Brent Anderson - VP, IR Steve Hilton - Chairman and CEO Larry Seay - EVP and CFO.

Stephen Kim - Barclays Michael Rehaut - JPMorgan Michael Dahl - Credit Suisse Ivy Zelman - Zelman & Associates David Goldberg - UBS Nishu Sood - Deutsche Bank Adam Rudiger - Wells Fargo Securities Ryan Tomasello - KBW Stephen East - Evercore ISI Jay McCanless - Stern Agee Will Randow - Citigroup Joel Locker - FBN Securities Alex Barron - Housing Research Center Mike Roxland - Bank of America Merrill Lynch.

Good morning, and welcome to the Meritage Homes Fourth Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. And I would now like to turn the conference over to Mr. Brent Anderson, Vice President of Investor Relations, Meritage Homes. Please go ahead..

Thank you, Robert. Good morning, everyone. Welcome to our analyst conference call today. Our fourth quarter 2014 ended on December 31, and we issued our press release this morning before the market opened.

If you need a copy of the release or the slides that will accompany our webcast today, you can find them on our Web site at investors.meritagehomes.com or by selecting the Investors link at the bottom of our homepage. Please refer to Slide 2 of our presentation.

Our statements during the call and the accompanying materials contain projections and forward-looking statements, which are the current opinions of management and subject to change. We undertake no obligation to update these projections or opinions.

Additionally, our actual results may be materially different than our expectations due to various risk factors. For information regarding these risk factors, please see our press release and most recent filings with the Securities and Exchange Commission, specifically our 2013 Annual Report on Form 10-K and our more recent 10-Qs.

We expect to file our 2014 10-K within the next several weeks. Today's presentation also includes certain non-GAAP financial measures as defined by the SEC. To comply with the SEC rules, we've provided a reconciliation of these non-GAAP measures in our earnings press release.

With me today to discuss our results are Steve Hilton, Chairman and CEO of Meritage Homes; and Larry Seay, our Executive Vice President and CFO. We expect the call to run about an hour, and a replay of the call will be available on our Web site within an hour or so after we conclude the call. It will remain active for 30 days.

I'll now turn it over to Mr. Hilton to review our fourth quarter results.

Steve?.

Thank you, Brent. Welcome to everyone on this call, and thank you for your continued interest in Meritage Homes. After an exceptionally strong rebound, the U.S. housing market in 2014 grew at a more reasonable rate, and we saw greater variability between markets, as opposed to the broad-based recovery we saw earlier in the cycle.

Home price inflation slowed even in higher-demand market, and incentives returned in some markets where prices had been rapidly increasing over the last couple of years. One such market was Phoenix, which we've seen stabilizing most recently. The home prices were more muted than last year.

Our average prices rose due to a combination of selling larger homes and more desirable communities as well as some market appreciation. As a result, we generated increases in total home closing revenues, order value, and backlog value that exceeded our unit volume growth.

Anticipating that price inflation would subside and be lesser of a driver of our future revenue growth and profitability, we focus on expanding an additional high-quality market to further diversify and broaden our community base. We acquired Legendary Communities in August 2014.

We then began -- solid position in the Atlanta, Georgia market, and the number one position in the Greenville, South Carolina market. Those two additional markets have great long-term growth potential for Meritage as the fifth and sixth new markets we've entered through 2011.

Those new markets added to our community count, and we entered the year with a total of 229 active communities, representing a 22% growth over 2013.

Those strategic investments directly contributed to our significant increase in orders, closings, backlog, revenue, gross profit, and net earnings for both the fourth quarter and the full year 2014, and have much more potential for future growth. We also benefited from the favorable market condition in Texas, while other markets softened during 2014.

Our diversified position in key markets across the U.S. has and should continue to be beneficial for Meritage throughout the cycle. We are aware of the concerns and debates about the potential effects of lower oil prices on the energy industry and housing markets, especially in Houston.

We haven't seen a drop in demand there, nor have we reduced our prices. We believe we're well positioned with our community locations and price points in Houston, which should allow us to sustain our sales pace in 2015, even though we have fewer communities opened in Texas than we had a year ago.

We are being very cautious in Texas at this point, and not securing new land positions in Houston. We are monitoring the situation and we're prepared to act as we get more clarity.

While the oil and gas industry is negatively impacted by lower prices, many other industries and consumers benefit from lower oil prices, which should help soften the impact on the overall economy. No one can say for certain what the future holds, but we believe the U.S.

economy and the housing market continue to grow despite a decline in the single industry. Interest rates remain at historically low levels, employment numbers have [ph] improved, and recent changes in the mortgage industry make it easier for buyers to get loan financing, all of which are positive conditions for homebuilders.

