Meritage Homes Corp (MTH) 2003 Q3 法說會逐字稿

Good day, everyone. And welcome to the Meritage third quarter 2003 earnings results conference call. Today's call is being recorded.

At this time for opening remarks and introductions I'd like to turn the conference over to Mr. Alan Osheki.

Thank you operator. Before you begin, you might check it sounds like we may have an open line from one of the participants. Good morning, everyone. And welcome to the Meritage Corporation conference call to discuss operating results for the third quarter ended September 30, 2003.

Participating on the call today from the company's management are John Landon and Steve Hilton, Co-Chairman and Co-Chief Executive Officers, and Larry Seay, Chief Financial Officer.

Along with this conference call we're also Web casting a slide show presentation which can be accessed on the company's Web site at www.meritagehomes.com. If you would-please refer to slide three, regarding forward-looking statements, on the discussion there, we'd 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 to the future financial performance of the company.

We also refer you to the disclosures of the company files of the Securities and Exchange Commission specifically those contained in the company's most recently filed form 10K and 10Q. These documents describe the 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'd now like to turn the call over to John Landon.

John?

Good morning and thank you for joining us. We discuss Meritage's third quarter 2003 results. In addition to this conference call, you can also file along with the slide presents on our Web site at www.meritagehomes.com.

First, I will recap our third quarter and year-to-date performance. Next Steve will discuss our outlook for the remainders of the year. Larry will then provide details about our balance sheet. After that we'd be happy to answer your questions.

Now, I'd like to begin on slide 4. Net earnings reached a new third quarter record of $25.8 million, up 15% from last year's third quarter of $22.4 million. Diluted earnings per share, reached an all-time quarterly record of $1.86 per diluted share up 18% from $1.58, last year's third quarter. We are also pleased that we have been consistently profitable having achieved over 130 consecutive months of profits.

Turning to slide 5, net earnings for the first nine months of 2003 were $62.8 million up 37% from last year's year-to-date earnings of $45.9 million. Diluted earnings per share for the first nine months were $4.57 cents up 28% from $3.58 in last year's first nine months.

Turning to Slide 6, net margin was steady at 6.8% for the third quarter of 2003, as compared to last year's quarter. This was a result of increased gross margins, and the slightly lower effect of tax rate, offset by start-up marketing costs relating to new communities in Arizona, increased sales commissions, and a general increase in marketing and other sales costs. Net margin was up slightly to 6.3% from 6.1% for the first nine months of 2003 versus the first nine months of 2002.

As we move into the fourth quarter of this year and in the next year, we believe increases in revenue should help better leverage our SG&A expenses. Now, moving to slide seven. With the first three quarters of 2003 behind us, we believe, we are on a way to our 16th consecutive year of record revenues profit. Home sales revenue achieved an all-time quarterly record of $381 million, up 16 %from last year's third quarter of $329 million. Home closings reached a new quarterly record of 1464 homes, up12%, from 1311 homes in the third quarter of 2002.

Turning to slide eight, home sales revenue for the first nine months of 2003 was $990 million, up 33% from $745 million in the first nine months of 2002. Home closings were 3,858 homes for the nine months of 2003, up 25%, in 3,091 homes for the first nine months of 2002.

Moving to slide nine, the number of home closings was up 12%, overall in the third quarter of this year compared to third quarter of 2002. Looking at it by region in Texas, closings were up 7%.

In Arizona, they were down 26%, and in California, they were up 16%. The primary factor in the decrease in Arizona was the delay in the opening of some communities in the fall of last year, which is now impacting closings. As new communities have now been open for sales over the last couple of quarters, and have been strong, we expect to see a significant increase in the number of Arizona closings in the fourth quarter.

Moving to slide ten, overall the number of home orders was up and impressive 37% in this year's third quarter over last year's third quarter. Looking at it by region, Texas was up 14%. Arizona was up a strong 57%, which speaks to the success of the new communities that were delayed but are now open and selling very well. In California's up 20%. Organically orders were up 27% excluding the acquisition, which we made in October last year.

