Meritage Homes CORP Q4 FY2024 earnings call

• Welcomed new Board member Geisha Williams, with the Board focusing on refreshment and diversity.
• 2024 was a record year with highest annual closing volume, $6.3B revenue, 24.9% gross margin, ROE 16.1%, EBITDA over $1B for three years, construction cycle times back to 120 days, backlog conversion at 177%, returned $0.5B to shareholders, top five builder status, and 95% customer satisfaction.
• 2025: Start of full-year under new move-in strategy, 40th anniversary, expanded into Gulf Coast and Alabama, increased community count, focus on market share, and high customer satisfaction.
• Q4 2024: 3,304 sales orders, 91% from entry-level homes, 14% Y/Y order growth, 10% cancellation rate, 39 new communities, average absorption pace up in regions, specs and backlog levels, and cycle times at 120 days.

In the fourth quarter of 2024, Meritage Homes delivered 4,044 homes with a home closing gross margin of 23.2% and SG&A leverage of 10.8%, resulting in diluted EPS of $4.72. For the full year 2024, the company achieved a record 15,611 home closings, generating $6.3 billion in closing revenue. The full-year home closing gross margin was 24.9%, net earnings totaled $786 million, and diluted EPS was $21.44. Revenue contribution breakdown by product segment was not explicitly detailed in the transcript.

• Full-year 2025 guidance: Closings 6,250-16,750 units, home closing revenue $6.6B-$6.9B.
• Q1 2025 guidance: Closings 3,200-3,500 units, home closing revenue $1.26B-$1.40B, comp closing gross margin ~22%, effective tax rate ~24%, diluted EPS $1.59-$1.83.

• Volatile mortgage rate environment affecting sales and margins.
• Supply chain issues, labor shortages, tariffs, and immigration policy uncertainties.
• Impact of energy tax credit changes on profitability due to higher IRS thresholds reducing qualifying homes.

Q: Great, thanks so much for taking my questions. First, I'd love to focus around kind of the drivers of the gross margin trajectory, obviously, incentives having a huge part, a huge role in this and looking for a little bit of a further easing in the first quarter. How should we think about, to the extent that incentives stabilized here in the first quarter, are there any other kind of puts and takes that we should anticipate as 2025 progresses relative to locked costs or construction costs? And just kind of curious about -- even if you have upcoming community mix changes that might impact the 22% starting point that you see in the first quarter, again, if incentives kind of stay where they are currently.

A: Thanks for the question, Mike. I think overall this is just a function of the incentives. When we're closing and selling so many of our homes in the same quarter, the current market is what we're modeling. So it's primarily an incentive issue. Although, as Philippe mentioned, the slight pullback in demand in the first couple of weeks of January is causing us to model a slightly lower volume which, as you know, also impacts the margin. So this is just modeled on what we're seeing in the market today. There's definitely opportunity for improvement if the volume picks up or if we can pull back on the cost of financing incentives.

Q: Okay, great. I guess secondly, with maybe a little bit of a softer start to the year, I'm also just curious about if -- again, if demand, kind of, stays where it is today, are there other levers -- would you be on track in effect to hit the full-year closings guidance? Or would you need to take other measures like perhaps even raising incentives further to get to that full-year closings guidance? Just trying to understand again like what the assumptions for the market backdrop would be when looking at 2Q to 4Q.

A: Yes. Thanks, Mike. This is Phillippe. I think we feel very comfortable with our full-year closing guide based on current market conditions, which are getting better as we move through January. So we're optimistic that January was just a little bit slow for other reasons and the spring selling season is starting to materialize in a way that makes more sense based on the current pattern. But I think we're still going to be relatively conservative given that we're operating in a 7% mortgage rate environment, and we're not expecting that to get any better. So we feel really comfortable that we can hit our number in that environment with current incentive structure based on the current demand we're seeing. I'm optimistic actually that rates are going to hopefully settle down here and maybe get a little bit better. And then I think we can possibly recover in February and March and get back to a 17,000 number over time. We have the lots and the inventory and the communities to achieve 17,000 units, but we're just being conservative based on the 7% mortgage rate environment.