you talked a little bit about speculative inventory in the Q4 and some of the incentives that were being employed tore move that inventory. Not for you guys, but for your competition, and I was wondering if going into the first quarter of this year if you have seen that abate a bit, maybe some of that spec inventory out there has been absorbed.

Yeah, I can. I think the spec inventory were in price ranges above where we concentrated our business. We have seen a little bit of that in the price range we are at which is under the 250, but it really hasn't had a significant impact on the business. You know, it is really business as usual. Texas has always been a market where incentives have been used quite regularly, so, you know, and I can say it, I think business feel it is good. I think inventory is feeling balanced. I don't think there's an overhang of too much spec inventory out there in the price ranges. I think on the higher end above a half million, there is some. But I am not that familiar with just what the conditional of that market is since we don't really aren't in that spec.

Rob, actually if you look at where we were on specs at the end of last year versus this year, pulling out Hammonds and Perma Built, you have an apples to apples comparison. We are actually down. Last year we were right about 240 homes, spec homes, and we are down 219 on a comparable basis. Once you throw in Hammonds and Nevada we are up to 325. Looking at our total backlog, that's a very reasonable number.

Right. And secondly I was wondering on the acquisition front, historically you guys have really been able to structure deals that have looked very favorable. Are you still seeing those opportunities or are they getting tougher and tougher to find attractive valuations?

No, I don't think pricing has changed that much. I think there's more people looking harder now, but I don't think prices have changed. I think there's going to be opportunities out there.

Great. Well, good luck. Thank you.

We will go next to Tony Campbell with Knot Partners.

Good morning, gentlemen. Good numbers, congratulations. A couple of things. I wondered, you bought back some stock, it looks, can you sort of expand on, will you continue to buy back stock here? I would urge you to do so just because I think it is a good use of capital, because you will have another opportunity to sell it when it is up, or in a, maybe offer some stock in a deal. So that would be my first question, and then I would like -- I have another question.

We are going to continue to look at buying stock back, Tony. You know, if -- if we can see prices that are in the area they are right now, I think you will see that we are back buying some stock. So I hope that answers your question.

It sure does. You have our full support here, as a matter of fact. The -- I guess if you could just sort of give us some sense of your cancellation rate, and how that has kind of changed. If it has.

I don't believe that it has, within a relevant range has changed. It has been right in line with what it has been. We don't see any -- any change at all, and I could go market bill market and I don't think we are seeing anything that is even more favorable or worse favorable.

I can tell you, Tony, exactly our can rate 27% was exactly the same as it was for the quarter last year at the same time. And for the year, it is actually down a couple points. So '02 was a little less cancellation rate than it was in '01, but it is, you know, it is really -- it is almost just right there, same thing.

Well, keep it up. Some day we will get some respect.

Thank you.

Thank you.

Once again, ladies and gentlemen, it is star 1 for any questions. We will go next to Kenneth Pounds with Nutmeg Securities.

Thank you very much. I am a little new to this. I am a little confused bit the Q1 guidance is 85 to 90 cents and you said you had very strong orders out of the, you know, chute for January. Is that because closings are closer in the winter months or what's the reason for the guidance?

Most homes we sold in January went -- won't close until probably the third quarter of the year.

That much of a lag?

It takes six months to build the house.

We are back here in Connecticut where it takes two years. It was faster out there, so --. Yeah. Okay.

Okay?

Yeah. Thank you.

We will go next to Jim Wilson with JMP securities.

Good morning. I was wondering if you could give a little further detail on community count growth because I know particularly I would love to here about Hancock. You said you stepped up the count there, and where it has gotten to, and where you expect to take the rest of the year, and then maybe any color on what you are doing in Texas, outside of acquisitions.

The communities, we have 128 communities now, and what did we open in January JOHN, three, Hancock? Four?

We had one, two, three, really four, five community openings. Pleasant valley and the sun dance project.

We have several more, many more opening in Hancock over the next six months.

So their community count will be up quite a bit?

Yes.

Well, I guess I wouldn't say net it will be up quite a bit. It will be restored to where it was mid- to last year. We closed a lot of communities. We are opening new locations. The net will be up. Our sales fell off quite other bit in Hancock in the second half of last year and that is all coming back the first half of this year in new communities.

Okay. And then any color on your plans for just community count growth in Texas?

It will be moderate because it was so large last year because of the Hammonds acquisition. You will not see a significant bump. One thing I will comment is we are on target to enter San Antonio toward the end of the first quarter, the lot should be delivered the end of this month, first of march so we will set a sales trailer and will enter the San Antonio market. We have felt that the Austin market we think has strengthened a lilt bit. It is kind of flattened out at a lower level. The permits obviously were significantly lower year-over-year. We are seeing that stabilizing. We are seeing encouraging things out of Austin, Houston and Dallas continues to be competitive. We are, you know, that's the way it has always been. We are positioned to compete very favorably and get our share of the business.

Okay, good, thanks.

Again it was star 1 for any questions. We go to Alex Peron with Franklin Templeton.

Good morning and congratulations. I had a few questions. One was hoping you would break down the inventory line item by, you know, work in progress versus lands.

Larry, you got that handy?