Moving to slide eleven. The dollar value of backlog reached an all-time high as of September 30, 2003, up 40% to $840 million. Backlog in Texas was up 34%, Arizona's up 39%, and California 14%. Dollar backlog was up a strong 31% without a PermaBilt acquisition.

With this strong backlog, we expect closings to be strong in the fourth quarter, and to enter 2004 in very good position. Moving to slide twelve. The number of communities was up29% to 151, September 30 2003, from September 30, 2002. Actively selling communities were up in every state. Looking at it by region, Texas was up 28%, Arizona 14%, and California 50%. We anticipate our (inaudible) to reach approximately 155 by year-end or 21% higher than the year ended December 31, 2002.

Moving to slide thirteen. The average selling price of our homes in backlog remains steady at $261,000 per home. Texas prices were up 6% to $208,000, Arizona was down $270 -- down 4% to $277,000, reflecting the intentional decrease in the mix of our luxury product as we continue to expand our business in the more moderately priced homes in Arizona. In California, it was up 2% to $445,000. We are confident that we are selling the right product at the right price in the right locations in all our markets.

Moving to slide 14, with new homeowners up 37% in this year's third quarter, organic orders up 27% excluding PermaBilt, unit and dollar backlog up 40%, active selling communities up 29%, we believe we are in excellent position for a strong fourth quarter and our 16th consecutive year of record revenues and profits.

Steve Hilton will now cover our expectations for the remainder of 2003.

Steve?

Thank you, John. And good morning, everyone. Our industry continues to benefit from favorable demand and supply conditions as long as long of long-term deposit demographic trends that we believe, will continue particularly with an improving job market. Mortgage rates remain near an all-time low and are not anticipated to increase significantly in the near term.

On slide 15, we are raising our diluted earnings per share guidance to 645 to 665, up 25 cents from our prior guidance of 620 to 640 per share and up 21% to25% from $5.31 per diluted share in 2002. With recent new home order and backlog increases we expect to close approximately 5,600 homes in 2003, with revenue in the neighborhood of $1.4 billion. Increase of 22% and 25% respectively over 2002.With these projections for 2003, our four-year compound annual growth rate for home sales revenues is expected to be approximately 43%. We expect home sales revenues to have grown more than four-fold since 1999 from $334 million to our projection of approximately $1.4 billion in 2003.

On slide 17, our revenue growth is both organic and through acquisitions. Our organic growth has been driven by growing our acquisitions rapidly. Over the past five years, organic business has been responsible for more than 75% of Meritage revenue.

We continue to explore acquisition opportunities outside of our current market areas. However, none are imminent at this time. Areas of particular interest are still southern California, Colorado, Georgia, and Florida. On slide 18, with our expectation of the winner earnings per share reaching 645 to 665 per share in 2003, EPS is anticipated to grow as at a four-year compounded rate of 42% to 44% from $1.57 in 1999.

Slide 19, in addition to these impressive profitability growth measures, we anticipate our book value share will reach approximately $31 at the end of 2003 resulting in a four-year compound annual growth rate of approximately 38%. I will now turn the call over to Larry Seay to discuss our balance sheet in more detail.

Thanks, Steve. Good morning, everyone. Meritage's balance sheet remains strong which we believe has been a big contributed in our success and has provided a solid foundation for our future growth. Our balance sheet strategy is to maintain low levels of risk with high monitory turns, which produces returns near the top of our industry. Real estate inventory was approximately $668 million at quarter end, an increase of 44% from last year's third quarter.

Meritage now owns our controls approximately 29,000 lots, up 30% from a year ago. These lots represent an approximate 5.3 year supply, based on trailing fourth quarter closings. Inventory turnover has remained relatively steady at 1.9 times per year. Moving the slide21, at quarter end, the company had a net debt to capital ratio of 50% in line with our targeted range.

