Robert Schottenstein - President & CEO Phil Creek - EVP & CFO Derek Klutch - Chief Operating Officer.

Jason Markinson - JPMorgan.

Good afternoon. My name is Sheryln and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter M/I Homes Conference Call. [Operator Instructions]. I would like to turn the conference over to Phil Creek. Please go ahead sir..

Thanks for joining us. Joining me on the call today is Bob Schottenstein, our CEO and President, Tom Mason, EVP, COO of our Mortgage company, Ann Marie Hunker, VP Corporate 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 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 now turn the call over to Bob..

Thanks, Phil. Good afternoon, everyone. I too want to thank you for joining our call to review our second quarter results. We had another strong quarter with solid improvement on a number of fronts. Highlights include a 43% increase in pre-tax income, earning $21.9 million in the second quarter compared to $15.3 million a year ago.

We had an 8% increase in new contracts. For the quarter, we sold 1,100 homes compared to 1,016 homes a year ago. Year-to-date, we've sold 2,208 homes, an 11% better than last year. Homes delivered during the quarter increased 3% and the average sales price on deliveries increased from $306,000 a house last year to $340,000 in the second quarter.

The combined impact of this increase in the both deliveries and average selling price resulted in a 15% increase in total revenue. Homes in backlog at June 30 increased 9% to 1,794 units with an aggregate sales value of $657 million, 20% better than a year ago.

And the average sale price of homes in backlog equaled $366,000 which is a record high for M/I Homes. We're also pleased with the improvement in our margins and returns.

Gross margins for the quarter were 21.8%, 60 basis points higher than a year ago and we significantly improved our operating leverage reducing our SG&A expense ratio by 90 basis points. We opened 14 new communities during the quarter and also have now successfully opened 28 new communities during the first half of the year.

We ended the quarter with 155 communities that are on track to increase our year-end community count by 15%. Other highlights for the quarter include the performance of our financial services business. M/I financial had a very strong quarter with pre-tax income increasing nearly 60% over last year's second quarter.

Derek Klutch will discuss this in a few moments. Our balance sheet and liquidity are in very good shape. We ended the quarter with $567 million of shareholders' equity and the net debt to capital ratio of 48%. Going forward, we're very optimistic about our business.

We expect to continue expanding our community count, growing our market share and improving our profitability. Now, I'd like to give a little more specific information on our various regions. First, the Southern region which is comprised of our two Florida and four Texas markets.

In the Southern region, we had 312 closings during the quarter or 34% of total volume. New contracts in our Southern region increased 12% year-over-year. We're achieving very solid results in our two Florida markets, Orlando and Tampa and we continue to grow our position in each of these markets.

Sales were strong in both Tampa and Orlando during the quarter and we expect both of these to continue to perform well throughout the remainder of 2015. In our growing Texas operation, Dallas and Austin both contributed significantly to our sales and deliveries, particularly compared with being in startup mode in those markets a year ago.

San Antonio was relatively flat year-over-year and we have seen slower activity in Houston as we continue to monitor market conditions there as job growth has slowed down in the Houston market. The dollar value of our sales backlog in the Southern region at quarter end was 38% higher than a year ago.

We had 60 communities in the Southern region at June 30, an increase of 20% from June of last year. As to our four Texas divisions, we had 34 communities at June 30 versus 32 communities at the end of 2014. We continue to be very excited and optimistic about our growth opportunities in the Southern region.

Moving next to the Midwest region which consists of our operations in Columbus, Cincinnati, Indianapolis and Chicago, we had 351 closings in the second quarter which is a 21% increase from last year's second quarter and 38% of total company-wide deliveries. New contracts in our Midwest operations were collectively up 1% for the quarter.

Our sales backlog in the Midwest was up 8% from the end of the second quarter last year in dollar value and our controlled lot position in the Midwest is now up 23% compared to a year ago. We ended the quarter with 62 active communities in the Midwest which is an increase of 3% from June, a year ago.

And I want to add finally the demand in all four of our Midwest markets is solid and encouraging. Finally, the mid-Atlantic region, we have operations in Charlotte, Raleigh, North Carolina, as well as Washington DC.

New contracts in the Mid-Atlantic region were up 14% for the quarter compared with a year ago and backlog value was up 20% at quarter's end. We ended the quarter with 33 active communities in the Mid-Atlantic region which is down about 6% from a year ago.

We delivered 256 homes in this region during the quarter which comprises 28% of total company deliveries and this volume was down 6% from last year as well. Our Charlotte operation had a strong quarter with noticeable improvement in sales and closings and Raleigh continues to be one of our best performing markets.

