Meritage Homes Corp (MTH) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Meritage Homes Second Quarter 2018 Analyst Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Brent Anderson, VP, Investor Relations. Please go ahead.

Thank you, [Jed] . Good morning, everyone, and welcome to our analyst call to discuss our second quarter and year-to-date 2018 results.

We issued the press release after market closed yesterday, and you can find it along with the slides for this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage.

I'll refer you to Slide 2 and remind you that our statements during this call as well as the press release and slides contain forward-looking statements including our projections for 2018 operating metrics such as closings, revenue, margins and earnings. Those and other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them.

Any forward-looking statements are inherently uncertain and actual results may be materially different than our expectations. We've identified risk factors that may influence our actual results and listed them on this slide as well as in our press release and most recent filings with the Securities and Exchange Commission, specifically, our 2018 annual -- 2017 annual report and subsequent 10-Q for the first quarter of '18, which contain a more detailed discussion of the risks. We've also provided a reconciliation of certain non-GAAP financial measures referred to in our press release and presentation as compared to their closest related GAAP measures.

With me today to discuss our results are Steve Hilton, Chairman and CEO of Meritage; Hilla Sferruzza, Executive Vice President and the CFO; and Phillippe Lord, Executive Vice President and Chief Operating Officer of Meritage.

We expect to conclude this call within an hour, maybe a little bit less, and a replay will be available on our website approximately an hour afterwards and will remain active for approximately 2 weeks.

I'll now turn the call over to Steve to review our second quarter results. Steve?

Thank you, Brent, and welcome to everyone participating on our call today.

I'll begin on Slide 4. We had another good quarter and are pleased with the results we delivered through the first half of 2018. We're on track or slightly ahead of the expectations we communicated at the beginning of the year.

The growth in revenue and earnings we achieved this year is been primarily driven by the success we're having in the entry-level market with our LiVE. NOW. homes and the improvements we've made in our East region. We expect demand for entry-level homes to continue to be strong. We have aligned our real estate investments and our operations to maximize our opportunities to further growth in that area.

Similarly, we expect further improvements in our East region's results that will benefit our consolidated earnings, and plan to grow our community count in the East over the next several quarters. We delivered year-over-year growth across nearly all key metrics in the second quarter.

Home closings increased 12%. Home closing revenue was up 19%. Our gross margin has expanded by 60 basis points, increasing home closing gross profit by 13%, and pretax earnings also grew 13%. Our diluted earnings per share were 34% higher than the second quarter of 2017, benefiting from a lower tax rate and diluted share count.

While we have been focused on increasing our gross margins to maximize our profit on every sale, we still produced 5% of order growth in the second quarter driven by 6% higher absorptions from relatively the same number of actively-selling communities in the second quarter as we had a year ago.

Turning to Slide 5. Clearly the success of our entry-level LiVE. NOW. homes has been a significant driver of our order growth in recent quarters. We're building many more LiVE. NOW. communities, and those communities have been selling at a faster pace than move-up.

Entry level homes made up about 44% of our total orders in the second quarter compared with 33% for the full year 2017. We have nearly reached our year-end 2018 goal of having 35% to 40% of our total communities offer entry-level homes that are priced below the FHA loan limit. We ended the second quarter with approximately 34%.

We're building solely on a spec basis in these communities, looking to deliver those homes faster and at lower cost to our customers. While price is, obviously, paramount for entry-level buyers, having homes available to move into quickly is also critical.

More than 60% of our LiVE. NOW. buyers are coming out of a rental home, and 70% want to move within 3 months. Quicker closing dates allow those buyers to lock in interest rate, to alleviate concerns and to alleviate concerns about rising rates.

Building on a spec basis also offers us greater efficiencies than build to order, allowing us to meet the needs of our buyers while managing our cost. We're carrying a little over 9 specs per community on an average at the end of the second quarter this year compared to about 7 per community a year ago. As a result, 55% of our total closings for the second quarter were from spec homes, up from 49% for all of 2017. Continuing the strategic channel we've established over the last couple of years, it's clearly working for us, and we believe that it can continue to drive future growth.