We expect this ratio to drop to the mid 40's during the fourth quarter, as we enter our strong fourth quarter closing cycle. Debt to trailing four quarters EBIDTA was 2.3 times, up from last year's third quarter of 1.7 times.

During the quarter we enhanced our liquidity position by completing an add-on offering $75 million in aggregate principal amount of our 9.75% senior notes due 2011. The proceeds were used to pay down a portion of our credit facility, our. (inaudible) was very strong when approximately $135 million of additional bank credit available to borrow under our credit facilities.

Thank you, Larry. I think you can see that we're on track to achieve another record year in 2003. That ends our formal comments. And we'll now open the floor to questions. The conference call operator will provide you with instructions, on how to register your questions. Operator.

Thank you, Mr. Landon. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit "1" on your touch-tone telephone. If you on your speaker-phone, please be sure your mute function, is turned off to allow your signal to reach our equipment.

And we'll take our first question from Greg Neshna (ph) with Deutsche Bank.

Good morning. Steve or John, either one, I wonder if you could just comment on traffic, cancellation rates, conversion patterns as the quarter progressed. Did you experience stronger momentum as the quarter progressed, or weaker momentum? How would you characterize the month-to-month trends?

Well, I think that's a market-by-market, you know, response, Greg. California, Nevada, continues to remain strong. We have waiting lists in a lot of communities. The battle out there is really replacing the communities that we have, because we're selling so well. Arizona, I think traffic has been relatively stable for the last year. Our new communities are, you know, being received well. Traffic is the one with our expectations. John, do you want to talk about Texas?

Yeah. I would say that earlier in the quarter, we seemed to thank that you have we have to even break Texas down even further and look at it on a city-by-city basis. We have seen improvement in this quarter in Austin, compared to the first six months of this year, so we see good signs in Austin. Houston continues to remain pretty steady throughout the whole quarter.

On in Dallas you'd have to break Dallas for work, into Dallas for working you say that foot worth is continued to be strong, north Dallas seemed to be a little bit slower although still good toward the end of the quarter, so, you know, nothing alarming in north Dallas, but I would say that it's -- it seems to be a little bit more competitive than it has been in the past.

Great Thanks.

Just a reminder, if you have a question, please star, 1 on your phone. We'll take our next question from Margaret Whelan with UBS.

Good morning, guys.

Good morning.

Great quarter. Couple house keeping things first. Why should we forecast for a tax rate for the next couple of quarters? I know you've got some ground for some incentive in some markets

Margaret, this is Larry. You know, I think we had a little bit of an unusually low tax rate for just this quarter. And it really it reflecting a greater percentage of deliveries in Nevada and Texas. As you know, deliveries in Arizona weren't as strong this quarter.

Next quarter, we expect that to bounce back. So I think you'll see the tax rate go back up to more in line with what you've seen for the full year.

OK. And then in terms of the SG&A, I guess, is a little higher than we expected. Would you just give us an idea of what we should expect there again for the next couple of quarters?

Again, I think you're seeing a little bit of the impact of our new communities that have been opening up over this last quarters or so.

A good half of the increase you've seen have been related to start-up costs on the new communities we have been opening, and we're not seeing that the revenue yet, so as you see, revenue come in real strong for the fourth quarter, particularly in Arizona, as you see those strong sales that we've been posting actually turn into closings. I think you'll see that percentage also comeback down more in line with what you've seen historically. You know, one thing -

Below 10% would be a good number for next year?

Correct. Commissions is one thing that's been running at about 30 basis points higher this year than last year, and that may be one number that may hang up a bit more some thing like come quite back down to exactly what we were achieving last year, but I think it will get pretty close.

What is the driver for higher commissions?

Generally, speaking I think we're just working in markets that were particularly in Texas where it's a little more competitive, and you were seeing a little bit more a sales commission being paid to gather sales.

OK, and then on the gross March margin, it was better than we expected, which was good and I am wondering Were you impacted at all by timber prices or do you expect to be next year?