I should note, however, that demand in the DC market remains a bit sluggish. Our total controlled lots in the Mid-Atlantic region at quarter's end saw a decrease of 13% versus a year ago. And with that, I'll turn it back over to Phil to more specifically discuss our financial results..

Thanks, Bob. We continue to focus on improving our profitability and our returns. In the second quarter, our pre-tax income increased 43% on revenue growth of 15%. And our pre-tax income percentage increased to 6.8% from 5.4% a year ago.

New contracts for the second quarter increased 8% to 1,100 and our traffic for the quarter was up 5% and our community count was up 7%. Our new contracts were up 10% in April, up 1% in May and up 14% in June.

And as to our buyer profile, 37% of our second quarter sales were the first time buyers compared to 40% in 2015 first quarter and 50% of our second quarter sales were inventory homes compared to 43% in 2015 first quarter. Our active communities were 155 at the end of the second quarter.

The breakdown by region is 62 in the Midwest, 60 in the South and 33 in the Mid-Atlantic. During the quarter, we opened 14 new communities while closing 12. Our current estimate is to end the year with about 15% higher community count than we began the year.

We delivered 919 homes in the second quarter, delivering 57% of our backlog compared to 59% a year ago. Revenue increased 15% in the quarter compared to last year, primarily a result of the increase in the average closing price.

Our average closing price for the quarter was 340,000, an 11% increase from last year's 306 and our backlog average sale price is 366, up 10% from a year ago.

Our building cycle times for homes were slightly higher than the second quarter -- excuse me -- slightly higher than the first quarter -- excuse me -- slightly higher in the second quarter as compared to the first quarter with certain markets experiencing weather-related delays.

Our construction and land development costs increased slightly when compared to the second quarter of last year. Our gross margin was 21.8% for the quarter compared to 21.7% in the first quarter and up 60 basis points when compared to 2014 second quarter.

Our second quarter SG&A expenses were 13.8% of revenue, improving 90 basis points compared to 14.7% a year ago. And in dollars, our SG&A expenses increased 7% in the second quarter compared with 2014.

Interest expense increased $1 million for the quarter compared to the same period in 2014 and increased $1.3 million for the first six months of 2015 when compared to the same period of 2014. This reflected higher weighted average borrowings, offset in part by lower weighted average borrowing rate.

We have $16 million in capitalized interest on our balance sheet compared to $15 million a year ago. This is about 1% of our total assets. And our effective tax rate for the quarter was 39%. Our earnings per diluted share for the quarter were $0.43 per share.

This per-share amount reflects $1.2 million of dividends paid to our preferred shareholders during the quarter. Now, Derek Klutch will address our Mortgage company results..

Thanks, Phil. Our mortgage and title operations' pre-tax income increased from $3.1 million in 2014 second quarter to $4.9 million in the same period of 2015. Our second quarter results include an increase in loans originated from 607 to 666 and an increase in average loan amount.

A loaned value on our first mortgages for the second quarter was 84% in 2015 compared to 86% in 2014 second quarter. We continued to see a shift towards conventional financing, 75% of the loans closed were conventional and 25% were FHA, VA. This compares to 68% and 32% respectively for 2014 same period.

Overall, our average mortgage amount increased 8% to $274,000 in 2015 second quarter compared to $254,000 in 2014 second quarter. The average borrower credit score on mortgages originated by M/I Financial was 743 in the second quarter of 2015 compared to 739 in 2015 first quarter.

Our mortgage operation captured about 79% of our business in the second quarter compared to 2014's 77%. At June 30, 2015, we have $57 million outstanding under the MIF credit agreement which expires June 24, 2016, along with $13 million outstanding under a separate repo facility which expires November 3, 2015.

Both facilities are typical 364-day mortgage warehouse facility that we extend annually. Now, I'll turn the call back over to Phil..

Thanks, Derek. As far as our balance sheet, 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, 2015 was $1.04 billion, an increase of $225 million above June 30, 2014 levels.

This increase was primarily due to higher investment in our backlog and a higher number of finished lots. Our land investment at June 30, 2015 is $488 million, a 32% increase compared to $393 million a year ago. At June 30, we had $259 million of raw land and land under development and $229 million of finished unsold lots.

We owned 3,360 unsold finished lots with an average cost of $68,000 per lot. And this average lot cost is 19% of our $366,000 backlog average sale price. The market breakdown of our $488 million of unsold land is $129 million in the Midwest, $203 million in the South and $156 million in the Mid-Atlantic.