Before if I turn it over to Phillippe, I'll recognize our East region for their significant improvements and performance this year. The region encompasses our newest markets, and has been a turnaround story that reached an inflection point in the first quarter this year and continued to improve in the second quarter. The changes we've made in product, personnel and training over the last couple of years are helping to drive more orders, higher margins and greater operating efficiency.

As a result, the East region's home closing gross margin increased by more than 200 basis points over the second quarter of 2017, driving most of the increase in our consolidated home closing gross margin for the quarter and getting closer to the margins in our 2 other regions.

I'll turn it over to Phillippe to discuss the highlights of our operational performance. Phillippe?

Thank you, Steve. We are generally continuing to see solid demand in our markets, especially at the lower price points. We have been focused on improving our margins by pushing prices wherever the market will give it to us. Those increases are helping to offset rising costs, but our ability to continue this is limited by affordability. We are managing price and pace in every community to ensure that we are competitively priced and offer a strong value proposition to successfully win buyers. I'll discuss our progress by region with some local color, beginning with the East region on Slide 6.

As Steve said, we are pleased with the gains we see in the East due to our community positions, new product and improved execution. Our East region orders were up 12% year-over-year in the second quarter. South Carolina, Florida and Tennessee each produced strong double-digit growth in orders and absorptions despite having fewer average communities in the second quarter of 2018 compared to 2017.

Our average community count for the East region was down 2% from a year ago, but our order pace increased 14% to 8.1, which is in line with our Texas region. Total order value was up 11% year-over-year. With the improvements we made in product positioning and sales execution, we're shifting our focus towards operating efficiencies to drive higher margins, profits and growth from the region.

Slide 7. Moving left, Texas continued its solid performance with growth across the board and out into communities. Orders paced orders and order's value in the second quarter of 2018 compared to last year. Our average community count in Texas was up 6% year-over-year in the second quarter, and average absorptions increased slightly, resulting in a 7% increase in orders for the second quarter.

Total order value for Texas increased 9%. While ASP will continue to trend down over time with more entry-level homes, we had strong orders within a few higher-priced communities during the second quarter that drove the region's ASP up 2% year-over-year.

Slide 8. Our orders in the West region were down year-over-year due to a 40% decline in California's average community count and a smaller decline in Arizona. With the order pace up 20% -- 27% in California and up 5% for the region as a whole, the net effect was a 4% decline in orders for the quarter.

Strong demand in California is evident in the fact that our second quarter absorption of 12.7 were the highest in the company. As we have mentioned before, it has been difficult to get new communities open as the approval process is long and unpredictable, and development is often complicated. However, we do plan to open up many new communities and grow our active community count in California over the next 4 to 6 quarters.

Arizona is still experiencing broad-based market strength across most price segments, especially entry-level. We are very confident in our positions there with some of our newest community selling dozens of homes even before our grand opening. We've opened 9 new communities in Colorado in the last quarter, including the first of several townhome communities. The result was an 80% increase in second quarter average community count in Colorado and a 25% year-over-year increase in orders. The decline in absorption pace does not reflect the lack of demand, just timing. It is still one of the highest demand markets in the country.

I will now hand it over to Hilla to provide some additional information. Hilla?

Thank you, Phillippe. I'll provide a few additional details on our P&L as well as covering the land and balance sheet metrics, beginning on Slide 9.

Overall, our second quarter results were clean with very few unusual or nonrecurring items. Net earnings were up 29% year-over-year for the second quarter, contributing to the 50% growth in net earnings for the first half of the year. The primary drivers for this growth were increases in home closing, revenue and gross margin as well as the benefit of lower tax rates in 2018.

SG&A was a little higher than last year's second quarter as we expected. We explained last quarter that we would incur additional compensation expense in the second quarter of this year, that we didn't have last year, due to a change in the structure of certain equity awards to a more advantageous tax structure for the company. All equity awards for executives are now performance-based rather than time-based, and the timing of the expense is variable based on when the performance targets are considered likely to be achieved.