We are confident in our market position as Meritage is strategically located in many of the highest quality markets in the country for long-term growth, and we have avoided entry markets with limited profit potential just for the sake of short-term expansion.

That strategy has enabled us produce strong returns for our shareholders over the long-term, and we expect it to continue into the future. I'll review some of our highlights of the fourth quarter results and Larry will recap the full year results. Turning to Slide 5; we generated good revenue growth year-over-year in the fourth quarter.

We combined a 27% increase in home closing revenues with a 2% increase in average closing price to deliver a 29% increase in home closing revenue over the fourth quarter of 2013. Texas accounted for about half of that increase with 53% growth in home closing revenue.

Our East region delivered 40% more home closing revenues in the fourth quarter of 2013 with the additions of Georgia and South Carolina this year, in combination with strong growth in Tennessee; all three of the new markets for us in the last two years.

Florida's fourth quarter closings were down 8% year-over-year as a result of lower backlog from fewer communities in the first two quarters of 2014, compared to the prior year. We also had an 8% increase in closing revenue from our West region. Our year-over-year revenue growth in California and Colorado more than offset the decline in Arizona.

Those revenue gains offset the expected year-over-year tightening in home closing gross margins, and we delivered a 13% increase in total home closing gross profit.

Turning to Slide 6; as we've been experiencing in recent quarters, our home closing gross profit margins continued to trend back towards more normalized levels as home price inflation has slowed relative to our cost inflation in recent quarters.

Additionally, the effective purchase accounting adjustments on the closing of homes acquired from Legendary reduced our home closing gross margin by approximately 48 basis points in the quarter.

Our effective tax rate for the fourth quarter was approximately 26% in 2014 compared to 30% in 2013, significantly below the statutory corporate tax rate of approximately 35%. Manufacturing credits account for some of the reduction, but the majority was from Federal energy tax credits.

We've earned more than $20 million in energy tax credits over the last two years due to our industry-leading energy efficient homes. Tax credits represented tangible benefit for our shareholders in addition to the many benefits that our homeowners enjoy. The net result was a 7% increase in fourth quarter net earnings over 2013.

Turning to Slide 7; our fourth quarter orders increased 12% primarily reflecting a 24% increase in our actively selling communities mainly in Georgia and the Carolinas. We saw a smaller increase in our orders due to fewer average sales per community consistent with general market trends.

Our average sales per community of 5.6 for the fourth quarter of 2014 were 10% lower than the fourth quarter of 2013, which was at 6.2.

The decline is partially explained by the fact that Legendary Communities generated a little more than three sales per community during the quarter, which is lower than our other markets, but consistent with our operating strategy.

In addition, California, Colorado, and Florida, which had the highest sales pace a year ago slowed some in 2014, but remained above our average sales pace for the company.

Texas orders were down 8% for the fourth quarter of 2013 from the fourth quarter of 2013, due to 13% fewer actively selling communities, which was partially offset by an increase in average sales per community. With that, I'll turn it over to Larry to review our full year results and a few other highlights.

Larry?.

Thanks, Steve. Turning to Slide 8; we reported net earnings of $142.2 million for the full year of 2014, a 14% increase over 2013's net earnings of $124.5 million. Earnings before taxes increased 17% year-over-year, mainly due to a 16% increase in home closing gross profit for the year.

Our full year home closing revenue increased 20% over 2013, reflecting an 11% increase in closings combined with an 8% increase in average prices. Home closing revenue growth was led by our East region, which grew 50% over 2013. It includes our newest markets in Tennessee, Georgia, and the Carolinas in addition to our strategic Florida positions.

Texas home closing revenue grew 39% for the full year in combination with the East region's gains more than offset the decline in our West region. Our home closing gross margin for the year 2014 was 21.2%, 80 basis points lower than it was in 2013, and our second highest annual margin since 2005.

The margin contraction is generally explained by the fact that rapid price inflation had driven margins to unusually high levels in 2013, especially in Arizona and California, and they trended back toward long-term historical levels in 2014.

Purchase accounting on home closings from our acquisition of Legendary Communities also accounted for approximately one third of the total decrease in home closing gross margin percentage for the year. Commissions on our sales costs were up 20 basis points, while G&A for the year was down 20 basis points.

While we've gotten some leverage from the additional divisions and communities we've added, we're still ramping up on incurring integration costs relating to our acquisition companies during 2014. We expect to gain additional leverage as these new divisions are fully online and contributing more revenue to offset corporate overhead.