Lots owned and controlled as of June 30, 2015 totaled 21,738 lots, 48% of which were owned and 52% under contract. We owned 10,415 lots of which 31% are in the Midwest, 44% are in the South and 25% in the Mid-Atlantic.

During 2015 second quarter, we spent $44 million on land purchases and $44 million on land development for a total of $88 million and about 50% of the purchase amount was raw land. Our estimate today for 2015 land purchase and development spending is $400 million to $450 million which includes $177 million we've spent year-to-date.

And at the end of the quarter, we had 324 completed inventory homes, two per community and 917 total inventory homes. And of the total inventory, 270 are in the Midwest, 440 are in the Southern region and 207 are in the Mid-Atlantic. And at June 30, 2014, we had 279 completed inventory homes and 948 total inventory homes.

Our financial condition continues to be strong with $567 million in equity and net debt to cap ratio of 48%. And at June 30, 2015, there was $160 million outstanding under our $300 million unsecured revolving credit facility. This completes our presentation. We will now open the call for any questions or comments..

[Operator Instructions]. Your first question comes from Michael Rehaut..

It's actually Jason Markinson for Mike. So, my first question is on the gross margin, you saw a nice sequential uptick of about 80 basis points, I think, in the core homebuilding gross margin and it's now, I think, at the highest levels you've seen in quite a while.

So, I wanted to see if you look -- when you look at the current backlog and you think about the current cost environment, is there anything that would prevent the gross margin from at least staying where it is. So, if you could comment on that, it will be great..

There is nothing that would suggest us that it's going to frankly move down or noticeably up. We've been pleased with our margins and they consistently ticked up a little bit quarter by quarter by quarter and as we look at the backlog, we feel good about the quality of the backlog in terms of margin and profitability..

Next question is on the land position.

I mean, I think if you look at your owned versus option land, it shifted pretty materially, I think, in the quarter towards actually having more option land, just wanted to get your take on how you're thinking about your overall land strategy as you get further into the cycle?.

Let me just make one comment about that and then I'll turn it over to Phil. Our overall land strategy really hasn't changed. We're optimistic about housing. We want to have meaningful presence and grow market share in all of our markets and we think we're well positioned to do that.

Job one has been and continues to be to secure premier locations and we try to balance that with the risk associated with owning versus optioning, obviously preferred option everything if you can, but I would rather own a great piece than option and average piece and so therein lies management and really the business of the business.

We feel really good about our land position today.

Phil, I don't know if you want to add anything?.

Yes, nothing has really changed. We liked to own the two-to three-year supply and we owned a little over 10,000 lots now and in that owned 2 to 3 year supply we liked to own about one year of finished lots. So, we feel really good about where we're there.

You probably are referring to the under-contract fees which was about 8500 lots at 331 and that went to 11,300 at 630, went up about 2,800 lots, just happened to be a couple of larger parcels that we tied up, but again no overall change to our strategy..

And then lastly, in terms of the cycle time and some of the delays that you talked about.

I think assuming the weather is normal over the next quarter, would you expect the backlog conversions in the third quarter to be similar to what it was last year?.

You know it's a hard number to predict, it's something we're always focused on, as we mentioned, about 50% of our sales continued to be specs. And it just kind of depends on how many of those are finished specs versus partially completed or whatever.

We're obviously very focused on our cycle time and trying to turn our inventory over faster, but that's just a difficult number to predict..

There is no question that in many of our markets, the historically wet weather and it hasn't affected us any differently than it affected other builders. I mean, no one has a big umbrella. It clearly extended our cycle times as well as land development whether it's developed by third parties or us..

The next question comes from the line of [indiscernible]..

On the pricing environment, first, if you could maybe discuss what types of home price increases you're able to get and maybe other various across markets. And secondly, when we look at price and backlog and compare that with closing price, it seems like there is about a three quartered lag between the two.

Would you expect closing price to eventually reach your backlog price or is there any reason due to mix headwinds with lower-priced communities, is there anything like that, that might mitigate closing price from reaching that backlog price level?.

I'll try to handle the second one first. As far as the backlog average share price, we feel very good that we've had pretty significant increase in spend at nine consecutive quarters and the 366 million in backlog now is the highest ever. As I mentioned before, we're selling 50% specs.

So, again, that's pretty hard to predict what it's going to be, but you know basically, should the price [indiscernible] backlog absolutely. It's just hard to predict exactly with so many specs coming out and also mix. As far as pricing power what we're seeing, I'll let Bob deal with that..

