Meritage Corporation (MTH)

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Meritage Homes Corp. (MTH)

Q4 2008 Earnings Call

January 29, 2009 11:00 am ET


Brent Anderson – Vice President, Investor Relations

Steven J. Hilton – Chairman and Chief Executive Officer

Larry W. Seay – Chief Financial Officer and Executive Vice President


Nishu Sood – Deutsche Bank

David Goldberg – UBS

James Wilson – JMP Securities

Eric Landry – Morningstar

Carl Reichardt – Wachovia Capital Markets

Joel Locker – FBN Securities

Lee Bradding – Wachovia

Daniel Oppenheim – Credit Suisse

[Timothy Jones] – [Wasserman & Associates]



Good morning, my name is [Sarah] and I will be your conference operator today. At this time I would like to welcome everyone to the Meritage Homes fourth quarter and full year 2008 Conference Call. (Operator Instructions). Thank you, Mr. Anderson you may begin your conference.

Brent Anderson

Thank you [Sarah]. Good morning everyone. I would like to welcome you to the Meritage Homes Fourth Quarter and Full Year 2008 Earnings Call and webcast. Our quarter ended on December 31st and we issued our press release yesterday with our results for the quarter and fiscal the year.

If you need a copy of the release you can find it on our Web site at on the investor relations page, along with the slides that will accompany our webcast today. Please refer to slide two of our presentation.

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 opinions.

Additionally, our actual results may be materially different than our expectations due to various risk factors. For information regarding those risk factors, please see our press release and our most recent filings with the Securities and Exchange Commission, specifically our 2007 annual report on form 10-K and our latest report on form 10-Q.

Today’s presentation also includes certain non-GAAP financial measures as defined by the SEC. To comply with their rules we have provided a reconciliation of the non-GAAP measures in our earnings press release.

With me today on the call to discuss our quarter are Steve Hilton, Chairman and CEO of Meritage Homes, and Larry Seay our Executive Vice President and CFO. We’ll keep our call to about 50 minutes this morning so that we end before noon Eastern Time.

I’ll now turn it over to Mr. Hilton to review our fourth quarter results. Steve?

Steve Hilton

Thank you Brent. I would like to welcome everyone to our call today. I will begin with slide four if you’re following along on the webcast. The most significant highlights of our fourth quarter include our cash generation, year end cash balance, and expected tax refund in the first quarter of 2009.

In addition, we operated a small profit for impairments due in part to reductions in our direct cost and overhead, which we believe will continue to benefit us in the future. Let me walk you through some of the more details on those items.

As anticipated, we generated a significant amount of additional cash, increasing our cash position by $87 million, more than 70% increase in the last three months of 2008. We ended the year with $206 million in cash and no borrowings outstanding under our credit facility.

That compares to $28 million in cash and $82 million borrowed under our credit facility at the end of the $2007. In addition we expect to collect approximately $112 million of tax refunds in the first part of ’09. In addition to generating cash, the other significant accomplishments this past quarter was our small positive pre-tax income before impairments compared to the prior year’s pre-tax loss before impairments.

The recent quarter’s results were due to an increase in our gross margin before impairments, which was due to construction costs savings and the benefit of previous quarters impairments that reduced the cost basis of the homes that we closed.

Our improvement – our improved results also reflected a decrease in general administrative expenses of 47% from last year’s fourth quarter. We also reduced our community count by 14% during the quarter. I’ll address each of these in more detail. Slide five; we generated positive cash flow from our operations since the middle of 2007.

We used that cash to first pay down more than a quarter billion dollars in bank debt by the end of 2007 and have since added to that cash position every quarter. We also completed an equity offering in the second quarter of 2008 to raise $83 million and it increased our cash – year end cash balance to $206 million.

Our cash flow from operations for the fourth quarter was $94 million which brought our total cash flow from operations for 2008 to approximately $200 million. Slide six, our fourth quarter 2008 home closing revenue declined 37% from the prior year due to 30% lower closings, coupled with a 10% year-over- year decline in average sales price.

We’ve closed 1,488 homes at an average price of about $260,000 in the fourth quarter of 2008, compared with 2,139 homes closed at an average price $288,000 in the fourth quarter 2007. As we discussed last quarter, the increase in foreclosures has put pressure on both sales and margins due to their heavily discounted prices.

Slide seven, fourth quarter net orders declined six – or I’m sorry – declined 52% from 2007 to 2008 after a 56% cancellation rate in the quarter. Sequentially higher than the 40% rate in the third quarter of 2008 and above the 47% cancellation rate we experienced in the fourth quarter of 2007.

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