Meritage Homes(US:MTH)2022-07-28 20:52Financial Data and Key Metrics Changes - Home closing revenue grew 11% year-over-year to $1.4 billion in Q2 2022, driven by a 13% increase in average selling price (ASP) despite a 2% decline in closing volumes due to supply chain issues [35][39] - The gross margin for home closings reached a record 31.6%, a 430 basis points improvement from 27.3% a year ago, attributed to higher ASPs and lower land costs [35][38] - Diluted EPS increased by 55% year-over-year to $6.77, reflecting improved pricing power and expanded margins [38][39] Business Line Data and Key Metrics Changes - The company achieved its highest second quarter sales order volume of 3,767 homes, a 6% increase from the previous year, with entry-level homes comprising 86% of quarterly orders [9][20] - Order cancellation rates increased from 10% in Q1 to 13% in Q2, with some buyers opting for move-in ready homes [21][29] Market Data and Key Metrics Changes - Demand was strongest in the East region, with a 24% increase in order volume, primarily due to a 37% increase in active communities [23] - South Carolina saw a 64% year-over-year increase in order volume, while Texas experienced flat order volume due to a decline in average orders placed [24][25] Company Strategy and Development Direction - The company aims to focus on affordable products and streamline operations, with a disciplined land acquisition process to move down the price band [49][50] - The strategy includes offering rate locks to help buyers secure monthly payments and adjusting pricing and incentives based on local market conditions [17][33] Management's Comments on Operating Environment and Future Outlook - Management acknowledged a softening housing market due to rising mortgage rates and changing buyer psychology, but remains optimistic about long-term demand driven by favorable demographics [8][18] - The company expects to navigate the current market dynamics and maintain volume and market share through strategic adjustments [19][50] Other Important Information - The company opened 49 new communities, increasing its community count to 303, and plans to maintain this count for the rest of the year [44] - The cash balance at June 30, 2022, was $272 million, with a net debt to capitalization ratio of 20.6% [40] Q&A Session Summary Question: Impact of rate locks and lumber costs on gross margin - Management indicated that rate locks would weigh on gross margin, with an estimated impact of around 100 basis points, while lumber savings are expected to materialize late in Q4 [54][56] Question: Normal absorption levels and incentives - Management expects normal absorption levels to be between 3 and 4 sales per month, with current incentives aligned with historical averages [57][59] Question: Cancellation rates and buyer behavior - Cancellation rates were reported at 13% in Q2, with a mix of recent and legacy buyers contributing to this figure [64][65] Question: Build-to-rent segment performance - The build-to-rent segment accounted for approximately 5% of orders, with steady demand anticipated as more communities come online [66][68] Question: Land acquisition strategy - Management is closely scrutinizing land deals, renegotiating terms where necessary, and has not walked away from significant options yet [75][79]