Slide 9; net orders for the full year were up 6% in 2014 over 2013, and total order value increased 13%, driven by our East and Central regions, which grew total order value by 38% and 23% respectively. We ended the year with backlog of orders valued at 23% higher in total than our backlog at year end 2013.

Units were up 14%, and our average price per unit of approximately 400,000 was 8% higher than 2013's 371,000 average price. Moving on to Slide 10; we ended the year with a $103.3 million in cash and cash equivalents compared to $363.7 million at December 31, 2013.

We invested much of our cash in the new markets and growth of our existing markets during the year, including our acquisition of Legendary Communities for approximately $130.7 million.

We also invested in approximately $205 million in land and development during the fourth quarter of 2014 for a total of approximately $705 million in total land development expenditures for the year. We expect that land spend in 2015 will be about the same as in 2014, depending upon the economy and market conditions.

We contracted for about 2,000 lots during the fourth quarter and end of the year with approximately 30,300 total lots under control, an increase of approximately 4,600 during the year. Of the 30,300 lots under control, approximately 65% were owned and 35% auctioned.

At year end, our net debt to capital ratio was 42.9% in 2014 compared to 39.8% in 2013. We increased our revolving credit facility by $200 million to $400 million during 2014 to provide additional reserve liquidity though we had nothing drawn against that credit line at the end of the year.

With that, I'll turn it back over to Steve before we begin Q&A..

Steve Hilton:.

We grew our community count both within our established market as a whole and across our new markets. We expect to grow that again in 2015 based upon our current projections. We grew our top line sales and revenue, average home prices, gross profit, and net earnings for the year.

We maintained our balance sheet strength and flexibility, and we earned ratings upgrades from all three major rating agencies in 2014.

Based on our year end 2014 community count, that is 22% higher than it was at the beginning of 2014, we expect to show continued growth in 2015 orders, closing, and closing revenue, though we are tempering our expectations somewhat until we have greater clarity about our near-term market strength.

We expect our full year 2015 home closing gross margin to be consistent with what we just reported in our fourth quarter, because the first two quarters of '14 present more difficult year-over-year comparisons.

We are projecting lower quarterly margins in the first half of 2015, improving both sequentially and year-over-year in the second half of the year. We also anticipate lower closing volumes due to seasonality in the first quarter, growing as we progress through the year. We're therefore confident we'll show meaningful earnings growth for the year.

2014 was a year of investing for the future growth and we should see the returns on those investments as we move through 2015. Thank you for your interest in Meritage Homes. We'll now open up for questions. The operator will remind you of the instructions.

Operator?.

[Operator Instructions] Okay. The first question comes from Mr. Stephen Kim from Barclays..

Thanks very much guys.

Yeah, I wanted to follow-up if I could, Steve, with your comments about the gross margin; I was wondering whether or not there was anything in there that was you're factoring in for either a deterioration in Texas in your specific commentaries about the margins in the back half and the volumes as well, or anything else that you might feel is worth calling out.

Thanks..

I mean it's hard to pinpoint precisely what the effect is going to be in Texas, but certainly things are probably going to get a little softer, particularly in Houston. But I think some of our other markets are going to improve and we might get some lift in our margins, particularly maybe in Arizona and in California.

So I don't have any precise commentary for you on how we did our calculations, but we did take that into account when we talked about our guidance for the year..

Okay, that's fine. I was wondering if you could comment little bit specifically on Phoenix then. I would say a couple of years ago, you were fairly early in identifying the risk in that market, particularly with land prices I remember meeting with you very early 2013, and we were talking about that.

And I was curious getting your comments now about how Phoenix maybe stabilizing or even getting a little bit better. Are you thinking that there's opportunities now in the Phoenix market….

Well, I mean we're only three weeks into the year, four weeks into the year; it's hard to call a trend. But the first few weeks are looking pretty good. I think it's going to be our -- maybe our best month in the last six months as far as sales if the year is starting out nicely. That said, December was pretty weak.

So I'm optimistic that 2015 is going to be a better year in Phoenix, but I would say we have all the land that we need, and I don't expect that we're going to be buying any land in Phoenix this year. And I would say generally, land in Phoenix is overpriced. So [indiscernible] our inventory, anybody is looking to buy land in Phoenix..

Thanks very much for that..

Okay..

The next questioner is Mr. Michael Rehaut from JPMorgan..

Thanks. Good morning, everyone. First question, I was hoping Larry perhaps to get a little more granularity also on the directional guidance of the gross margins, I really appreciate of course your thoughts on that metric.

