Meritage Homes(US:MTH)2021-07-29 21:30Financial Data and Key Metrics Changes - The company reported a 23% year-over-year increase in home closing revenue to $1.2 billion, driven by an 18% increase in home closings and a 4% increase in average selling price (ASP) [28][40] - Home closing gross margin improved by 590 basis points to 27.3% from 21.4% a year ago, reflecting higher ASPs and leveraging of fixed costs [41][46] - Diluted EPS increased by 83% year-over-year to $4.36, with net earnings up 85% [46] Business Line Data and Key Metrics Changes - The average absorption pace increased to 5.5 net orders per month, up from 5.0 the previous year, despite a tightly controlled order pace [10][29] - Entry-level homes accounted for over 80% of total orders, up from 70% in the same quarter last year, indicating a strategic shift towards more affordable housing [31][22] - The company achieved its highest quarterly home-closing gross margin in history at 27.3% [12] Market Data and Key Metrics Changes - The East region saw a 78% increase in order volume year-over-year, attributed to a 25% growth in average absorption pace [32] - The Central region's average absorption pace grew 8% year-over-year to 6.0 per month, the highest in the company, despite a 16% decline in average community count [33] - The West region experienced a 10% decrease in order volume, but a 22% increase in order ASP due to strong demand and pricing power [34] Company Strategy and Development Direction - The company aims to grow its community count to 300, which is expected to generate 15,000 orders at a normalized run rate of 50 orders per store [16] - The focus remains on entry-level and first move-up markets, with a commitment to affordability and quality in home offerings [22][24] - The company plans to spend approximately $1.75 billion to $2 billion on land acquisition and development in 2021 to support its growth strategy [55] Management's Comments on Operating Environment and Future Outlook - Management noted that while the current demand and pricing dynamics are strong, they are not sustainable indefinitely, and a normalization of sales pace is expected in the coming quarters [19][20] - The company is monitoring affordability indicators and has not seen significant pushback on pricing, although some consumer feedback suggests a preference to wait due to rising prices [76][77] - Management expressed confidence in achieving the 300 community goal by mid-2022, supported by a strong backlog and increased spec counts [63] Other Important Information - The company has maintained a strong balance sheet, with a cash balance of $684 million and a net debt to capital ratio of 15.4% [48] - The company has a backlog of over 5,500 units, providing good visibility into future margin trends [59] - The company is committed to a 100% spec building strategy focused on entry-level products to maintain affordability [24] Q&A Session Summary Question: Comments on normalization of absorption rates and impact on gross margins - Management acknowledged that while margins are currently strong, normalization of absorption rates may impact future gross margin trends, but they expect to maintain a solid margin profile due to favorable land costs [66][68][72] Question: Indicators of affordability being stretched in some markets - Management noted that while FICO scores and debt-to-income ratios remain stable, there has been qualitative feedback indicating some consumers are hesitant to buy due to rising prices [74][76] Question: Impact of falling lumber prices on margins - Management indicated that while lumber prices peaked in Q2, the benefits of falling prices will be more pronounced in 2022 rather than the second half of 2021 [82][84][89] Question: Incentives and their relationship with ASP increases - Management clarified that traditional incentives are currently low, and while they expect some return of incentives as supply increases, they anticipate ASPs will continue to rise in a normalized market [90][92][94] Question: Loan limits and affordability strategies - Management emphasized the importance of monitoring both loan limits and overall affordability, with a focus on positioning products below FHA limits to enhance accessibility for buyers [97][100]