Meritage Corporation (MTH)

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Meritage Homes Corporation (MTH)

Q4 2009 Earnings Call Transcript

January 27, 2010 9:00 am ET

Executives

Brent Anderson – VP, IR

Steve Hilton – Chairman and CEO

Larry Seay – EVP and CFO

Analysts

Joshua Pollard – Goldman Sachs

Ivy Zelman – Zelman & Associates

Nishu Sood – Deutsche Bank

David Goldberg – UBS

Josh Levin – Citigroup

Joel Locker – FBN Securities

Timothy Jones – Wasserman & Associates

Carl Reichardt – Wells Fargo Securities

Jay McCanless – FTN Equity Capital

Susan Berliner – J.P. Morgan

Dan Oppenheim – Credit Suisse

Presentation

Operator

Greetings and welcome to the Meritage Homes fourth quarter 2009 conference call. (Operator instructions) It is now my pleasure to introduce your host, Mr. Brent Anderson, VP of Investor Relations. Thank you, Mr. Anderson, you may begin.

Brent Anderson

Thank you, Nicky. Good morning. I would like to welcome you to the Meritage Homes fourth quarter 2009 earnings call and webcast. Our quarter ended on December 31st, and we issued a press release with our results for the quarter and full year 2009 yesterday.

If you need a copy of the release or the slides that accompany our webcast today, you can find them on our website at www.investors.meritagehomes.com, or by selecting the investor's link at the top of our homepage.

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 these risk factors, please see our press release and most recent filings with the Securities and Exchange Commission, specifically our 2008 Annual Report on Form 10-K and our most recent quarterly report on Form 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 VP and CFO. We expect our call to run about an hour this morning, and a replay of the call should be available on our website within an hour after we conclude the call. It will remain active for about 30 days.

I'll now turn the call 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 an overview of our fourth quarter and full year highlights shown on slide four.

We reported net profit of $43 million for the fourth quarter of $1.35 earnings per diluted share. We were profitable in the quarter on a pre-tax basis, adjusting for impairments and about $12 million in accruals for certain items that increased our cost of sales and G&A expenses, which I will discuss later in more detail.

We sold several non-strategic properties near the end of the year that accounted for $14 million of our impairments, but also allowed us to harvest the tax benefits on those properties and increase our tax refund. Our average margin on the 1202 homes we closed this quarter continued its upward trend, reflecting the cost reductions we have achieved to date, reduced incentives and higher margins on newer communities both on lower cost lots.

Despite a general slowing in new home sales near year end, we sold 24% more homes than our prior year with 14% fewer communities offset by a 50% increase in sales per community. And we're gearing up for the 2010 spring selling season. We generated positive cash flow from operations of $27 million in the fourth quarter, after spending approximately $82 million of cash to purchase roughly 2,600 lots during the quarter.

For the full year, we generated $184 million cash flow from operations, and ended the year with more than $390 million in cash and securities, plus another $93 million coming soon in tax refunds. Taken together our cash and tax receivable equate to approximately $15 per share, roughly equal to our book value and nearly three quarters of our market cap.

Our net debt-to-capital dropped to 31%, the lowest it has been in many years. And we contracted for approximately thousand new lots with total purchase prices of $45 million in the fourth quarter, including what I believe were some exceptional buys. That brought our total to more than 4,000 lots put under contract in 2009 for a total purchase price of $150 million, which is roughly equivalent to the number of homes we closed during the year.

Slide five. We were generally pleased with how we ended the year considering that was a very difficult year for home-builders and the economy as a whole. In addition to our financial results, we undertook a number of strategic initiatives last year to improve virtually every area of the company and further enhance our competitiveness.

Based on what we have already accomplished in our ongoing plans, I believe we have not only positioned the company for return to profitability in 2010, but it is also permanently improved our competitiveness. We have significantly reduced our construction cost and overhead, and expect to realize further gains through a managed process of continuous improvement in our operations. We have built a robust market research function that we believe gives us a strategic advantage, underwriting lot acquisitions and pricing our homes for a better understanding of the competitive landscape for both resale and new homes, as well as homebuyer trends in our markets.

Read the rest of this transcript for free on seekingalpha.com