Well frankly, not a significant amount of pricing power, I think this is as much about, what we consider to be the sweet spot of our business, what we think we're best at in most markets and then I think Phil alluded to in the combination of mix. The first move up, second move up is something we think we do very well.

And I don't know if, going forward, the price appreciation will continue with the rate it has in the past. My sense is it won't, that remains to be seen.

We're conscious about price point, we're conscious about meeting affordability and it's really more about just communities location, product offering, what we expected to get when we make decisions to go into new communities and in fact, we're very pleased we're able to realize that. We think we've got excellent locations.

We think our model merchandising is very, very strong compared to other builders. And we have very well-run design centers which help sell more options and selections. And I think it's a lot of little things that it resulted in us being able to get the most out of our communities. We think this is a real plus for our company..

And second on Texas.

Maybe just if you could go into a little more detail on the potential impact of flooding, I know you mentioned some delays in the longer cycle times, but as it relates to community count in your guidance going forward being able to maintain that community count guidance for the full year, does this imply that there's more of a modest delay in community openings in Texas or how should we think about that going forward?.

Well, when you look at our community count, that really has not changed since the beginning of the year. We still expect to come out of that 15% higher. Internally, if we think we would have a few more communities open now than we do, you know the answer is yes. But again, we do expect to catch up by the end of the year.

As far as growth, we've consistently said we like all of our markets, all 13 of our markets, but we see more of our business being in the South. So, should there be more community count increase in Texas and Florida percentage wise in the other markets, the answer is yes. And it has been impacted by the wet weather..

And lastly on Houston specifically, you mentioned some slowing in that market, is that mainly related to orders or are you seeing anything in terms of incentives or more competitive pricing?.

I think it's everything. I think it's softening of demand, particularly our average price in Houston is tailored more towards a move-up buyer. I think that price segment has been impacted more than perhaps the very low end of the market which we don't compete in at this point.

I think it's really a function of just -- and the market is still good, it's just not as near as good as it was expected and it's going through a little bit of the transition now as a result of the impact that the oil prices have had on oil exploration and all the collateral industries..

[Operator Instructions]. Your next question comes from [indiscernible]..

Just a question on gross margin, as you're seeing a regional shifts in deliveries over the past, say, like more than a few quarters.

Are you seeing any dynamics in terms of differential gross margin in a given region and how should we think about that?.

No, not really. Our margins are pretty consistent throughout. We did have some legacy communities to work to inform those and some in the Midwest which we work through the rest of them, so that's improving our margins a little bit in the Midwest, but overall they're really pretty comparable..

And then on the SG&A, in particular, I mean you're selling expenses stayed around the 7% level, but is there any room for that to come in with all the initiatives, you guys are dropping on price as well as other specs..

Yes. When you start looking at that variable selling piece, the variable selling piece has kind of stayed the same, of course that's made up primarily of the internal commissions than the external commissions and our co-op rate with realtors and so our variable really hasn't changed much. Incentives have probably tweaked down a little bit.

The biggest piece tends to be some of the non-variable selling. That's still a little bit sticky and a little difficult because we're opening a lot of new communities and we expect all those type of things as we incur them, but we're very pleased with our progress in SG&A.

We've really been focusing on that in a lot of different ways and as our volume continues to grow, we should hope to get more leverage out of our SG&A expenses..

Your final question comes from the line of Alex Barron [ph]..

I'm sorry if I missed it.

But did you guys discuss the orders went in the quarter and any comments on July?.

No, no comments on July, our sales were up 10% in April, they were up over 1% in May and up 14% in June..

And did you guys experience any type of labor shortages in any of the trades and in any other markets?.

I think there is an issue in every market we do business into one degree or another, it's not the same type of labor or not the same particular piece or part of the house in each market, that's just something that we and frankly all the builders are doing battle with right now in terms of quality and consistency of subcontractor support..

But nothing specific like framers or anything like that?.

There is not one that I could pinpoint now and what we were battling through, our backlog conversion rate was off slightly this quarter. I think that was as much due to weather as anything else and hopefully we could get back closer to where we were as we just sort of work through this..

Okay.

And can you guys remind me roughly what percentage of your homes, I guess, you guys would consider entry level and are you guys seeing any kind of pick-up in that segment of the market?.

Yes. When you look at a buyer profile, we estimate that 37% of our second quarter sales were the first time buyers compared to about 40% in 2015 first quarter, so that hasn't moved a whole lot..

And there are no further questions..

Thank you very much for joining us..

Thank you for your participation. This concludes today's conference call. You may now disconnect..