Meritage Homes Corporation (MTH)
Q2 2012 Earnings Conference Call
July 26, 2012, 10:30 a.m. ET
Executives
Brent Anderson - VP, IR
Steve Hilton - Chairman and CEO
Larry Seay - EVP and CFO
Analysts
Michael Rehaut - JP Morgan
Dan Oppenheim - Credit Suisse
Nishu Sood - Deutsche Bank
David Goldberg - UBS Securities
Steven Kim - Barclays Capital
Alan Ratner - Zelman & Associates
Jade Rahmani - KBW
Joshua Pollard - Goldman Sachs
Stephen East - ISI Group
Adam Rudiger - Wells Fargo Securities
Joel Locker - FBN Securities
Alex Barron - Housing Research Center
Presentation
Operator
Good morning and welcome to the Meritage Homes Second Quarter 2012 conference call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask question. (Operator Instructions)
I’d now like to turn the conference over to Brent Anderson. Please go ahead.
Brent Anderson
Thank you, Emily. Good morning everyone I’d like to welcome to our analyst conference call today. Our second quarter 2012 ended June 30 and we issued a press release with our results before the market opened today. If you need a copy of the release with the slide that accompanies our webcast, you can find them on our website at investors.MeritageHomes.com or by selecting the investors link at the top of our home page.
Turning to Slide 2. Our statements during this call and the accompanying materials contain projections and forward-looking statements which are the current opinions of management and subject to change. We undertake no obligation to update these projections or opinion. Additionally, our actual results may be materially different than our expectations due to various risks factors. For information regarding these risk factors, please see our press release and our most recent filings with the Securities and Exchange Commission specifically our 2011 Annual Report on Form 10-K and our first quarter 10-Q. Today’s presentation also includes certain non-GAAP financial measures as defined by the SEC, to comply with SEC rules we have provided a reconciliation of these non-GAAP measures in our earnings press release.
With me today to discuss our results are Steve Hilton, Chairman and CEO of Meritage Homes; and Larry Seay, our Executive Vice President and CFO. We expect our call to be concluded above an hour and a replay of the call will be available on our website within an hour or so after we conclude the call. It will remain active for 30 days.
I’ll now turn the call over to Mr. Hilton to review our second quarter results. Steve?
Steve Hilton
Thank you, Brent. I’d like to welcome everyone to our today. We are excited to report earnings of $0.24 per diluted share for our second quarter in addition to the 49% increase in orders that we preannounced on July 8. The earnings leverage we have been expecting to see was clearly evident this quarter as our 22% increase and closes over 2011 drove a 28% increase in home closing revenue, a 31% increase in gross profit and net income of $8 million.
We carried approximately two-thirds of the additional 12 million in gross profit to the bottom-line, increase in our net income by 7.4 million and our adjusted pre-tax income by 8.1 million year-over-year.
Net income for the second quarter of 2012 included a $5.8 million loss on the early extinguishment of debt largely offset by a $5.2 million tax benefit due to the partial reversal of our deferred tax asset reserve which Larry will explain later. Excluding those items and impairments of 863,000 this year compared to 590,000 in the second quarter of 2011, our adjusted pre-tax income was 9.5 million for the second quarter of ’12 and our resulting adjusted pre-tax margin was 3.4% compared to six-tenth of a point last year. We believe this is a better indicator of our earnings power and expect to expand it further as we leverage our increase closings and revenue to grow earnings at faster rate.
Turning to Slide 5. Home closing revenue benefited from a 5% year-over-year increase in average closing price mostly reflecting mix issues rather than price appreciation. As a greater portion of our close this year were on larger homes and homes in higher priced markets. We only began raising prices broadly in the first quarter his year, so we expect most of the impact from rising prices to appear on our second half revenue and earnings.
Some of our home price appreciation has been offset by higher cost for land and construction which are moderating our gross margin expansion. However, we improved our second quarter gross margin by 50 basis points year-over-year to 18.5 from 18% in 2011. We believe that some of these cost increase are due to temporary supply and demand imbalances caused by the rapid increase in home sales this year as suppliers and contractors ramped up to support the increase volume of activity, some of these cost pressure should diminish in the coming quarters. As we said before we expect our gross margins to gradually increase toward our 20% higher gross margin overtime. We also expect to see continued improvement in our net margins as we leverage our fixed cost while growing our closing in revenue.
Our average sales price on second quarter orders increases 10% year-over-year again mostly driven by mix. As demand for our homes increased during the second quarter, we continue to raise prices in many communities across almost all of our markets which we believe accounted for about a third of the increase ASP on our second quarter orders.
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