Certain warrants were considered probable to be earned as of the end of the second quarter of 2018, so we recognized approximately $1.3 million of expense at the end of this quarter with no corresponding expense in 2017.

We also benefited from a lower effective tax rate of 24% for the second quarter of 2018 compared to 34% a year ago, and diluted EPS benefited from the approximately 2 million share reduction in our diluted share count after the retirement of our convertible notes last year.

Turning to the balance sheet and cash flow items on Slide 10. Our net debt-to-cap ratio came down to 40.4% at June 30, 2018, from 41.4% at the beginning of the year. Under our newly authorized share repurchase program, we're planning to repurchase up to $100 million of shares over the next several quarters, depending on market and other conditions, and may begin as early as this quarter. As we repurchase shares, our net debt-to-cap will increase a little but remain well within our target of below 40%.

Total land and development spending was around $221 million in the second quarter of 2018, about $58 million less than last year's second quarter of $279 million, but still in line with our full year target of about $1 billion. We added approximately 2,600 new lots under control during the quarter, with 85% of those for entry-level communities aligning with our strategy. Our total lot supply at June 30, 2018, was relatively flat year-over-year in terms of total lot, which increased by just 260, though that translated to a 4.2-year supply of lots based on the trailing 12-month closings for this year compared to 4.5-year supply of lots at June 30, 2017. We own about 70% of our total lot inventory, with 30% auctioned as of June 30, 2018.

Slide 11. Based on our results through the first half of the year and our expectation for continued demand, we are maintaining our projections for full year 2018 home closings of approximately 8,450 to 8,850 closing and total home closing revenue of roughly $3.5 billion to $3.65 billion. That's about 10% to 15% growth over 2017.

We are also slightly increasing our expectations for home closing gross margin to 18% to 18.5% for the full year compared to last year's 17.6%. The high end of that range is tempered by potential future increases in material costs due to recently proposed tariffs. While we have been able to offset rising costs through price increases, the potential for additional cost increases in markets where affordability is already strained may prevent us from passing on those costs. We're adjusting our earnings expectations based on better-than-expected margins in the first half of 2018.

Pretax earnings for the year are projected to be roughly $295 million to $315 million, with strong growth in the second half of the year. Our effective tax rate remains at 25% for the balance of 2018.

For the third quarter, we're projecting 2,050 to 2,250 closings for total home closing revenue of approximately $850 million to $925 million. We're expecting to maintain our home closing gross margin roughly in line with the second quarter of 2018 and last year's third quarter, generating pretax income of approximately $70 million to $75 million, which would be 10% to 20% higher than the third quarter of 2017.

With that, I'll turn it back over to Steve.

Thank you, Hilla. In summary, we are pleased with our second quarter results and the progress we made on nearly all key metrics this year. We believe there's more to come. The economy remains relatively strong and demand for new homes remains healthy, especially for lower-priced and entry-level homes. We are strategically positioned to capture the demand for additional growth while also leveraging the growth for greater earnings through gross margin expansion and operating efficiencies.

We're mindful of the affordability concerns and the potential that further cost increases could drive home prices even higher, which could slow the market in some areas. We're carefully monitoring affordability trends and their impact on our markets.

I'm proud of our entire Meritage team for putting our customers first and working hard every day to make the company successful. We're confident in our abilities to make the most of the opportunities ahead of us, and we expect to continue to grow and deliver increased shareholder value. Thank you for your support of Meritage Homes.

We'll now open it up for questions, and the operator will remind you of the instructions. Operator?

(Operator Instructions) The first question will come from Alan Ratner with Zelman & Associates.

Congrats on the progress in the East. It's good to see. So -- yes, on the order front, up 5%, I think. Obviously, a little bit softer growth than we've seen in the last few quarters, and I think that's generally been the trend that we've seen in a lot of the macro data through the quarter. And, I guess, as you sit here in the middle of the year and you kind of look at your business, your community count, that pipeline of growth, the comps you've got coming up here and just generally the demand environment today, what degree of confidence do you have, maybe not this quarter or next, but that growth can eventually reaccelerate back to that kind of high single, low double-digit range the industry was enjoying for the last several years? And what needs to happen in order for that to occur?

