Meritage Homes(US:MTH)2023-02-02 21:56Financial Data and Key Metrics Changes - Home closing revenue grew 32% year-over-year to $2 billion in Q4 2022, driven by a 29% increase in home closing volume and a 3% increase in average selling prices (ASPs) [11][49] - The fourth quarter 2022 home closing gross margin was 25.2%, a decline of 380 basis points from 29.8% in Q4 2021, attributed to higher incentives and direct costs [22][49] - Diluted EPS increased by 13% year-over-year to $7.09, supported by higher closing volume and a lower outstanding share count [24][52] Business Line Data and Key Metrics Changes - The company delivered 4,540 homes in Q4 2022, a 29% increase year-over-year, with entry-level homes making up 85% of closings, up from 81% in the prior year [16][49] - Sales orders for Q4 2022 totaled 1,808 homes, with 89% being entry-level homes, an increase from 82% in Q4 2021 [16][43] - The cancellation rate in Q4 2022 was 39%, up from 12% in Q4 2021, significantly impacting net sales [43][49] Market Data and Key Metrics Changes - The highest regional absorption pace was 2.6 homes per month in the Central region, while the West region saw a decline in orders with an absorption pace of 1.6 homes per month [17][18] - In Florida, average selling prices on orders increased by 11% despite a 25% reduction in orders, indicating a shift in product mix [18] - The East region had the lowest decline in orders at 41% year-over-year, with a gross sales pace in line with the target of 3 to 4 homes per month [44] Company Strategy and Development Direction - The company aims to maintain a sales pace of 3 to 4 net sales per month by prestarting 100% of entry-level homes, which are ready for quick sale [30][40] - The strategy includes moderating construction starts to align with lower demand, with approximately 2,100 homes started in Q4 2022 compared to over 3,700 in Q4 2021 [19] - The company is focused on cost reductions and operational efficiencies, targeting a long-term gross margin of 22% or higher [50][81] Management's Comments on Operating Environment and Future Outlook - Management noted that ongoing economic uncertainty, rising mortgage rates, and inflation have overshadowed favorable demographics and low housing inventory [5][39] - The company expressed cautious optimism about January sales, reporting a net absorption pace greater than 4 homes per month, indicating potential recovery in demand [45][65] - Management highlighted the importance of move-in ready inventory in driving sales, as buyers prefer homes that can close within 45 to 60 days [40][70] Other Important Information - The company ended Q4 2022 with a backlog of 3,300 units, improving the conversion rate from 60% last year to 75% this year [20] - The company maintained a strong cash position with over $860 million in cash and generated $562 million of free cash flow in Q4 2022 [25][53] - The company has no impaired communities despite reduced ASPs and higher direct costs, indicating confidence in asset valuations [26][103] Q&A Session Questions and Answers Question: Can you help us think through Q1 gross margins? - Management indicated that Q1 margins are expected to be choppy due to various cost factors and market conditions, with no clear guidance beyond Q1 [32][80] Question: What are the potential cost tailwinds outside of lumber? - Management is actively rebidding vertical costs to capture savings, with some divisions reporting savings of $15,000 per home [35][62] Question: How does the company view the current market conditions? - Management noted that while January showed improvement, the overall market remains uncertain, and they are focused on operational discipline [65][94] Question: What is the strategy regarding community openings? - Management stated that they will prioritize opening communities with strong inventory and cost structures rather than rushing to increase community counts [94][95]