Phil Creek - EVP and CFO Bob Schottenstein - Chairman, President and CEO Paul Rosen - President, Mortgage Company Ann Marie Hunker - VP Controller Kevin Hake - SVP.

Ivy Zelman - Zelman & Associates Scott Tyrone - Citigroup Michael Rehaut - JPMorgan.

Good afternoon. My name is Lindsey and I will be your conference operator today. At this time, I’d like to welcome everyone to the M/I Homes Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Phil Creek, you may begin your conference..

Thank you and thank you for joining us today on our call. On the call is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Paul Rosen, President of our Mortgage Company; Ann Marie Hunker, VP Controller; and Kevin Hake, Senior VP.

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 non-public items with you directly.

And 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 the call over to Bob..

Thank you Phil. Good afternoon everyone and thank you for joining our call to review our second quarter results. As reported earlier this morning, we had another solid quarter highlighted by pre-tax income of $15.3 million which was more than double the pre-tax income recorded in last year’s second quarter.

Also want to note that our pre-tax income for the first half of 2013 was also more than doubled the income that we earned during the first six months of 2013. A number of factors contributed to our improving profitability.

Total revenues for the quarter were up 20% as a result of a 13% increase in closings as well as a 9% improvement in our average selling price. And our gross margins improved by 150 basis points increasing to 21.2% in the second quarter compared to 19.7% one year ago.

Our balance sheet liquidity remained strong, we have no outstanding borrowings under our $200 million unsecured credit facility and our net debt to capital ratio stands at a very healthy 43% at quarter’s end. Also at quarter’s end the sales value of our backlog equals $546 million which is 11% higher than it was a year ago.

Our new contracts for the quarter were down 6% compared with last year’s second quarter primarily due to delays in new community openings as well as lower traffic levels and frankly somewhat choppy market conditions.

I’ll have some closing comments in a few moments but at this point I’d like to talk more specifically about our three operating regions. I’ll begin with the Midwest region where we have home building operations in Columbus Ohio, Cincinnati Ohio, Indianapolis, Indiana and Chicago, Illinois.

Our Midwest region had 291closings during the second quarter which represented one third of total company wide closings. Deliveries decreased 2% in the Midwest for the second quarter compared to the last year and our new contracts in the Midwest region were flat year-over-year.

Our sales value in backlog in the Midwest was up 39% from the second quarter of last year and our total controlled lot position in the Midwest was flat year-over-year. We ended the quarter with 60 active communities in the Midwest which is a year-over-year decrease of 8%.

I do want to note that we have seen continued improvement in profitability across all four of our Midwest markets. Next is the southern region which consists with our Florida operations in Tampa and Orlando as well as four Texas operations in Huston, San Antonio, Austin and Dallas.

We continue to be very excited about our progress and growth in our forecast this markets. And we are achieving solid results in both Tampa and Orlando, though somewhat tempered from last year’s pace. And we have been growing our position across our markets in the southern region.

We delivered 330 homes in the southern regions for the quarter which was a 33% increase over the last year, this represented 37% of closings company-wide. The dollar value of our sales backlog at the end of the quarter was 1% higher than a year ago.

We increased our control of lot position in the southern region by more than 2,100 blocks which is a 30% increase from a year ago and we have 50 communities in the southern region at the end of the quarter, this represents a 25% increase over the last year.

Our new contracts decreased 3% for the quarter in the southern region impart due to particularly difficult sales comps in Florida which contributed to the drop in sales. Finally the Mid-Atlantic region where we have operations in Charlotte, Raleigh, North Carolina, as well as Washington DC.

In the Mid-Atlantic region our new contracts were down 16% year-over-year and our backlog sales value was also down 11% at the end of the quarter. Deliveries increased 13% in the Mid-Atlantic region compared with last year and this region accounted for 273 deliveries or 30% of total closings company wide.

I want to note that our North Carolina markets have been performing quite well and we continue to grow our positions in these markets. We ended the quarter with 35 active communities in the Mid-Atlantic region the same as last year.