Down sequentially in the first quarter, if you could just give us any sense of a degree of magnitude there, 50 or 100 or more or maybe within that range, and then when you talk about the expected year-over-year improvement in the back half, would that be more driven by just the burn-off of the purchase accounting in Legendary or is there type of -- other types of drivers either from a geographic or land cost standpoint that's driving your outlook for the improvement in back half year-over-year?.

Sure. Mainly the first quarter particularly comparative to the prior years, first quarter we are just dealing with prior year having just better margins, so of course we are going to have a tough, tough comparison and that also drives a tougher comparison on the bottom-line number too.

It's tough to give you any real specific, but I think, you said 50 to 100 basis points, I think it's probably something in that range. I might also point out that maybe within that number is about another 25 bips from Legendary.

It's going to be from what we can tell about the same number was in the fourth quarter and the first quarter, but then as you said, it should burn-off pretty quickly after that.

And the overall improvement in the year is mainly driven by just better overhead leverage and some of the construction overhead numbers, which are in cost to sales, and some of those fixed costs. So not necessarily predicting an improvement of margins because of an improvement in marketing conditions or a change in mix or anything like that..

Okay. And so just to clarify, when I was referring to $50 to $100 referring sequentially 4Q to 1Q that's what you were talking about as well..

Correct..

Okay. And then second question, Steve, you also reiterated I guess from the press release about perhaps that why you still expect year-over-year growth, you are tampering your expectations at the same time. So I was just curious about what that really means.

If you are entering the year 20%, community count growth, does it reflect perhaps a view that your sales pace might continue to be down year-over-year in the first half, or just any further quantification or rough quantification on what that means, when you say, you still expect to grow but less so?.

Okay. Look, I am really bullish about the business. I mean our Western markets, Arizona and California have no where to go but up, I think they are going to improve.

I am excited about what we are doing in the Southeast, particularly in the South, what we have in Atlanta and Carolinas, and Nashville, and we are really starting to get our Tampa business going on and we got a great franchise in Orlando.

We have a great position in Texas, but I am cautious like everybody else is about what the impact of the lower oil prices is on the Houston, and to a lesser degree to Dallas, and some of the other Texas market. So I don't know that we are going to see the impact of it for a couple of quarters.

So I think I got reasonable visibility the next couple of quarters, but after that, we will just have to wait and see. So we are looking for pretty good growth everywhere else. Our community count is growing in Texas. That could offset some lower absorption per community..

Thank you..

The next question comes from Mr. Michael Dahl of Credit Suisse..

Hi. Thanks for taking my question.

Steve just to follow-up on that last point, I think, I saw it in the opening remarks you had made a comment that, you thought you could hold pace in Texas but with that last one, you were saying, community count could offset some lower absorptions, so I guess what is the baseline for your expectations for Texas in 2015 from a pace standpoint?.

What do you mean by the baseline, I mean the baseline would be what we did in 2014, I guess..

Flat absorptions you are saying..

Yeah..

Okay got it.

And then as far as the energy tax credits is that -- how should we think about from I guess modeling standpoint the tax rate for the near term, is that something, that's going to continue to help at the same magnitude?.

I mean it's hard to model quarter-to-quarter, but I think if you look back over the last three years or so, you can see that we had a consistently lower tax rate than most of our peers, because of our -- I call it extreme energy efficiency program.

And it's unfortunate we can't bring this up into the gross margin, but it's part of our cost structure, building the energy efficient homes that are qualifiers for this federal tax credit and I don't see any reason why the governor won't continue to renew that year-over-year and structurally we will continue to get those credit and be able to obtain lower tax rate and benefit, not only our consumer by having great homes that are extremely energy efficient but our shareholders by paying lower taxes..

Okay, and from quarterly standpoint..

Yeah, I was just going to answer that question. We don't get to account the credits until Congress passes the extender bill and the President signs it, which is why we booked in the fourth quarter of 2014, it just depends on when Congress does that, until they do it, we can't recognize the benefit.

The benefit tip is running kind of about 2% or so until we -- and what happens is that builds up quarter-by-quarter and then we get the benefit of like the full year in the fourth quarter so that's why the adjustment in the fourth quarter is so large, but if you could book at each quarter maybe about 2% benefit so our normalize tax rate is about 35.5% so you get about 2% improvement, if you could book on a ratable basis throughout the year..

Got it. Okay that makes sense. Thank you..

The next question is from Ivy Zelman, Zelman & Associates..

Thank you. Good afternoon guys or good morning I should say.