I don't think we're impacted initially. Might have some slight impact in the fourth quarter, if you remember, prices really started rising over the summer. So I don't think a lot of those houses that we were framing over the summer delivered this last quarter. But we might have a small impact from them in the fourth quarter, but I think the pricing power, the continued pricing power in some of our markets will certainly offset a lot of that.

OK. OK, and just finally, guys, you've put up really terrific performance for the year. What are you thinking for '04 and into '05 as you look at it from, from your market perspective.

We're really not giving guidance for '04 and '05 -

Not specifics but just in general what are you seeing?

I'll comment first and then John will comment. We have a great land position, in California, in Nevada. Particularly in the last half of next year we have a lot of new communities opening up. Arizona we have a lot of new communities opening up. So we think the company is really poised forward lot of growth next year and into '05.

Yeah, I would just add on to that, no, I think that we're very positive about our own company as well as the industry in terms of looking at the demand for housing. We're in an affordable interest rate environment. We're in the right markets. We think we are in the right we have the right product at the right prices. We've got a lot of you know, we have got a great team in the execute as we've seen in the past. So we feel really good about 2004.

We've been bringing our average sales price down end of our market and we think that's going to help us in the long haul.

You're more competitive. Just finally in terms of the M&A pipeline, what are you seeing at moment?

There's some interesting opportunities out there. We're not ready to comment specifically about anything. But I think you'll see something happen in the next year, either a small acquisition or maybe a series of start-ups in some new markets.

OK. Thanks, guys.

Thank you.

We'll go next to Craig Coocher (ph) with SBR.

Good morning and congratulations on great quarter.

Thank you

I just wanted to follow up. I know you won't comment much on your guidance for '04 or give any guidance, but in the past you've alluded to having an internal growth plan achieving I guess about $1.7 billion in '04 and $2 billion in '05. Do you still feel that sit is achievable given your existing growth plan?

Yes, we do. You know, without characterizing that as our guidance, I think we'll give you more specific numbers next quarter at our conference call, if not sooner. But I think the statements we've made in the past are pretty accurate.

OK. And, then in regards to your comments earlier about bringing down your average sales prices in a lot of markets, your overall new sales in the quarter were up, I believe, to about an average price of $268, $269,000. Is that really more of a geographic mix issue? Or are you still kind of bouncing around and still primarily gearing up for the move-up market?

We definitely are focused over two-thirds of our business is on first and second move-up. And depending on where the orders come has impact on what the average sales price are. But if you look at the type of product and who we're targeting most of our business toward, it's that business and 268, 261, we're right there where we think we're in the meat of the market where the best sales price is where we can make the most margin and deliver the most for the shareholders.

OK. Thanks a lot.

We'll take our next question from Richard Frieri (ph) with Delfi Management.

Yes. Really on the call, you talked about the Arizona communities having a little trouble starting up. Last year there was some openings delayed. Does that account for all of the decrease in home sales revenues? Or it's actually not a decrease but your home sales revenues in the third quarter were significantly less than they were for the nine months, the increase that is. Is that all because of Arizona or is there a mix issue?

Most of the that is being drive driven by Arizona as you can see on slide 9. The homes closing off on 26%. But on the next slide, the orders are up by 57. So you're seeing that bounce-back.

All right. There's nothing else keeping that growth at 16% versus the 33%? It's all Arizona?

The great, great majority is Arizona.

OK. Thank you very much.

I think you really have to look at Arizona both in terms of looking at what closings were, but then looking, you know, at orders, which is going to indicate what the future is going to hold. We've had the largest increase in our orders in region was, was in Arizona.

I think you look at the future of California also. We had six new communities open in this last quarter versus the previous quarter. So we're going to see some action from those communities in the fourth quarter and the first quarter next year.

I see. All right. Thank you.

Thank you.

We'll go next to Charles Mooken with Norman Checker Company.

Hello there. I just had a two question and since I've been following what used to be Monterey Homes, you've grown so much. And I wondered what changes in the management -- in fact what you guys at the top actually do as a company - the companies evolved into a bigger sales volume and where is that going?