Well, Alan, we're very confident in our business, and we're really confident in the demand for our products. We had a really consistent quarter. We didn't really see a drop-off in demand in June. We debated whether to give monthly order numbers, but I can assure you that the orders that we received in June were very consistent with what we received in April and May. The biggest challenge for us, really, was California. We've had many communities that we've been planning to open this last quarter that have gotten hung up for a variety of reasons, getting final approvals and development work completed. It's been tougher than anticipated and it's slowed down our community count growth there. And if it wasn't for that, we would have better results in the West, which would've drive better net order growth. I think our net order growth in the other regions was pretty decent and definitely around the double-digit numbers. So we're really confident in our business. We haven't seen a lot of pushback on the interest rates. I think this summer is probably a little bit more seasonal than the last couple few years because of the higher prices and the higher rates, but I don't think overall there's a cause to be concerned.

That's helpful, Steve. So it sounds like just the key is getting those communities to the finish line, and that should solve a little bit of the challenges I think you and others are feeling as well. I guess, just in terms of the pricing side. So you mentioned affordability concerns and constraints several times. But at the same time, it seems like on the margin front, you're still having success offsetting the cost pressures that you're experiencing. Is there any color you can give just as far as looking at the material side of things? Obviously, lumber went up a ton earlier in the year. It sounds like maybe that's starting to pull back a little bit. How should we think about that flowing through your business as far as when you lock in the prices, when -- if there is any relief over the last few weeks, when would we start to see that showing up in your actual delivery numbers?

I'll let Phillippe or Hilla take that. Do you guys want to?

Yes. This is Phillippe. We usually lock lumber 30 to 60 days right now because it's been rising quite a bit, and we wanted to stay flexible. We've seen a little bit of pullback here, but I wouldn't say it's super meaningful at this point, but we do expect it to continue to go down as this kind of -- these issues work through the system. And so we're -- we'll probably be relocking, depending on the division, over the next quarter here to try to capture some of those savings back to our business. So that's kind of how we're managing it.

The next question comes from Michael Rehaut with JPMorgan.

This is Elad on for Mike. I just wanted to follow-up on the entry-level homes representing 44% of your 2Q orders. That's a little bit of an acceleration from 1Q, and it was at 38%. And you mentioned that you ended 2Q with, I think, 34% of your total is entry level. I'm just wondering if there's any upside to that 35%, 40% by 2018-end for your community count?

Might be a slight bit of upside, you know, a few extra communities, probably not a lot. But there's probably more upside to the number of entry-level buyers that we're getting, because we are getting some entry-level buyers that are buying in some of our first move-up communities. So we're probably gravitating more towards 50% of our orders in total being from entry-level buyers, than that 35% to 40% of the communities, because we are getting entry-level buyers in other communities. So we welcome that. We think that we want that to be a bigger part of our business, and we think that's where the market's going to be over the next many years, and that's where we're really trying to get to.

So that's 50% -- okay, go ahead.

I'm sorry. As we get closer to that 40% of the community count, the absorptions pace that we're seeing with the entry-level buyer is also accelerated compared to the move-up product that we still sell, the first-time move-up. So as we get closer to that 40%, that 50% of volume that Steve referenced, it becomes much more achievable.

Okay, great. Great, that's helpful. Just one more. On SG&A, it seems to be normalizing to some extent around the 11% level. I know it was a little bit up year-on-year because as some of those compensation expenses that you guys had called out. But how should we be thinking about SG&A over the next 6, 8, 12 quarters? Is this about where you think it should fall out on a steady state basis? Or do you see room for additional improvement?

Well, we really think it would be a little bit less. We really want to be in that 10% to 10.5% area. This quarter was a little bit of an anomaly for a couple of reasons, that we already articulated. So we think it should come back down to around that 10.5% number, and that's what we're expecting over the next several quarters.

