Brent A. Anderson - Meritage Homes Corp. Steven J. Hilton - Meritage Homes Corp. Phillippe Lord - Meritage Homes Corp. Hilla Sferruzza - Meritage Homes Corp..

Alan Ratner - Zelman & Associates Paul Przybylski - Wells Fargo Securities LLC Peter T. Galbo - Bank of America Merrill Lynch Ryan Tomasello - Keefe, Bruyette & Woods, Inc. Jay McCanless - Wedbush Securities, Inc. Carl E. Reichardt - BTIG LLC Alex Barron - Housing Research Center LLC.

Good morning and welcome to the Meritage Homes Second Quarter 2018 Analyst Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Brent Anderson, VP, Investor Relations. Please go ahead.

Thank you, Chad. Good morning, everyone, and welcome to our analyst call to discuss our second quarter and year-to-date 2018 results.

We issued the press release after market close yesterday and you can find it along with the slides for this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage.

I'll refer you to slide 2 and remind you that our statements during this call, as well as the press release and slides, contain forward-looking statements, including our projections for 2018 operating metrics such as closings, revenue margins, and earnings.

Those and other projections represent the current opinions of management, which are subject to change at any time and we assume no obligation to update them. Any forward-looking statements are inherently uncertain and actual risks may be materially different than our expectations.

We've identified risk factors that may influence our actual results and listed them on this slide, as well as in our press release and most recent filings with the Securities and Exchange Commission, specifically our 2017 Annual Report and subsequent 10-Q for the first quarter of 2018, which contain a more detailed discussion of the risks.

We've also provided a reconciliation of certain non-GAAP financial measures referred to in our release and presentation as compared to their closest related GAAP measures.

With me today to discuss our results are Steve Hilton, Chairman and CEO of Meritage; Hilla Sferruzza, Executive Vice President and CFO; and Phillippe Lord, Executive Vice President and Chief Operating Officer of Meritage.

We expect to conclude the call within an hour or maybe a little bit less, and a replay will be available on our website approximately an hour afterwards and will remain active for approximately two weeks. I'll now turn the call over to Steve to review our second quarter results.

Steve?.

Thank you, Brent; and welcome to everyone participating on our call today. I'll begin on slide 4. We had another good quarter and are pleased with the results we've delivered for the first half of 2018. We're on track or slightly ahead of the expectations we communicated at the beginning of the year.

The growth in revenue and earnings we achieved this year has been primarily driven by the success we're having in the entry-level market with our LiVE.NOW. homes and the improvements we have made in our East region. We expect demand for entry-level homes to continue to be strong.

We've aligned our real estate investments and our operations to maximize our opportunities to further growth in that area. Similarly, we expect further improvements on our East region's results that will benefit our consolidated earnings and plan to grow our community count in the East over the next several quarters.

We delivered year-over-year growth across nearly all key metrics in the second quarter. Home closings increased 12%. Home closing revenue was up 19%. Our gross margins expanded by 60 basis points, increasing home closing gross profit by 13%, and pre-tax earnings also grew 13%.

Our diluted earnings per share were 34% higher than the second quarter 2017, benefiting from a lower tax rate and diluted share count.

While we have been focused on increasing our gross margins and maximizing our profit on every sale, we still produced 5% order growth in the second quarter, driven by 6% higher absorptions from relatively the same number of actively selling communities in the second quarter as we had a year ago. Turn to slide 5.

Clearly the success of our entry-level LiVE.NOW. homes has been a significant driver of our order growth in recent quarters. We've built many more in LiVE.NOW. communities and those communities have been selling at a faster pace than move-up.

Entry-level homes may have about 44% of our total orders in the second quarter compared with 33% for the full year 2017. We have nearly reached our year-end 2018 goal of having 35% to 40% of our total communities offer entry-level homes that are priced below the FHA loan limits. We ended the second quarter with approximately 34%.