Well, John and I have been partners here now for over six years.

Yes.

And we've continued to bolster our middle and senior management ranks. We have experience division presidents in all of our cities. A lot of these guys have been with us for, you know, seven, eight, nine, ten years or more. And we have also some real strong regional managers, so we think we're paying real close attention to making sure we have our strong team and a strong bench.

Keep up the good work.

Thanks.

We'll go next to Jeff Feinberg with JLS Asset Management.

Yes guys. Congratulations. Quick question. I want to understand in terms of the potential for the margins, in sort of pretax margins, as we're looking at those overtime, where is the opportunity goat the pretax margins? Thank you very much.

Our margin trends over the last three quarters have been positive -- our net margins have increased from 5.6 in the first quarter to 6.8 in the third quarter. And typically, you see that kind of pattern throughout the year as we get to our strong third and fourth quarter closings. So, I think you'll see at least for the next quarter the net margin remain on that positive trend. So, you know, is that answer your question?

No, my -- my question -- I'm sorry -- was much more sort of, on an annual basis looking forward. Is there opportunity to improve the pretax margins of the Corporation I know you're running roughly 10-ish% now. Where can those go?

Let me say as a company, our target has been to always been north of 10% and we've been in the 10% to11% range and if you look at your industry, typically, the builders that are achieving over 10% pretax are really builders that are doing a pretty good job when you're talking about the balance of margin, growth, earnings and you balance all those.

Typically, we have experienced, you know some areas you may get at times 15-16% margin. Other times, other margin, Other regions may be a little bit less than only average, really 10 to 12 % pretax is what I think you can expect from us.

I would just add on to what John said, the builders have, are increasing their margins giving can you just (inaudible) 10% of bonus that they will avail development. You can see the 85 % of our loss are controlled through options.

And we are strictly a merchant home building focus company, and you know the opportunities for us to significantly increase our margins are limited because we're not doing land development. And we just made a constitution not to be in that business. Just to reiterate what John said, we will be in that 10 to 12 percent range.

OK. Terrific, which I do think, given '01 was a larger than lower level in this year, I think based on your guidance, gets you, you know, roughly 101/2 there should be some opportunity to improve '04 versus '03, though, of these current levels if I'm understanding correctly, not dramatically but some.

Possibly.

Possibly.

OK. Thanks so much for the perspective.

Thanks.

Next we'll take a follow-up question from Margaret Whelan at UBS.

Hi, guys. I wanted to kind of follow up on a question about acquisition. What markets are you guys looking at? What type of characteristics do you look for in an acquisition.

Smaller builders. They have a good platform to grow that we can expand rapidly. Southern California, Denver, Atlanta, and a few different markets in Florida, markets are continuing look for prospects and/or do start-up.

OK. Thank you.

We'll go next to Sam Kerner with Franklin Research

Hi, guys. Great quarter. Just couple of question here your average sales price in Nevada, it's going higher. How much of that is appreciation for versus mix?

I'd say most of it's appreciation.

OK. And with San Antonio, how many homes do you expect to deliver there?

This year, you know, we're pretty pleased and proud of what we've been able to do there. We actually started our first homes there in April of this year. We closed our first homes September of this year.

And from a dead start, stop, we'll be profitable in our first year of operations there. We'll close just probably under 20 homes there this year. And then we expect to open a lot of communities next year, It will be a year of growth and opening communities, although it will be a profitable year. And then we expect really some very nice growth in 2005.

So I'd be looking at, you know, dramatic on a percentage basis, a dramatic increase in our revenue growth in San Antonio next year. But it's still going to be relatively small dollars, and then it should have some really nice impact in 2005.

OK. Great. Thank you. Great quarter.

It appears we have no further questions. So, Mr. Landon, I'll turn the conference back over to you for any additional or closing remarks.

Thank you for joining us today. We look forward to reviewing our full year 2003 results with you in January. Thank you.

This concludes today's conference. We thank you for your participation. You may disconnect at this time.