The next question will be from Steven East with Wells Fargo.

Actually this is Paul Przybylski on for Stephen. If my memory serves, I believe your West margins have been comparable to the East and you -- over the past several quarters, you've spent quite a bit of time elaborating on a plan to raise the East gross margins. Do you have a similar plan for the West? Or is that really just a case of pricing catching up with land costs?

Well, margins -- I'll let Phillippe and Hilla respond after, but the margins in the West have been rising, particularly in Phoenix or in Arizona. We've been pushing prices hard. In some of the newer communities definitely, we're opening in Colorado, are coming in at higher margins. So I think we're on track to improve margins in the West for the remainder of this year and into next year.

So, Paul, our East region's increased, I believe, Steve mentioned, over 200 basis points this quarter, the second quarter of '18 over '17. Our Centrals kind maintain steady. They're still at above 20%. They're pretty normalized and continuing to hold the line. The West, actually, also had some improvements this quarter over last year's Q2. You'll see that when our 10-Q comes out, and we break everything out by region. But the strength of the entry-level markets in Arizona, the continuing strength in California and Colorado, as well as the drop-off of some of those FHA-impacted communities in California and Arizona that we talked about a couple of years ago, as that impact is muted, we're starting to see the margins creep up in the West as well, much back into more normal territory.

Okay. And one more on the West. Is there -- I know you mentioned 4 to the 6 quarters, I believe, to get the California communities open. But it sounded like if they were delayed this quarter, that may be on the shorter end of that spectrum than the longer end. Am I reading that correctly?

Yes. This is Phillippe. We definitely are expecting growth in community count, especially both in Colorado and Southern California. As fast as we are opening them, we also are closing out other ones, because we have -- sales are so strong. So when we have community delays, we're kind of chasing that community count, to some extent. But it could be on the shorter side of things. But 4 to 6 is a good metric to assume, that we're going to see that community count growth in California.

And one final one. Any color on July orders?

Yes -- go ahead, Steve.

(inaudible)

Yes, it's really too early to tell. July is always a very weird month because the first 2 weeks of July are always very slow, and then we see a lot of demand come back as people return from vacation. So it's much too early to tell and kind of typical seasonality as Steve mentioned earlier.

Your next question will be from John Lovallo with Bank of America.

It's actually Pete Galbo on for John. I guess, Phillippe, very helpful color around the California communities. I would think -- and I just want to get clarity for this. You said you'd be opening more, I think in the Southern California than in Northern California, over the next 4 to 6 quarters. But I just wanted to confirm that. And also see if the 5% to 10% overall communiqué (inaudible) talked about for the company for this year still held?

Yes, we -- sorry, it's Phillippe. We already have achieved the 5% community count growth for the year, and that's kind of where we expect it to be. As it relates to California, I would say this: we're going to open up -- we're going to see more community count growth in Southern California because we're coming from a lower base. We'll actually be opening up more communities in Northern California in as -- like total gross, but the net community count growth in Southern California will be higher than Northern California.

Got it. Got it, okay. And maybe a question for Steve. Just thinking about, you know, as you do shift the portfolio more towards entry level, I think a lot of times people would think that, that would actually lead to a degradation of margin. We would almost argue the opposite in some instances. I mean, can you just kind of bucket the efficiencies that you see from shifting the portfolio more into entry level, whether it's on the labor side, the material side, underwriting land and getting processed faster? Just any color there would be helpful.

Well, it's all of the above. So number one, we're able to get better costs and better reception from our trades. They love us line building, spec building, 100% spec. It's easier for them to build. They're able to keep our people -- their people on our job sites longer. So our trades love it. They love that segment of the business. Generally, the land that we use for the entry-level market's a little bit farther out. So it's easier to process. It's easier to get titled. The buyer cycle is quicker. From the time when the buyers come in, make first contact with us to the time of the sale, it's much faster. So our salespeople like it. The buyers like it. It's a simpler process. And we think the way that we're approaching it, and which has got some nuances that are a little different than some of the other larger entry-level builders, is unique. And the customers like it, and we don't believe there's margin degradation. And we think it's just the opposite. It's more stability, and it's a better place to be in a rising price and a rising demand environment.

