Meritage Homes(US:MTH)2022-10-28 01:14Financial Data and Key Metrics Changes - Home closing revenue increased by 25% year-over-year to $1.6 billion due to a 12% greater home closing volume and a 12% increase in average selling prices (ASPs) [43][48] - The gross margin for home closings was 28.7%, a 100 basis points decline from 29.7% a year ago, primarily due to increased incentives and $8.8 million in write-offs for option deposits [44][48] - Diluted EPS reached a record high of $7.10, reflecting a 35% year-over-year increase [48] Business Line Data and Key Metrics Changes - Sales order volume decreased by 33% year-over-year to 2,310 homes, with a cancellation rate of 30%, significantly above the historical average [13][27] - The absorption pace was 2.7 homes per month, down from 5.0 homes per month in the prior year [13][27] - Entry-level homes constituted 84% of closings, up from 78% in the prior year [26] Market Data and Key Metrics Changes - The East region outperformed other regions with an average absorption pace of 3.8 homes per month, while the West region struggled with a pace of 1.5 homes per month [28][29] - Florida maintained strong performance, representing 44% of the East region's orders, with an absorption pace of 5.0 net sales per month [33] - The company experienced the highest cancellation rates in the West region, particularly in Colorado and Arizona, due to affordability issues and supply chain challenges [30][31] Company Strategy and Development Direction - The company is focusing on pre-starting 100% of entry-level homes and prioritizing pace over price to navigate the current market environment [20][63] - A significant pullback on new land deals has been implemented, with a focus on exceptional opportunities only [22][24] - The company aims to maintain a strong balance sheet and liquidity while managing through changing market conditions [50][51] Management's Comments on Operating Environment and Future Outlook - Management anticipates continued weaker demand in the near term due to rising mortgage rates and economic uncertainty [12][20] - The company expects further deterioration in buyer confidence, impacting both new customers and those in the backlog [20] - Future gross margins are projected to be materially impacted by aggressive incentive actions and increasing costs in a rising interest rate environment [60][62] Other Important Information - The company ended the third quarter with a backlog of approximately 6,100 units, with a conversion rate decline from 57% last year to 48% this year [41] - The company has ample liquidity, with a cash balance of $299 million and no draws on its credit facility [50][51] - The company is forecasting total closings for Q4 2022 to be between 4,300 and 4,700 units, with home closing revenue projected at $1.85 billion to $2.10 billion [60][61] Q&A Session Summary Question: What are the expectations for gross margins in the current environment? - Management indicated that predicting future margins is challenging due to fluctuating market dynamics and costs, but they believe they can outperform despite the need for incentives [66][68] Question: What are the current incentive levels across markets? - Incentives vary by region, with high teens in the West and more normal adjustments in the East, reflecting the need to remain competitive [75][78] Question: Has the speed of price adjustments surprised management? - Management expressed surprise at the rapid increase in mortgage rates, which necessitated significant price rollbacks to maintain consumer confidence [88][90] Question: What is the outlook for impairments in the current market? - Management does not anticipate broad-based impairments unless there are significant further declines in ASPs, as many communities are still above impairment thresholds [94][96] Question: What is the expected sales pace for Q4? - Management does not expect a significant improvement in sales pace for Q4, citing ongoing market challenges and the need for rate stabilization [105]