Steve, you sound balanced in your views and I know you are bullish longer-term, give us a sense of what you maybe expecting from the benefits of the mortgage market on the margin incrementally, getting a little bit better for today's consumer, I know it's too early in January, but the correlation to I guess Phoenix getting better maybe, is there anything to do with the mortgage market getting better or consumer getting more aware, I guess just how excited is the mortgage market improvement getting for 2015 outlook?.

I think just a marginal improvement. It's not the fantasy that we are hoping for. I am hoping there is more to come. I've been studying the new Fannie, Freddie 3% down payment to see if we had an impact from that yet. It's been pretty nominal. It's more expensive to the consumer to get advantage of the lower down payment loans. But I am….

Sorry.

Steve, are you marketing that program to your potential buyers and going out with more aggressive campaigns to educate them?.

We are going to be, we just came out -- for us a few weeks ago, we had a handful of buyers take advantage of it.

So our mortgage company is going to begin to market it more aggressively and we are going to see if we can garner some more sales activity with it, but the credit scores of our buyers is same about the same as have been throughout the entire last year they are in 740, I think it was 741.

Our FHA book has dropped down, it was about 18% a year ago, it's 8% now lowering a bit, FHA loan limit so that's come done quite a bit.

Our down payment have come up a little bit like 16% 17% that, but it would be nice to see the FHA piece of our business increase, we are trying to do more, we call entry level plus homes, particularly in the south and southeast, which will fit more into the FHA caps and I think we know to get buyers more access to financing opportunities to buy new home so, we are optimistic about the increase availability of credit..

That's really helpful, Steve.

And then just my second question relates to acquisition opportunities you guys did a good job over the last several years of incrementally expanding your company and diversifying into new markets, it seems that the side of builder balance sheet may not be as secure as obviously the public so are you seeing any situation and willing sellers incrementally come to market or the opportunity for acquisition more stable or even declining..

I think everybody is taking a little bit of pause right now, I don't see a lot of phones not ringing like it was a year ago and we are not as aggressively looking maybe as much as we were a year ago.

But our eyes are always open, I think for us, we have four or five markets we want to really increase our market share and become more relative particularly in the south and get bigger, so we are really focused on that right now.

But I think, we will see what happens for the first couple of quarters, there may be more M&A activity over the summer than there is probably right now..

Than if I can sneak in one more on the cost side, have you seen any release from the constraints around labor and in Arizona for example where the business is definitely slowed and maybe just an overall view on what the cost is brick and brick in labor will look like in land going forward in 2015, in your assumptions..

We have clearly taken maximum cost out west in Arizona, we have taken back several thousand dollars per house, the only cost pressure we have nationally is concrete and a little bit dry wall.

Most of the other cost are, we have been pretty much holding line on, but clearly those markets were slower in 2014, than they were in 2013 when we took some cost back..

Right. Well, thank you guys, appreciate it..

The next questioner is Mr. David Goldberg of UBS..

Thanks nice quarter everybody..

Thanks..

I want to ask a question kind of follow-up on Ivy's question and not so much the negotiating power in terms of labor but I am wondering the land side of the business, Steve you mentioned not buying a lot of land, I think maybe you said you are not buying any land in Houston right now and obviously there is a lot of uncertainty in the market, are you finding that it's getting easier to get some leverage land sellers in terms of buying more options and putting more lender controller options, and how you look at that in terms of some of these markets where there is more uncertainty instead of walking away from deals maybe trying to get more option focus deals..

Not necessarily in Arizona, not that we have been really that interested in buying land because market softened out here in early 2014 but there has just been no movement I mean sellers hadn't softened on prices, hadn't proposed a lot of term deals or options and I would say the same for Houston, October, November last year people kind of started putting the breaks on land deals in Houston and maybe some other parts of Texas but we haven't, no one is really panicked no one changed anything up, so I think it's way to see situation everywhere..

That's helpful and then just a follow-up I was wondering, if you could talk about consumer demand for energy efficiency homes and product and the work you guys do on the greenside and really maybe thinking about that relative to oil prices and natural gas prices, is there any sensitivity or is it look the buyer just appreciate lower energy bills and even if it changes $50 versus $100 because there bill would have come down, there are not sensitive to it or does demand actually fluctuate based on what's going on in the energy market and the cost of energy market..

I think oil prices translate to home energy bills that well, so I don't think there is a direct correlation I mean it's more as the gas comes in -- do you think read people talk about, now people are more comfortable driving further to buy a home, maybe some locations in the further reaches of the town could become more viable, particularly for entry level buyers but I think for them, that is more financing issue than it is gas price.