Got it. And maybe just quickly on the last one. Any color around what stick and brick costs were up this quarter, year-over-year?

Yes, this is Phillippe. Probably around 6% actual cost inflation, okay? Not as a percent of ASP, but true cost inflation about 6%.

For the year.

For the year, yes.

Full year, not a quarter.

Yes.

Our next question comes from Susan Maklari with Credit Suisse.

This is Chris on for Susan. So my first question was just on your capital allocation priorities following the share repurchase announcement. How should we think about the pace of share buybacks over the next several quarters? And how does that stack up relative to your other internal investments and debt pay-downs?

Well, we're -- we definitely want to keep liquidity to -- for our refinancings in 2020, when it begins. Is it '19 or '20, Hilla?

It's '20.

Yes, '20. So keep liquidity aside for that, but we're going to be opportunistic. We're going to spend that $100 million as the opportunities present themselves. But at these prices today, it could be sooner. But we definitely to get in the market, buy back some shares. At the same time, we're keeping our land spend kind of steady to a little bit less; where it was the last couple of years. But we expect to generate free cash flow in 2019, and that's our plan.

Got it. And then just following up on the inflation question earlier. Could you guys break out the inflation you're seeing in land, labor and materials for us, if that's possible?

Yes, we don't have the detail of all that. Like I said, I think our costs are up around 6%. Most of that is materials and specifically lumber, but not all of it, and there's certainly a labor component as well.

And then just a reminder, Phillippe touched on this before, the component of our costs in the sticks and bricks area is about 50% on the revenue equation. So it's a 50% relationship. So a 6% increase in materials and labor only needs a 3% increase in revenue to offset it. So that's how we're able to still maintain and improve our margins even in a rising cost environment.

The next question will come from Stephen Kim with Evercore ISI.

This is actually Chris on for Steve. You previously mentioned that you expect full year '18 closing ASPs to be down year-over-year. But, obviously, with all of the respective affordability constraints and some signs of emerging softness, do you expect this to be down significantly or just reflect the shift more towards the entry level?

It's entirely the shift to the entry level. We're not -- ASPs are not going down because we're lowering prices or giving discounts. ASPs are declining because of our shift to lower-priced homes.

The next question comes from Nishu Sood with Deutsche Bank.

This is actually Tim on for Nishu. So I guess just digging into the regional margins there. So East came up about 200 basis points to around 16% in the quarter. So just curious as to how are we positioned into kind of, I guess, the normalized range that this region can get to? Steve, you mentioned a bit of an inflection point. So just curious, are we past that inflection point or midway through it? How much headroom is, I guess, left to get the (inaudible) levels?

We're not there yet. We still have room -- quite a bit of room to run on the margins. But some of the other parts of the business are getting to more normal levels. But definitely, the margins are an area that we expect to see continued improvement from in the East and the South, particularly.

And there's no reason for us to expect the margins in the East to not be normal. So if they're around 15-ish, mid-16s, there's clearly still headway to go. They should be earning something closer to the expectation for the entire company, which is 18% to 20%.

Got it. No, that's very helpful. So I guess -- well, similar on the margin topic, you guys did mention a lot about the benefit that you're getting from the spec build, I guess, the shift towards more spec build. So could you help us understand, I guess, the spread between the spec margins and the build-to-order margins that you saw in this quarter? Was that different on a regional basis? Yes, just any sort of details there would be helpful.

There's no difference in margin, because in the entry-level segment LiVE. NOW. communities, that's the only way that we build. So there's no difference in margin. And we could argue to our customers that we should be able to charge a premium for our houses ready versus a house you have to wait 6 months to build. I think in a rising interest rate environment people want to move quicker because they want to lock in their rate, but we don't see a gap in margin between specs and build-to-order.

The next question will be from Jade Rahmani with KBW.

