M/I Homes, Inc.

Thank you all for joining and welcome to the MI Home second quarter earnings conference call. My name is Brica and I will be your rent specialist operating today's call. During the presentation, you will have the opportunity to ask a question by pressing star followed by one on your telephone keypad. Please press star two if you change your mind and for operator assistance at any point, please press star zero. I now have the pleasure of handing the call over to our host, Phil Creek, so Phil, Please go ahead.

Thank you for joining us. Joining me on the call today is Bob Schottenstein, our CEO and President, Susan Croney, SVP and Chief Legal Officer, Derek Klutz, the President of our Mortgage Company, and Marie Hunker, our VP and Chief Accounting Officer, and Mark Kirkendall, VP Treasurer. First, to address regulation fair disclosure, we encourage you to ask any questions regarding issues that you consider material during this call. because we are prohibited from discussing significant nonpublic items with you directly. As to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also be advised that the company undertakes no obligation to update any forward-looking statements made during this call.

With that, I'll turn it over to Bob. Thanks, Phil. Good afternoon, everyone, and thank you for joining us for our call today. At a time of rapidly changing market conditions, we had a very strong quarter, highlighted by record quarterly net income of $136.7 million, which is 27% better than a year ago, and a 34% increase in earnings per diluted share. These record earnings resulted in our return on equity improving to 27%. Our revenues increased 8% to a second quarter record $1 billion, with gross margins improving by 220 basis points to 27.3%, and our SG&A ratio improving by 70 basis points to 9.7%, all of which led to a pre-tax income margin of 17.5%. Our backlog sales value with June 30 increased by 9% to a second quarter record $2.7 billion. MI Financial, our financial services segment, also contributed to our positive results for the quarter with pre-tax income of $8.7 million. During the quarter, we began experiencing noticeable moderation in demand as a result of the unprecedented rapid rise and the 30-year mortgage rate, combined with continued inflationary pressures and overall concerns with housing affordability. Traffic, both online and foot traffic in our models, has clearly declined from the robust levels we saw throughout all of 2021 and certainly the beginning of 2022. This drop-off in both demand and traffic has impacted our sales. Specifically, we sold 1,820 homes during the quarter, a decline of 20% from the record 2,267 homes that we sold during 2021's second quarter. During the quarter, it should be noted that we were operating in 8% fewer communities on average than a year ago. In the second quarter, we sold 3.5 homes monthly per community, well ahead of our sales pace in any prior second quarter over the last decade, with the exception of last year. Our Smart Series, which is our most affordable line of homes, continues to be very successful and a leading contributor to our sales performance. During the quarter, our Smart Series sales comprised roughly 50% of company-wide sales compared to 40% a year ago. And we continue to see better monthly sales pace, better cycle time, and better gross margins in our Smart Series communities. Now I will provide some additional comments on our markets. We experienced strong performance from all of our divisions in the second quarter, but with particular substantial income contributions coming from Dallas, Minneapolis, Tampa, Raleigh, Columbus, and Charlotte. However, given that we are operating in fewer communities than a year ago, as well as the declining market conditions discussed earlier, new contracts for the second quarter in our southern region, which consists of nine of our markets, decreased by 21% and decreased by 18% in the northern region, which consists of the other six markets. Deliveries in the southern region decreased 13% from last year. Deliveries in the northern region increased by 4% from last year. 53% of our deliveries came out of the south, 47% from the northern region. Our owned and controlled lot position in the southern region increased by 12% compared to last year. And our owned and controlled lot position remained at the same level as last year in the northern region. 32% of our owned and controlled lots are in the north, while 68% are in the southern region. While we have over the last year sold through communities somewhat faster than expected, we are on track to open a record number of new communities in the balance of 2022, and in addition to further grow our community count in 2023. We have an excellent land position, Company-wide, we own approximately 24,800 single-family lot or lot equivalents, which is roughly a three-year supply. Of this total, 31% of the owned lots are in the northern region, 69% in the southern region. On top of the owned lots, we control via option contracts an additional nearly 23,000 lots. In total, our owned and controlled lots increased 8% year-over-year to approximately 47,500 lots or roughly a six-year supply. Importantly, almost half of the lots that we own and control are controlled pursuant to option contracts, which gives us tremendous flexibility to react to changes in demand or individual market conditions. Before turning the call over to Phil, let me make a few closing comments. Clearly, there is growing uncertainty on a number of macroeconomic fronts, and choppy market conditions are likely to persist for some time. That said, housing fundamentals remain very solid with an undersupply of available homes and extremely favorable long-term demographics. Moreover, as we head into more challenging times, MI Homes is in excellent financial condition. Our balance sheet is as strong as it's ever been. We ended the quarter with record shareholders' equity of $1.8 billion, an increase of 24% over a year ago, book value of $66 per share, cash of $188 million, zero borrowings outstanding on our $550 million credit facility, and the home building debt to capital ratio of 28%. Looking ahead, we believe we are well positioned to manage through these changing and uncertain times, given the strength of our balance sheet, our low debt levels, our record backlog, our diverse product offering, and our very well located communities.