Our total control of lots in the Mid-Atlantic region at the end of the quarter increased by more than 1,600 lots which is a near 40% increase year-over-year. Let me make a few closing comments before I turn it over to Phil.

Despite uneven and at times choppy market conditions during the first half of 2014 we continue to be very optimistic about our business and the outlook for housing.

As stated in our release we continue to believe that the fundamentals are in place notably declining net employment, improving job growth, low inventory levels, increasing household formation and gradually improving U.S. economy to support further improvement and housing conditions.

With the strength of our backlog our planned community openings and the quality of various markets in which we operate we believe we’re very well positioned to have a solid 2014. And with that I’ll turn it over to Phil..

Thanks Bob. New contracts for the quarter decreased 6% to 1,016 and our traffic for the quarter was down 8%. Last year’s second quarter sales were up 37% over 2012’s second quarter. Our new contracts were down 13% in April down 9% in May and up 10% in June.

As to our buyer profile, 40% of our second quarter sales were to first time buyers compared to 42% in '14’s first quarter and about 50% of our second quarter sales were inventory homes similar to the first quarter. Our active communities increased 4% from 140 at the end of June last year to 145 this year.

And the breakdown by region is 60 in the Midwest, 50 in the South and 35 in the Mid-Atlantic. During the quarter, we opened 9 new communities, while closing 22. We had delays in getting our planned new communities opened primarily from the land side of our business.

Our current estimate is to end the year with about the same community count as we began in 2014. We delivered 894 homes in the second quarter delivering 59% of our backlog this quarter compared to 57% a year ago.

Our building cycle times were about the same in the second quarter as the first quarter however certain markets such as Huston continue to have challenges. Our construction and land development cost increased slightly in the second quarter, slightly less of an increase than the first quarter.

Our average closing price for the second quarter was 306,000 compared to last year’s second quarter of 281,000 and 299,000 in ’14’s first quarter. And our backlog sale price is 332,000 up 13% from a year ago.

In the second quarter we recorded pre-tax charges of 804,000 for impairments, these second quarter charges were for older land assets in our Midwest operations. We continue to work through our older assets we are currently down to a couple of older Midwest communities. Our gross margin was 21.2 for the quarter up 150 basis points year-over-year.

Sequentially our gross margin declined slightly when compared to the '14’s first quarter primarily due to a lower land sale gross profit percentage and lower mortgage company market contribution. Our second quarter SG&A expenses were 14.7% of revenue flat when compared to last year’s second quarter and down 20 basis points for the first half of ’14.

We continue to focus on improving our special average. We are now delivering homes in Austin and except to start Dallas deliveries later this year. These increased deliveries will aid our expense ratios. Interest expense decreased 1.7 million for the quarter compared to last year and decreased 1.8 million for the first six month of ’14.

This reflects higher capitalization due to higher land development activity and we have $15 million in capitalized interest on our balance sheet compared to 14 million a year ago about 1% of our total assets. With respect to income taxes during the quarter, we reversed an additional 4 million of our state deferred tax asset valuation allowance.

This reversal was due a change in estimate based on our improved financial results and projections.

This reversal was offset by 5.7 million our current tax expense related to our current quarter earnings, excluding the reversal our affected tax rate for the quarter was 37% and we expect our effective tax rate for the remainder of 2014 to approximate 39%.

Our earnings per diluted share for the quarter was $0.44 per share and this per share amount reflects 1.2 million of dividends paid to our preferred shareholders. Now Paul Rosen will address our mortgage company results..

Thanks Phil. Our mortgage and title operations pre-tax income decreased from 3.8 million in 2013 second quarter, to 3.1 million in the same period of 2014. Our second quarter results include a slight increase in loans originated from 597 to 607 in higher average loan amounts.

While still strong, the margins on loans sold during this period were lower than those we’re able to achieve in the second quarter of 2013. A shift and product mix from FHA to conventional as compared to 2013 same period also affected margins.