This is actually Ryan on for Jade. Just in terms of the land market, are you seeing any changes there based on increased construction costs and slowing home sales, maybe less competition or perhaps a pullback in pricing?

It's market by market, but any changes that we're seeing are kind of subtle, and they're not very dramatic. But some markets, there's a few more opportunities to buy parcels than there were maybe a year ago. But generally, it hasn't changed that much.

Okay. And in terms of the absorption pace, can you quantify how the LiVE. NOW. piece compares with your other product lines in terms of maybe absolute and year-over-year growth rates?

Yes. This is Phillippe. I mean, on average, our LiVE. NOW. product is about 12 per quarter or month. In the first move up, we're closer to 8. And then when we're priced above the first move-up, we're seeing around 6. So those are kind of the absorption pace, on average, for the company for those 3 segments.

And maybe can you give that on a year-over-year basis, the growth rates?

On the LiVE. NOW., it's pretty steady. For the first move up, it's been increasing a little bit because we're seeing second move up buyers migrate to first move up. And then on the second move up, it's a little slower.

At this time, we just have a couple of more questions left. The next question will come from Jay McCanless with Wedbush.

Steve, what finally changed your mind on the stock buyback? A pleasant surprise to see that.

Our ability to generate excess cash flow and the low price of the stock. I really expected the stock to be higher right now, but we have a lot of confidence in our business, we have a lot of confidence in the next several years where things are going and it doesn't seem to be reflected in our stock price. And we think buying back shares is accretive to the shareholders and is a good investment we have on our books. And so we think it's the right time and the right opportunity right now.

Good. And then, Hilla, a quick question on some of the other line items to get to the pretax earnings guidance for the year. What are you guys expecting, either from land sale profit or from other income profit? Just wondering if there's going to be something there to make up for what looks like a little bit of a SG&A deleverage in the back half of the year.

There's not really anything forecasted in either other or land sales. The -- we are expecting to see some material improvement in the SG&A leverage. It is highly correlated to the volume of revenue. So as the revenue and units increase in the back half of the year, we'll see some leveraging on the SG&A.

And then the last question I had. In terms of cycle times, where are you guys now from kind of -- I don't know how y'all measure it -- either contract close or -- if you can give us any color there? Just wondering what labor availability looks like and how that's affecting or not affecting your delivery times?

Yes, this is Phillippe. Depending on the region, again, depending on how much exposure we have to LiVE. NOW. product, which is obviously much -- the cycle times are much shorter than our first move-up or second move-up communities. But we've reduced our cycle times year-over-year, probably 15 to 25 days depending on, again, those variables. In Phoenix, we're down probably 30 days since last year, just because of all the LiVE. NOW. products. Denver is another story where we've started pivoting the LiVE. NOW. and seeing big cycle time reductions. But it's probably somewhere around there.

And then for us, on LiVE. NOW, it's a dual benefit. Number one, it's an easier product to build, so the cycle time is less, and it's a repeatable product. But also with this over 9 specs for community in the ground, the cycle time becomes a little bit less. The metrics that we're monitoring, when 44% of your volume is coming from homes that are already in some stage of construction, the ability to turn that becomes much quicker.

Our next question will be from Carl Reichardt with BTIG.

I wanted to ask about the next year or 3, Steve. When you're looking at the new land you're buying now and looking at LiVE. NOW. entry level, which regions do you expect to see the most significant mix change in towards that product and away from your more traditional product? We know, obviously, Arizona is already pretty high, so I'm curious about the others.

Well, I mean, we've got a lot of LiVE. NOW., a lot of entry level in Phoenix, but we can still do quite a bit more. We're looking for some more in Tucson. Certainly, Colorado could do a lot more. In Texas, we've got quite a bit in Austin, but we could do more in Houston, we could do more in Dallas. I mean, really everywhere, we could do a lot more. We don't have very much in California, and we need to get more there. So there's a lot of opportunities for us in a lot of markets. But I'd say it's pretty broad-based across the entire country.