So we continue to use our highly energy efficient homes as a selling tool, not only gets our competition but again it's resale and you know we believe it to be very effective, it's important for our brand, builds both credibility for our company and it's a big part of our culture and our strategy so..

Thank you..

Thank you..

The next questioner is Mr. Peter Galbo, Bank of America Merrill Lynch. Mr.

Galbo?.

I think we lost him..

Okay. It looks like we might have lost Mr. Galbo for today. So the next questioner will be Nishu Sood of Deutsche Bank..

Thanks. First question, clarifying on the gross margin guidance 15 should be consistent with you were in 4Q does include or exclude the purchase accounting effect..

That includes the purchase accounting effect..

Got it. Okay.

And second question I wanted to ask was in terms of your significant community account growth over the last two years, mostly was outside of Texas which probably will turn out to be a good thing, given the oil price risk, looking ahead and I know Steve you said you have a kind of balanced view on growth but where do you see your incremental dollars going is it a simply case of anywhere but Texas or what regions are you more less excited about given the vary landscape we see across the country..

Well we got a big push in the south and southeast, we really focus on Atlanta, focus on the Carolinas, where California, we are focused on particularly closer to the coast. Our business in northern California is really strong right now.

So we are continuing to Intel opportunities particular in California, so we probably won't be buying much land in Arizona this year and we are going to be very cautious about Texas but most of our other markets Florida, we are looking at some other markets close to our core markets in Florida that we potentially could be build some homes and so, there is a lot opportunities out there within the markets that we are already building..

Got it great. Thank you..

The next questioner is Mr. Adam Rudiger of Wells Fargo Securities..

Hi, thank you.

I am just thinking about the absorption pace and the impact from Legendary if, what I call, it looks like maybe about seven point impact this quarter of the 9-ish% decline, I know it's a tough question but all else stay the same, will it be right to think about similar declines on a year-over-year basis until you anniversary the acquisition?.

Probably, Larry..

Yeah, certainly going to have an impact but it's not large of an impact and you are talking about pretty small differentials, so it's kind of hard to quantify it's like slicing hairs.

So it's going to have a little bit of impact we know whether it's that much I don't know but I think it's probably appropriate if you are going to make a flat absorption per community absorption, assumption to go, yeah they are going to have a adjustment on that for Legendary going forward until you hit the year-over-year comp..

Okay.

And then I want to go back to the Texas for a second only because Steve you mentioned I think earlier you said community count will be growing, it's been declining, so I just want to make sure, I understood that correctly that the decline this quarter that your expectation that community count throughout 2015 are declining, and just put that in a context of your cautious comments?.

Well, we've bought some land positions there in 2104 and then 2013 they're going to be coming online in Dallas, Houston and Austin. So our community count will be increasing back towards previous levels. But with the slowdown we made the absorptions per community decline they would mitigate the increase in store count. .

Got it, thank you..

The next questioner is Jade Rahmani from KBW..

Hi, yes. Thanks for taking my question. This is actually Ryan Tomasello on for Jade.

On marketing and commissions front are you guys doing anything to drive higher sales there? And would you expect that expense to increase going forward in 2015?.

We're doing lots of things every day to try higher sales internally and externally. But I wouldn't say that there's anything on the horizon it shouldn't increase our cost.

Larry, would you give me that statement?.

Yes, I think we have some programs going on, motivational programs that cost a little money but it's not that much money to spare our sales force. And of course we're continuing to focus on advertising particularly internet advertising. So there -- and model the decoration and fool proving that so we do have some costs in there.

But it's not very significant..

Okay great, thanks.

And then for backlog conversation, do you expect that to train the similar level quarter-to-quarter to those that we saw in 2015, I mean in 2104?.

It's all a little higher in the fourth quarter. But I think overall for the year it should be pretty somewhere to what we saw..

Okay, great. Thank you..

Next question is from Mr. Stephen East of Evercore ISI..

Thank you. Good morning, guys. Steve, we've heard from several builders during conference calls that incentives are picking up etcetera and yet when we're out broadly speaking -- but when we're out in the field we're just not seeing that in a big way.

Would you mind running through your markets at least where you're seeing some movements in incentives and maybe markets that just aren't moving that direction..

So West/East Northern California, very strong -- we opened several new communities over the last couple of months and people almost waiting in line strong sales ahead of the shoes, nominal incentives or no incentive, Southern California inland empire acting more like Phoenix, coastal communities we have only a couple there pretty strong, hard incentives at all.