The loan to value on our first mortgages for the second quarter was 86% in 2014 compared to 87% in 2013’s second quarter. We continue to see a shift towards conventional financing 68% of the loan’s closed were conventional and 32% were FHA, VA this compares to 65% and 35% respectively for 2013’s same period.

Overall, our average mortgage amount increased 8% 254,000 in 2014’s second quarter compared to 234,000 in 2013’s second quarter. The average borrower credit score on mortgages originated by M/I financial was 733 in the second quarter of 2014 compared to 736 in 2014’s first quarter.

Our mortgage operation captured 80% of our business in the second quarter compared to 77% in the second quarter of 2013. At June 30, 2014, we had 49 million outstanding under the 110 million M/I financial credit agreements which expires March 27, 2015.

And 30 million outstanding under our separate $50 million repo facility which expires November 5, 2014 both facilities are typical 364 day mortgage warehouse facilities to be extended annually. Now, I'll turn the call back over to Phil..

Thanks, Paul. We continue to manage our balance sheet carefully focusing on investing in new communities, while also managing our capital structure.

Total homebuilding inventory at June 30, '14 was 816 million, an increase of 201 million above June 2013 levels, primarily higher due to higher investment in our backlog, higher community count and increased land investment. Our land investment at June 30th was 393 million compared to 271 million a year ago.

And at June 30th we had 249 million of raw land and land under development and 144 million of finished unsold lots. We owned 2,460 unsold finished lots with an average cost of 59,000 per lot and this average lot cost is 18% of our 332,000 backlog average sale price.

And the market breakdown of the 393 million of unsold land is 107 million in the Midwest, 177 million in the South and 109 million in the Mid Atlantic. Lots owned and controlled as of June 30, totaled 21,000 lots, 52% of which were owned and 48% under contract. And our owned and controlled lot’s of 21,000 is an increase of 22% versus a year ago.

We owned 10,900 lots of which 30% are in the Midwest, 46% in the South and 24% in the Mid Atlantic. We believe, we have a very good solid land position, 29% of our owned controlled lots are in the Midwest, 43% of our land is in the Southern region and 28% is in the Mid Atlantic.

During 2014's second quarter, we spent 72 million on land purchases and 34 million on land development for a total of 106 million. Year-to-date we have spent 177 million on land purchases and land development. And as to our 2014 land purchases about 50% of the purchase amount was raw land.

Our estimate today for total 2014 land purchase and development spending is approximately 425 million to 475 million, including the 177 million we spent year-to-date. At the end of the quarter, we had 134 million in inventory homes, 279 that were completed and 669 inventory homes under construction.

This translates into about 6.5 inventory homes per community and of the 948 inventory homes 327 are in the Midwest, 367 are in the Southern region and 254 are in the Mid Atlantic. And as of June 30, 2013, we had 703 inventory homes with an investment of 86 million, which is about 5 homes per community.

We believe we are well positioned with our inventory levels. And our financial condition continues to be very strong with 44 million of cash 520 million in equity and a net debt to cap ratio of 43% and the company has no borrowings under our 200 million unsecured credit facility.

That completes our presentation, we’ll now open the call for any questions or comments..

Thank you. (Operator Instructions) Your first question comes from the line of Ivy Zelman with Zelman & Associates..

Hi guys good afternoon..

Hi guys good afternoon..

Ivy, how are you?.

I’m good, thank you. It’s a beautiful day in the Midwest so it’s all good.

I guess I want dig into little bit with you and understanding you have some big miss place you mentioned as well as delay in community count and realizing if you can make it offer what we should be thinking about guidance should we be self thinking by the 10% year end, from a year ago and then, and I guess looking in Mid-Atlantic orders they were down pretty substantially and recognizing pretty soft there and North Carolina being so strong relevant strong about, is taking you a little bit further there? So those are the two questions I start with.

Thank you..

I’m good, thank you. It’s a beautiful day in the Midwest so it’s all good.