And when looking at the dirt supply that you have today and, let's say, over the course of the next year, where do you expect that mix shift to be most significant as a percentage of total deliveries?

I'll just have to think about that. Phillippe, you have an answer for that?

Yes. I think you're going to see -- we're buying a lot of entry-level dirt in the South region and Florida region. So you're going to see a big shift there. But Texas, too. Just -- you look at the land -- what we bought for land the last couple of quarters and what percent is LiVE. NOW., as Steve just said, we see opportunities everywhere to grow that part of our business. And we really think that's the strategy. That's what we need to do right now, and that's what where all the demand is.

Yes. Okay, and last one. Let's think about the long-term future. Where would you guys say you're comfortable, peak-wise, as a percentage of your business selling LiVE. NOW. entry level? Is it 70% of total business? 50%? 100%? Where would you put it? Sort of big picture, long term, as you look at it today?

Well, it's at least 50%. And when we get to 50%, we'll kind of assess it and kind of see how we're doing with it and reevaluate then. But I'd say it's at least 50% and it can, potentially, could be more.

But we also -- the other part of our strategy is the first move-up piece, and we think that's the second-strongest segment in the market. All the second move-up buyers, they're very sensitive to interest rates, prices going up. So we think there's a lot of strength in that first move-up buyer as well. And so those are our 2 markets that we're going after, and we think there's a lot of opportunity there.

Okay. I'm sorry, can I ask one more? If you look at LiVE. NOW., what percentage do you think is going to that entry-level buyer -- that first-time buyer versus say, a move-down customer? Is there some high percentage of that product that's selling to that customer as well?

That's probably 20% to as much as 1/3 of those people that are buying in those communities are move-down buyers, baby boomers, which is pretty -- somewhat surprising, but it's nice to see.

(Operator Instructions) The next question comes from Alex Barrón with Housing Research Center.

Congrats on having the foresight to move in this direction of the entry level. I was curious how you guys are thinking about the pace versus price, particularly for that type of buyer. Are you more focused on trying to maximize the price or the -- or maintain the pace by not raising the price too aggressively?

Well, the entry-level buyer is certainly a lot more price-sensitive than a move-up buyer. So you have to be more careful certainly with your pricing. But overall, as a company, we're really focused on getting our margins to where they need to be. So we have to give up a little bit of pace in certain places to get the price, and we think that provides better long-term benefits. By increasing our gross margin 1%, we can increase our bottom line [11%]. So we can grow the earnings of our business pretty substantively by focusing more on driving price versus pace. Of course, we want to get growth. We're still up, I think, 7% to 8% for the year right now, and I expect to get that or if not more for the full year. But at the same time, we need to push our margins, and that's what we're doing.

And Alex, Phillippe mentioned earlier that the pace -- our sales pace this year versus last year in entry level is about the same. So even though we are able to still push pricing, we're not seeing a pullback on the entry-level buyer, and a big part of that is by design. When we underwrite these communities to be below the FHA limit, we give ourselves some breathing room to allow for some pricing increases. So despite price increases, we're still under the FHA limit, making us an extremely affordable offering.

Got it. And my second question, I guess, is with regards to M&A. Obviously, some other builders are seeing some merit in being bigger, I guess, because it attracts labor, it attracts more land, opportunities, so forth. I'm curious on your thoughts on whether you feel it's -- there is any interest in maybe acquiring some other private guys or -- versus just continuing to grow organically through land acquisition?

Our eyes are always open. But as I've said on -- over the last several quarters, we have a lot of opportunities in the market that we're already in, and if we can find some in-market acquisition opportunities, where we can tuck under some builders to grow our lot count and grow our market share in certain markets, we're certainly going to be -- keep our eyes open to those. And we're also having our eyes open to some new market opportunities as well. But it's not our primary focus, but we're certainly open to it and keeping our eyes on it every quarter.

I believe that's our last question for today. So I think we're going to wrap up our call here. Appreciate everybody being on the call for our second quarter and supporting Meritage, and we look forward to talking to you next quarter. Thank you very much. Have a great day.

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.