Mr. Seay will be back with us momentarily.

Let's come back to that. Larry will try to get that for you.

Okay. The other thing was I was hoping you could give us guidance for Q1 in terms of deliveries are you expecting or revenues.

And Larry will be able to get that for you. We got that.

He had two questions. The caller would like to have a little bit better breakdown on the inventory between land and our whip , I believe, and the second part of the question was some kind of what do we think revenues are going to be for Q1 closings?

Steve, this is Larry Seay. I am back. Our phone system went down here.

Did you hear that, Larry, the question?

What was the question?

Looking for a better breakdown on inventory between land and other parts of inventory.

As far -- oh, a more detail on land and land under development, the total inventory number?

Well, that and then the overall inventory breakdown for houses, land, things like that.

Okay well, hang on for a second. I can dig that out. Go ahead and take another question.

The other question was what will we expect our revenue to be for the first quarter? Revenues or deliveries or both?

Yeah, our revenue for the Q1 is going -- it should be in the --

About 205 million?

The -- hold on for just a second here. It is actually more than that, Steve. Around 250, 260 million.

Okay.

And then for, you know, a little bit more breakout on the inventory, houses are in, this is total homes under construction models, specs, and it is in the 250, $260 million range, with a balance being land and land under development.

Okay. And can you give us an idea of how many homes you expect to deliver this year and the -- to perma built Las Vegas?

Around 500.

Okay. And what is your breakdown I guess of land between owned spots versus option?

Of the 25,394 of total lots, at the end of the year, 81% of those were controlled through options.

Okay. And how much do you expect you will be spending I guess on additional land this year?

We can't tell you a precise number, but it will be pretty much in line with what we spent in years past.

We will continue to grow inventories including land to support our sales growth, and we should keep that ratio fairly consistent with past years.

Okay. And can you comment on pricing trends you are seeing in each of your markets?

Yeah, I think if you start looking at the markets, I think the ability to maintain a 10% pre-tax exceeded a 10% pretax margin is going to be there for 2003, all things remaining equal. The topline margin moves around a little bit division by division, but the bottom line overall, we still see us being able to meet that north of 10% pre-tax. I don't know if that answers your question. We really look at just being able to focus and manage each one of our pieces of business individually, but then collectively make certain we are still maintaining a certain return.

Okay. Great. And are you still basically actively looking for perhaps another acquisition sometime this year or what can you comment there?

We are keeping our eyes open, but the numbers that we have forecast we put out, you know, don't account for an acquisition, so if the opportunity avails itself, we will do an acquisition, but it is not a mandate that we have to do one.

Okay, great. You guys are doing a great job, thank you.

Thank you.

We will take our next question from Anthony Orfino with Munich & Company.

Good morning. Congratulations on a great quarter. And just again on the related question, if you give us some idea based on all of the rest of the guidance that you have been giving us, just, you know, what -- let's say compared to the inventory, the ending inventory amount for 2002, what might that look like for 2003.

I don't really have a specific number to give you.

Up 5, 10?

I really -- again I would say, we plan for inventory to grow consistently with the growth in the past as a relation to sales.

Okay, that's fair. Thank you.

We will go next to Dan Celiay with Sedonia and Company.

Good morning, guys. Congratulations. I was wondering if you could add color to the impact of the writeup in the acquired inventory, and when that might, you know, fall off?

Sure essentially what that writeup relates to is when we purchased homes that were in backlog under construction, Dan, if a house is closer to being completed, we wrote the house up to reflect the fact that a lot of the earnings process has been completed. And to the extent that a house was not very much along, we wrote it up a bit. To the extent it was far along we wrote it up allot. Essentially that's what causes that number that we talk about. That procession usually takes about six months, because it takes as Steve mentioned earlier about six months to build a house. To by the time you get six months past an acquisition, the effect of that has rolled through the income statement completely. So all we have left is about one quarter of that for Perma Builts. And it is not a huge number, so it is a few hundred thousand, so it is not going to have a major impact on the first quarter, but it will have a minor impact.

Okay. Great, thanks.

You are welcome.

And now we will return to Margaret Wheelen with UBS Warburg.

This is William Lamb. I had a question related to land investments in '03. Is there any particular area that -- well, I am actually as curious about what the allocation would be across your various markets?

As far as a percentage of land invested in each market?

Right.

You know, we keep a pretty homogeneous mix of land throughout the company and I don't think any one market or division has a lot more land than another, so I think it is fairly well, you know, evenly spread across all of our divisions. I don't think there's any one large concentration.

We don't really release those numbers, you know, on every single division's land holdings.

Right. My second follow-up question is can you give us a breakout of the sales commission and G & A expenses?

I could. I am -- I can't do it right now over the phone. Selling commissions typically run about 3.5%, as a percent of sales. So that's the number I would give you just as a rough idea.

The balance would be G&A?

Right.

Okay, thank you.

There are no other questions standing by at this time. Gentlemen, I would like to turn the conference back to you for additional closing remarks.

We thank you for joining us this morning. We are excited about the future of Meritage. If you have further questions, we would happy to speak with you individually and look forward to talking with you next quarter. Thank you.

This does conclude today's conference call. We thank you for your participation and you may disconnect at this time.