I guess I want dig into little bit with you and understanding you have some big miss place you mentioned as well as delay in community count and realizing if you can make it offer what we should be thinking about guidance should we be self thinking by the 10% year end, from a year ago and then, and I guess looking in Mid-Atlantic orders they were down pretty substantially and recognizing pretty soft there and North Carolina being so strong relevant strong about, is taking you a little bit further there? So those are the two questions I start with.

Thank you..

Sure. Let’s take community count first, or community openings first and then maybe I’ll let Phil restate that which he already indicated with respect to where we think we will be yearend on community count.

The one thing that we’re seeing pretty and much across the board is that new communities whether they are developed by third parties or developed eternally by us, are coming on anywhere from in some case 60 days late to almost as much as six months or more late an average would be misleading because they are a little bit different but almost none are getting done on time and mostly because of just the stresses on the system as housing begins to come back and the contract is required to finish developments are stressed with because of what’s happening within the markets.

What you are seeing somewhat on a look back it appears that it was somewhat foreseeable but at the time I don’t think we expected anything close to the kind of delays we’re experiencing.

In some cases these are deals that we are in with other builders where they’re having the same go as we are when they want to developed by third party is frankly the delays are greater.

And the other side of it is and these aren’t excuses this is just the reality of it, even communities are we are able get open they’re not getting open maybe with the final quote of pay they’re just not as finished as we would like them to be when we are opening because everyone is rushing to try to get the play of it on time.

So that’s an issue, it’s an issue that we’re dealing with, we think we’re managing it very well does it impact sales yes it does as well as the tough comp last year impact sales the fact that our sales were up in June and improving each month to the quarter, all those things are true.

But the other side of it is, is I just think even though there is so many more reasons to be optimistic about housing or not and we are optimistic, we are optimistic about our business and as I said. We think that most of the fundamentals that are out there suggested housing conditions will continue to improve.

The pace of improvement at times is going to moderate or you’ve written a lot about this already be somewhat uneven and I think that’s what we’re seeing and I don’t think there is anything you watch it closely and you would rather see the other, actually we think this kind of growth is healthy for the industry it’s healthy for all us to try to work through what otherwise the strains on the system with shortages of contract or cycle time being extended and certainly shortages to get communities open on time.

I’m saying a lot of different things, we have lot of confidence in our Mid-Atlantic regions, our Mid-Atlantic division I should say will particularly bullish about our operations in the Raleigh and Charlotte.

Phil you just want to reaffirm what you said before relative to community count?.

Yes, as far as the community count we believe currently that will be about the same number of communities into this year as we starting this year, we ended last year with about 157 active communities. We have previously talked we would be opening private 10% more.

Today at about 10 community flat than we thought we would be due to these delays that we’ve talked about, but again we think we’ll be about even at the end of the year. Also as Bob said if you look at the second quarter of last year our sales were up 31%.

We had very strong sales in the Carolina, very strong sales in Florida and that is kind of what is hurting our comp..

Thanks for that I appreciate both of you.

So just to reiterate on the community count were so comfortable using 5 to 10 for the full year for ’14, is that correct?.

Thanks for that I appreciate both of you.

So just to reiterate on the community count were so comfortable using 5 to 10 for the full year for ’14, is that correct?.

No, we think will be flat, we think will be flat into this year same number we came into the year with..

Okay. And going back to the general trends and knowing the growth in June which is nice to see the double-digit growth.

When we go in the back half of the year, just how we maybe you just comment, I am thinking about it correctly, but where the government shut down each month they’ve got, seasonally it was worst than normal seasonal sequential declines as we were dealing with the backup rates and married with the surge in pricing it’s proved a lot of potential admires, it would seem as if you got pretty easy comps going into the second half as compared to the first half.

And therefore, you’ve seen nice acceleration with year-over-year order growth, even if your communities are now running flat, do you feel like you can get a nice juice momentum shifting already into back half, assuming that you said business feel it is lumpy but I think it is nice time describing, probably it’s not a straight line, so we think about it right?.

Okay. And going back to the general trends and knowing the growth in June which is nice to see the double-digit growth.

