Meritage Homes CORP Q1 FY2025 earnings call

• Meritage had a healthy first quarter with nearly 3,900 homes sold, despite January being slower than anticipated. They achieved a backlog conversion rate of 221%.
• Strategy focuses on 60-day closing ready commitment and move-in inventory to provide certainty in an uncertain market.
• In Q1 2025, they secured sales orders of 3,876 homes, a 3% decrease from prior year. Average absorption pace was 4.4 net sales per month, down from 4.9 prior year.
• Ending community count was 290, up 8% year-over-year with 30 new communities coming online, including some from the Elliott Homes acquisition. They also acquired land in Nashville with ~2,500 lots.
• Maintained a healthy balance sheet with $1 billion in cash, net debt-to-cap of 13.7%, and continued to return capital to shareholders through dividends and share buybacks.

Meritage Homes had a healthy start to 2025, selling almost 3,900 homes in the first quarter. They delivered 3,416 homes, generating $1.3 billion in home closing revenue. Home closing gross margin was 22%. Regionally, the central region had the highest average absorption pace of 5.3 net sales per quarter with a backlog conversion rate well north of 200%. The west region had an average absorption pace of 4.1, and the east region had 4 net sales per month. Revenue from home closings was an 8% year-over-year decrease due to lower volume and increased financing incentives, but gross margin showed resiliency at 22% despite challenges.

• Maintained full-year 2025 guidance for home closings of 16,250 to 16,750 units and home closing revenue of $6.6 billion to $6.9 billion.
• Projected Q2 2025 closings to be between 3,800 to 4,100 units, home closing revenue between $1.5 billion to $1.65 billion, home closing gross margin around 21.5%, effective tax rate ~24.5%, and diluted EPS in the range of $1.85 to $2.10.
• Anticipated use of pricing incentives to remain elevated in the near future, but current lumber price status quo helps with 2025 closings.

• Macroeconomic uncertainty leading to softening housing market due to buyer psychology and cost of homeownership challenges.
• Potential impact of tariff-related cost increases on gross margin, though current lumber tariff status quo helps most 2025 closings.
• Supply chain challenges and labor market uncertainties, though labor capacity remained consistent and slack in the system due to slower multifamily construction and reduced industry starts.

Q: Hey, guys. Good morning. Nice job in a very tough market. So, congrats on the continued progress there. First question on the guidance, I guess, if I look at the midpoint of your range, I think I'm getting to an average closing price of around $410,000, which would be up quite a bit from first quarter levels. And I didn't hear in your comments, any real indication of pricing power. So, I'm just curious if you could walk us through what the expectation is there.

A: Sure. So, if we're looking at our ending backlog, appreciating that our closings were at $393,000, our ending backlog is actually at $405,000. So, we're starting to see a function of mix. It's not necessarily pricing power, although we have taken price increases in markets that can allow it. So, it's a combination of both, but primarily mix.

Q: Yeah, thanks so much. I just appreciate that. I just wanted to continue that thought. Philippe, I think you indicated that new communities are opening up in their strongest markets and good sales initially, I guess right out of the gate in those markets, sorry, in those communities. When are we expecting to see the influx of these kinds of communities? Would it be as early as this quarter in the second quarter or is it more likely to be kind of, third quarter or even fourth quarter? And the reason I'm asking is because in order to hit your targeted closings guide, it looks like absorptions need to kind of rise from the level they were in the first quarter. That doesn't usually happen. And so I just wanted to sort of push on that a little bit and see whether or not you could elaborate a little bit more on these new communities coming in.

A: Yeah, definitely a little bit more, although timing of community openings on a quarter-by-quarter basis are very hard to predict. But as we look out over the next three quarters, we're very confident in our double-digit, year-over-year growth to end the year and move into the next spring selling season. It should be relatively, from where we are to where we want to end, pretty consistent from here. You'll sort of see it stair-step up. But obviously, most of the growth is going to come in the second half of the year, third quarter, fourth quarter. But we're going to be opening up those communities with move-in-ready inventory. We're going to be opening up those communities with things that can close within 60 days. And we personally believe that there's a strong demand for that product right now. So as you're looking at your modeling, my suggestion is that it's more about the community count growth that's driving our full-year guidance than it is about us assuming that the market's going to get better.

Q: Thanks. Good morning, everyone. Thanks for taking my questions. I wanted to first just kind of revisit, the really -- and hats off to you, the ability that you've demonstrated to reiterate your guidance. Amid, what other builders are seeing is a decent level of volatility and some downward revisions on both volumes and margins. And I wanted to drill down a little bit. You've talked in the past about the positioning of your communities. And I was wondering if you could try and dial in to the extent you have the best sense the ability to kind of maintain that targeted sales pace in the face of some of the challenges the industry has seen, if you feel that it's driven more by -- you're already -- your price point, which is already kind of at the lower end of the range positioning within markets or the way you go about the incentive levels as well or increase in some of the sales commissions could be a combination of all. But, just trying to get a sense from your perspective of, what's kind of driven the performance year-to-date from a competitive standpoint.

A: Yeah, I'll try to answer that a couple different ways. I think, first of all, our confidence as it relates to maintaining our four-year guidance is based on really three factors. The first one is that we just did exactly what we thought we were going to do in Q1. The second is that April's trending positively for us, so we're feeling confident in our Q2. And the third is that we believe in our double-digit growth in our community count. So that's really our confidence. Our crystal balls are about as murky as everyone else's right now on what the incentive environment's going to look like, the rate environment's going to look like as we progress through that. But the fact that we were able just to do what we did in Q1 gives us confidence that we can manage in these conditions. As it relates to what we're doing differently, I'm not sure we're doing anything differently than the rest of the folks. They all manage their businesses really, really well. But I do believe that offering move-in ready inventory is really offering customers something today that is in high demand. They're looking for certainty. They're looking for confidence in their home purchase. And we're able to manage and solve for affordability in a different way with that window. And so my belief is that that has allowed us to secure the demand that we needed to in Q1. And we're confident as we move forward that it'll continue to be that case.