Meritage Homes Corporation

Greetings and welcome to the Meritage Homes second quarter 2020 analyst call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Brent Anderson, Vice President of Investor Relations. Thank you. You may begin.

Thank you, David. Good morning and welcome to our analyst call to discuss our second quarter and first half 2020 results. We issued the press release yesterday after the market closed, and you can find it along with the slides we'll be referring to during this call on our website at investors.lamarriagehomes.com or by selecting the investor relations link at the bottom of the homepage. Turning to slide two, We'll caution you that any statements made during this call as well as the press release and the accompanying slides contain forward-looking statements, including but not limited to our views regarding the health of the housing market, potential adverse impacts related to the COVID-19 pandemic and the second wave of infections, community count, absorptions, Projected third quarter and full year home closings and revenue, gross margins, SG&A expenses, tax rates, and diluted earnings per share, as well as economic conditions and others. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors which we've identified and listed on this slide, as well as in our press release and our most recent filings with the Securities and Exchange Commission. Specifically, our 2019 annual report on Form 10-K and quarterly reports on Forms 10-Q, which contain a more detailed discussion of those risks. We've also provided a reconciliation of certain non-GAAP financial measures referred to in our press release as compared to their closest related gap measures. Our speakers today are Steve Hilton, Chairman and CEO of Meritage Homes, Hilla Sferruzza, Executive Vice President and CFO, and Phillippe Lord, Executive Vice President and Chief Operating Officer. We expect the call to last about an hour and a replay will be available on our website within approximately an hour after we conclude and will remain active through August 6. I'll now turn it over to Mr. Hilton to review our second quarter. Steve?

Thank you, Brent. I'd like to welcome everyone participating on our call today and hope that you're safe and well. It's hard to believe that just three months ago we were discussing the sharp drop in March orders due to the nationwide shutdowns intended to slow the spread of the COVID-19. And today we're discussing record orders for the second quarter in demand for our homes that even surprised us. It's been anything but a normal spring selling season. I can't remember another time like this in all my 35 years leading Meritage. We'll review some of the highlights of the quarter and explain what we believe is driving our success and how we're positioned for continued earnings growth. I'll preface it by saying that while the market is broadly benefiting all builders, we believe our strategy and execution will continue to place Meritage among the best performing home builders to own. I'll start with slide four. We reported in mid-May that our orders for the month of April were down just 15%, which was less than we had projected just a few weeks earlier, and looked like May orders could meet or beat May of 19. We ended up setting an all-time record in May for a single month's orders, selling a total of 1,320 homes, which we then surpassed in June with a new record of over 1,500 orders. May orders were up 44% higher than last year and June was up 66% over last year. We finished the quarter with 3,597 total orders, another all-time record for Meridish and 32% higher than the second quarter of 2019. What's most surprising is that all those records came in the midst of a pandemic that is still dominating the news and affecting nearly every aspect of our daily lives. We firmly believe that it's important to remain diligent in fighting the spread of the virus and just last week we issued more stringent protocols for our sales office and construction operations to safeguard our customers, employees, and trade partners. We are also continuing to invest in our virtual capabilities for selling, building, and delivering homes as we believe that's an important tool for us in today's environment and will likely permanently change certain aspects of our industry. Homebuyers use of our virtual capabilities to assist them efficiently and safely research, tour, purchase, and close on their new homes. I'll now turn to slide five. As illogical as it may seem to be selling homes at record levels during a pandemic and record unemployment, we believe it's a combination of market forces and our strategy. While there are many theories as to what's behind this unexpected trend, I'll explain what we believe is driving demand based upon feedback from our customers and why we believe marriages are so well positioned for this market as listed on slide five. With interest rates at historically low levels, historic lows, home ownership is affordable for millions of more Americans who can qualify to purchase a home. Many are finding that they're not spending as much of their days on things like eating out, going to sporting events or other entertainment, So they have more money to afford a new home. For example, we sell a five-bedroom, three-bath, three-car garage home in Fort Worth for about $336,000, which is about $1,950 a month, PITI. Rental for a comparable home is over $2,700 a month. Inventories of existing homes for sale are very low, and homeowners as well as buyers are uncomfortable about touring currently occupied homes. New spec homes available for quick movement offer advantages typically associated with existing homes without those disadvantages. As a nation, we have never appreciated the safety and security of our homes more than we do today, including a healthy living environment. We don't want small cramped homes in crowded urban centers. Most of us prefer a single family home in the suburbs where we have our own space by sharing amenities like elevators, laundry, facilities, gyms, or pools. We also need more interior space to work at home while our kids are also at home, not knowing when the schools will reopen or what that will look like. The combination of those conditions is driving demand for new homes, and Meriden is one of the best positions to deliver. On slide 6, we made the decision several years ago to concentrate exclusively on entry-level and first move-up homes where we saw the greatest opportunities going forward. It was the right move at the right time. 70% of our total second quarter 2020 orders were entry-level and 26% were first move-up. That's a dramatic shift from where we were just a few years ago as entry-level is outpacing everything else. We offered a differentiated and compelling value proposition combining Meredith's quality construction and high-end finishes with our M-connected home automation suite and signature energy efficiency standards that make our homes safe and healthy for our homeowners. And we have streamlined our operations to deliver homes at competitive affordable prices while striving to offer our customers surprisingly more than they expect. Our trade partners, suppliers, and customers share the benefits It's a win-win-win proposition that's not only driving sales but gross margins that are exceeding our underlying standards, all while continually raising the bar for the industry best customer satisfaction rating. Moving to slide seven. We believe that we have a solid strategy and are executing at a high level. We have the strongest balance sheet we've ever had with plenty of liquidity and low debt leverage providing tremendous flexibility for growth as well as a safety net in the event of another downturn. We purchased just under 6,000 new lots in the second quarter as demand has rebounded, including some great positions that other builders dropped during the peak of the pandemic. And we have a robust pipeline with opportunities to acquire almost 50 new communities in July alone. Our strategy for land acquisition development makes our teams more efficient at finding and assessing new positions quickly and improves our confidence that finished lot costs will allow us to achieve our target margins. We're very close to being on plan that we announced at our investor day in November 2019 to have 300 communities open by the end of 2021, though it may be delayed into early 2022 due to the COVID-related shutdowns that we're experiencing. That along with solid execution positions us well for future growth. I'll now turn it over to Phillippe to discuss more of the recent trends and opportunities that we see ahead of us. Phillippe?