When we go in the back half of the year, just how we maybe you just comment, I am thinking about it correctly, but where the government shut down each month they’ve got, seasonally it was worst than normal seasonal sequential declines as we were dealing with the backup rates and married with the surge in pricing it’s proved a lot of potential admires, it would seem as if you got pretty easy comps going into the second half as compared to the first half.

And therefore, you’ve seen nice acceleration with year-over-year order growth, even if your communities are now running flat, do you feel like you can get a nice juice momentum shifting already into back half, assuming that you said business feel it is lumpy but I think it is nice time describing, probably it’s not a straight line, so we think about it right?.

Well, three or four comments on that. Number one, we’re not giving any guidance or projections on sales, number two we do have much easier sales comps at the back half of the year.

Number three, I think right now nationally new home sales are down year-over-year, the fourth thing is I and we are lot more optimistic about housing conditions improving even at lumpier straight line enough. So we feel we have a really solid year and we feel good about our business..

And we’re also just continuing to be really focus on profitability, I mean margins are on 50 basis points, our return are better, our every sales price as you know are getting stronger. So we’re trying to make sure we’re focused on improving our return also as suppose to just discounting a lot of things and run through our inventory..

And I was just going to ask Bob, you please don’t tell me you think that new home sell numbers are good data points, because new sells and the rest of the nation as may showed, I mean it’s kind of silly but do you really don’t believe those numbers do you?.

And I was just going to ask Bob, you please don’t tell me you think that new home sell numbers are good data points, because new sells and the rest of the nation as may showed, I mean it’s kind of silly but do you really don’t believe those numbers do you?.

You’re asking if I believe what I hear and read. But it’s, but one thing we do know is that, it appears that this year, it might be, is either going to be a little down flat, the best case maybe a little up over last year..

Your next question comes from the line of Will Randow with Citi..

Hi, good afternoon. This is actually Scott Tyrone in for Will. Thanks for taking my question. I want to talk a little more about the reason opening up the communities, so as the, you kind of mentioned you had contracted this, is this a labor issue and if so is this going to….

Hi, good afternoon. This is actually Scott Tyrone in for Will. Thanks for taking my question. I want to talk a little more about the reason opening up the communities, so as the, you kind of mentioned you had contracted this, is this a labor issue and if so is this going to….

It’s a combination of lot of things, it’s -- I don’t want to make more out of it than it is number one, but I -- in order to for the pay new communities there are contraction, governmental, dis-governmental processes and approvals that are needed.

The systems been dis-stretch, things that you talk, you can do in 30 days we’re 45 or 50 and this things need to happen in sequentially and a two week delay here a three week delay here another then you run into weather, step in the other and pretty soon you begin to lose an opening that might have otherwise occurred, adding more seasonally appropriate time.

On the other side of it is, yes the dirt contractors in the papers and the folks that put the underground utilities and the great and in all that goes with subdivision improvement that there is stretch on that part of the system. So somebody doing the highway work, we’re not working on communities anymore. And so you get into just, the U.S.

economy begins to rebound, you end up with strains and stresses and shortages and you end up with these delays. Many of, some of our greatest delays are coming in areas where we got third party developers who are 3, 6, 7, 8 months behind.

And not all, most of their setting to because if you start to move into a period where it’s raining or bad weather you can, it’s the situation is as of awaits itself. So we’re just dealing with it and communities aren’t lost they will open and we’re very excited about them. And we think they’re going to be very solid contributors to the company..

Got it.

And as they open, is there going to be enough fact, as far as the backlog conversion on the labor side, will that kind of maybe dip how longer build or like depend or maybe 12 months or so?.

Got it.

And as they open, is there going to be enough fact, as far as the backlog conversion on the labor side, will that kind of maybe dip how longer build or like depend or maybe 12 months or so?.

Yes. Phil talk about that in his comments and we didn’t that begin to happen about a year ago and if that appears to as somewhat level that, we didn’t really see any impact in longer cycle time this quarter over the previous quarter. So but the cycle time has been extended whether it appears to have leveled off..