Phoenix that steady incentives are -- there was a lot of incentives in November, December lot of builders were trying to get things up the books. We didn't participate really to the degree, maybe others did, and our sales probably suffered a little bit in December.

People retreated from those incentives in January are still, as I said earlier, were much stronger in January. I'll feel like through the first three weeks, we'll have the best month in the last six months in Phoenix for January; Colorado really no change, very little change.

January is the -- it's pretty cold month up there, not really a barometer month in Colorado. Texas, no change yet, but let's wait few weeks till February and March, very cautious towards sectors. Rest of the country the east south east Florida, not hearing any real change in incentives, maybe a touch more incentives in Florida.

But I'm not hearing a very cost per concern..

Okay. All right. That's helpful. And then going back to the land; I think David asked about land and options etcetera. 6535 you continued to move towards more optioning that I was interested.

And the land banking environment and what you're seeing in just the change with oil etcetera, if more difficult to do land banking and how much more do you think you all can push that in 2015?.

Land bankers are just like us. I mean they look at land just like we look at it. They're cautious and they're going to be held it into do land bank deals in Texas just like we're going to be hesitant to Wyoming right now. So I don't feel lot of -- - more land bankers have entered the business; certainly there's more opportunities for us.

But I don't see a ratio changing that much going to the '15. .

Okay thanks a lot..

Thanks..

The next question comes from Jay McCanless of Stern Agee..

Hi, good morning everyone.

Steve, could you talk about a land with all of the recent acquisitions that had been made by the public builders in that market? Are you seeing a heightened competitive environment there or an increase in inventory people try to move through some of the things that they bought?.

It's a very completive land market. It's a very competitive housing market. But I still think there is a lot of opportunity there for public and private builders. We got to be careful about where you playing your flags. But I think there's more opportunity at the land that make money than there are and there isn't a lot of other markets.

So we're really bold and shining. We got a really good land position moving about legendary homes. We want to expand that position and build on the team that we have there, relatively small team and grow that business. It's relatively small business the business we have in Greenville's bigger. So we're working on it.

We're excited about our entry into Atlanta. .

Okay.

Second question I had is if you look at your land spend and how you're thinking about land spend for '15? Could you talk about -- I know you've already discuss Texas but some of the other charter fees where you'd like to put more money than less and also whether you'd rather focus on first time or move up or watch the buyers, how you want to spread the money out in those two separate ways?.

Well, that's going to be four. I want to spend more money in the south and the south east. And I want to try to drive our ASP down a bit more first time move up so some entry level plus, which is category between entry level and first time. In the Southeast we want to do some infill in the West.

There came a lot of resources to pursue infill in California. There are a couple of infill communities opening up here in the first quarter in California, we're really excited about and we are continuing to be bullish about our position in Colorado. And then, we'll be cautious about Texas.

We have a quite a few communities open up in Dallas that we're excited about particularly in north Dallas. And we'll continue to keep our eyes open for new markets as the later in the year to see what opportunities are out there as we continue to fill out and grow there our existing markets..

In fact, it sneak one more in. Could you just talk about option trends and also lot of premium what you're seeing generally this year versus last year? Thanks..

No real changes in -- on either front I mean as I said earlier there is a handful of new land makers that have come to the table that we're building relationships with. Some additional capacity but I don't think our ratio own versus land maker is going to change much in 2015.

And lot premiums -- people will pay a premium for a quality life with a view or oversized, we are in the coldest side, but they won't pay a premium for -- a lot of those are not a premium lot, and nothing is really changing that area..

Okay. Thanks..

Thank you..

The next question comes from Will Randow of Citigroup..

Hi, thanks for taking my question.

Can you give us a directional sense on how demand has been pacing over the last few months and potentially month to date for the company and particularly in your western markets that should be facing some easy comps?.

We'd see. Give me a second here. The Western markets were pretty slow in December. I think I talked about that a little earlier. Our Texas markets were pretty good in the back of the last -- the fourth quarter. I'm not sure.

What are the colors given on that, Larry?.

Well, I think we haven't said a whole lot of about the current month but the other kind of guidance we'd be provided is that we do see even though the west was slow. We seemed to have seen of a little bit of strength there in improvement in January.

So I guess even though it was slow on December, it seems like it's a little better in January in the West. So we're hopeful of that setting up a little bit better spring selling season for us there. .

Yes, I think I have said earlier we have a very strong January in Northern California. We're doing well up there and we're pretty pleased with what's happening in phoenix so far in the first few weeks. And Orlando is doing pretty good, and we're overall real pleased with what's happened across the board for the first few weeks..