Okay. And then my follow-up question is on the cost increases. And the gross margin expansion.

Are you, how are you seeing the cost increases versus the amount of ASP growth, hopefully you got?.

Okay. And then my follow-up question is on the cost increases. And the gross margin expansion.

Are you, how are you seeing the cost increases versus the amount of ASP growth, hopefully you got?.

Well, in our margin it has been moving up we’re 150 basis points versus year ago, we have a sell prices moved up pretty nicely, as I said earlier we continue to have some stick brick land development cost increases for the second quarter was little less than the first four, so we feel good about that not making the average price or gross margin projections but we have been pretty pleased with those increases last couple of quarters..

Great, thank you very much for taking my questions..

Great, thank you very much for taking my questions..

Thank you..

(Operator Instructions) Your next question comes from the line of Michael Rehaut with JPMorgan..

Hello?.

The first question back to growth margins for a minute, so if you kind of look at the core home building gross margin shifting at land and the financial services have been in that 20% range the last several quarters or so.

And just I guess as we think about this going forward, do you think there is much room for more improvement this year and how you’re thinking about land price versus pace and I guess finally in terms of the new land deals that you’re dealing, what type of gross margin you are into?.

The first question back to growth margins for a minute, so if you kind of look at the core home building gross margin shifting at land and the financial services have been in that 20% range the last several quarters or so.

And just I guess as we think about this going forward, do you think there is much room for more improvement this year and how you’re thinking about land price versus pace and I guess finally in terms of the new land deals that you’re dealing, what type of gross margin you are into?.

I go with the first one, we’re always working very hard on trying to improving price and margins opening up a lot of communities it depends on the community as far as what you start out and so forth. We are getting to the stage where we have pretty good critical mass in Huston and San Antonio so we feel good about those markets.

We’re starting to close houses in Huston and hope to close the few houses in Dallas this year, hopefully as we get more presence in those markets our margins and results will continue to improve there. So again no projections as far as gross profit but obviously that’s a very, very key part of our business that we’re focused on every day..

And as far as the underwriting Michael in terms of that has not changed in any material respect we underwrite based on conditions as they exists today, we don’t bake inflation into either the revenue or the expense side our underwriting on due land deals unless there is some material, something material we know that would suggest that we should but basically what we seek to achieve at a very high level is a minimum 20% internal rate of return until we loaded with all of our expenses..

Okay, thanks. Next questions around SG&A, I think we’ve seen some improvement overtime in the SG&A but I think overall the incremental SG&A and the overall SG&A a little bit higher than it appears, and so I was just hoping you can discuss trends that you’re seeing there, maybe you give us a little more color on that and….

Okay, thanks. Next questions around SG&A, I think we’ve seen some improvement overtime in the SG&A but I think overall the incremental SG&A and the overall SG&A a little bit higher than it appears, and so I was just hoping you can discuss trends that you’re seeing there, maybe you give us a little more color on that and….

The one thing I would say about that we’ve made is that and Phil touched on it, four of our 13 markets are relatively new two or three we don’t have near the scale we like to have yet.

As each quarter that goes by that conditions begin to get better and better and if we closing on a first terms in Dallas this year the Austin market is really beginning to take hold for us.

There is no question that will improve some of our ratios and I will just say it doesn’t help when we have the delays in community openings but I think that’s more of a generic across the industry. So clearly with the growth of our newer Texas markets we know that we’ll see some improvement in our ratios..

We are working hard on the cost side that’s for sure, but where we’re going to get today is trying for the blockage increase in the revenue side and again we thought we would be doing a little business that we are from the sale in the closing standpoint. We did have some choppiness in the market we also have some delaying community openings.

So as we continue to deliver more homes the sales price average increase has helped us. So again we have done a little bit of leverage this year and year-to-date not as much as we would like focus on trying to get the more leverage as we move through the year..

Okay, thanks..

Okay, thanks..

And there are no questions at this time..

Thank you for joining us. We look forward to talking to you again next quarter..

This concludes today’s conference call. You may now disconnect..