Thanks for that.

And then with the four years of lots supply owned and controlled in Texas, how much of that is owned and how much of that's owned in Houston?.

Oh, I don't have that in my fingertips.

Larry, do you?.

Yes, I don't have that number broken out by division to talk about on the call. Sorry. It's not radically different from elsewhere though. So….

Okay, great. Thanks guys..

Thank you..

The next question comes from Joel Locker of FBN Securities..

Hi guys, just on your community counts openings in the first quarter and throughout 2015, where do you think they're in and is there any trajectory level strong in the first parts of the years….

I don't want to give guidance for the quarter but I could tell you for the year, probably going to be up 15% maybe high as 20% for probably somewhere in the mid high teens for the year..

And that's on a net basis….

Yes, net..

And then also on -- looking at your absorptions obviously the Legendary is about half right around three years, three of quarter versus six of quarter based on the fourth quarter for the other Meritage communities.

I was wondering can you bridge that gap at least some maybe just going forward and then what kind of time frame if you can bridge that gap?.

Yes, I think that's part of our strategy to try to increase those sales per community for them. They have a little different kind of strategy where they have more communities, they have some communities where they may share a model with another community and they have less overhead.

So sales is a little different, but over time we hope build to increase the sales per community there in Atlanta Greenville. But I don't really have a time table for that. Probably could take a year or two..

All right, thanks a lot guys..

Thank you..

Okay. Mr. Hilton we have two remaining questions in the queue. Take those two, and if anybody else need to queue up, they can * 1..

Let's take this since we're almost at 9 O'clock. We are almost at the end of the hour.

Let's take those two and we'll call it a day, okay?.

It sounds good. The next question will come from Alex Barron of Housing Research Center..

Hey good morning guys, and good job.

Wanted to ask you about your next strategy; last quarter I think you guys talked about desire to increase your specs; wondering how that's working out and what are your current thought processes on that?.

I don't have those spec numbers in front of me. Larry, I think you have those, but….

Yes. Alex, I think we said we had been building specs but had decided to bring the number down a little bit. And we peaked at the end of 930 at a little over 1300 total specs. And we brought that down to about 1250, we'll probably see that come down a little bit more from there..

Okay, and I guess just in general what's your overall outlook I guess for 2105 as far as sales face.

Do you guys think it will be similar to 2014 higher or lower?.

Well, we're modeling the same, but we're certainly hopeful it's going to be higher..

Okay, sounds good. Thanks..

Yes, thanks..

The final question comes from Mr. Peter Galbo of Bank of America Merrill Lynch..

Hi this is Mike Roxland.

Can you hear me?.

Yes..

Hi. Sorry about that. Just appreciate you taking the question. I'll make it really quick as most of my questions have been answered. Just one thing you said fallowing upon the last one on specs. Obviously you have now turned the quarter despite of your spec bringing it down. But how a gross margin on spec trending versus your other built order products.

Certainly some of your peers have indicated the widening disparity between spec margins and built order products.

So how are you seeing gross margins trend on spec versus built order?.

Yes, we haven't seen a bid difference on margins, on spec versus build order. Historically though, obviously there's a generally a discount for spec home versus a build order. But most consumers today prefer to buy a spec home than a build order because they sold their house, or they're renter and they wanted to get in to a home sooner.

So they don't associate discount with that home. So it's sort of an advantage to how inventory readily available. So if there is a discount, it's generally small and if you have a discount that's probably because you built the wrong house in the wrong place, with the wrong upgrades and the wrong plan and wrong elevations. So try to avoid that.

Try to be smart about it. And we do our job. We won't have it discounted..

Got it.

And then just one quick follow-up on input cost? What kind of input cost appreciation you're factoring in to gross margin guidance for 2015?.

Larry?.

Are you saying -- what was the question again?.

Sure, just trying to get a sense of the input cost appreciation that you're factoring in to your gross margin guidance for the current year?.

Yes. So we generally assume that direct construction cost increases or step by sales price increases, but the number generally around 3-5% on the high side. It's not nearly as strong as it was a year or two ago when the market was [indiscernible] as Steve said earlier in some markets we have been able to actually bring the cost down.

So it's a fairly more inflation oriented type increased today..

So you basically mean that your price appreciation will offset any cost inflation you will experience this year?.

Correct..

Okay, thank you. Good luck in '15..

Thank you..

Thank you very much. That ends our call and prepared comments for today, and we appreciate your participation and attention and we look forward to talking to you again next quarter. Have a good day..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..