We're building solely on a spec basis in these communities so that we can deliver those homes faster and at lower cost to our customers. While price is obviously paramount for entry-level buyers, having homes available to move into quickly is also critical. More than 60% of our LiVE.NOW.

buyers are coming out of a rental home, and 70% want to move within three months. Quicker closing dates allow those buyers to lock in interest rates and to alleviate concerns about rising rates. Building on a spec basis also offers us greater efficiencies and build-to-order, allowing us to meet the needs of our buyers while managing our cost.

We're carrying a little over nine specs per community on average at the end of the second quarter this year compared to about seven per community a year ago. As a result, 55% of our total closes in the second quarter were from spec homes, up from 49% for all of 2017.

Continuing the strategic plan we've established over the last couple of years, it's clearly working for us, and we believe it can continue to drive future growth. Before I turn it over to Phillippe, I'll recognize our East region for their significant improvements in performance this year.

The region encompasses our newest markets, it's been a turnaround story that reached an inflection point in the first quarter this year and continued to improve in the second quarter.

The changes we made in product, personnel and training over the last couple of years are helping to drive more orders, higher margins, and greater operating efficiencies.

As a result, these regions' home-closing gross margin increased by more than 200 basis points over the second quarter of 2017, driving most of the increase in our consolidated home-closing gross margin for the quarter and getting closer to the margins in our two other regions.

I'll turn it over to Philippe to discuss the highlights of our operational performance.

Philippe?.

Thank you, Steve. We are generally continuing to see solid demand in our markets, especially at the lower price points. We have been focused on improving our margins by pushing prices wherever the market will give it to us. Those increases are helping to offset rising costs, but our ability to continue this is limited by affordability.

We are managing price and pace in every community to ensure that we are competitively priced and offer a strong value proposition to successfully win buyers. I'll discuss our progress by region with some local color, beginning with the East region on slide 6.

As Steve said, we are pleased with the gains we see in the East due to our community positions, new products, and improved execution. Our East region orders were up 12% year-over-year in the second quarter.

South Carolina, Florida and Tennessee each produced strong double-digit growth in orders and absorptions, despite having fewer average communities in the second quarter of 2018 compared to 2017. Our average community count for the East region was down 2% from a year ago, but our order pace increased 14% to 8.1, which is in line with our Texas region.

Total order value was up 11% year-over-year. With the improvement we made in product positioning and sales execution, we're shifting our focus towards operating efficiencies to drive higher margins, profits and growth from the region.

Slide 7, moving left, Texas continued its solid performance of growth across the board in average communities, orders pace, orders and orders value in the second quarter of 2018 compared to last year.

Our average community count in Texas was up 6% year-over-year in the second quarter and average absorptions increased slightly, resulting in a 7% increase in orders for the second quarter. Total order value for Texas increased 9%.

While ASP will continue to trend down over time with more entry-level homes, we had strong orders within a few higher-priced communities during second quarter that drove the region's ASP up 2% year-over-year.

Slide 8, our orders in the West region were down year-over-year due to a 40% decline in California's average community count and a smaller decline in Arizona. With the order pace up 27% in California and up 5% for the region, as a whole, the net effect was a 4% decline in orders for the quarter.

Strong demand in California is evident in the fact that our second quarter absorption of 12.7% were the highest in the company. As we've mentioned before, it has been difficult to get new communities opened as the approval process is long and unpredictable and development is often complicated.

However, we do plan to open up many new communities and grow our active community count in California over the next four to six quarters. Arizona is still experiencing broad-based market strength across most price segments, especially entry-level.

We are very confident in our position there, with some of our newest communities selling dozens of homes, even before our grand opening. We've opened nine new communities in Colorado in the last quarter, including the first of several townhome communities.

The result was an 80% increase in second quarter average community count in Colorado and a 25% year-over-year increase in orders. The decline in absorption pace does not reflect the lack of demand, just timing; it is still one of the highest demand markets in the country. I'll now hand it over to Hilla to provide some additional information.

Hilla?.

Thank you, Phillippe. I'll provide a few additional details on our P&L as well as covering finance (10:06) and balance sheet metrics, beginning on slide 9. Overall, our second quarter results were clean with very few unusual or non-recurring items.

Net earnings were up 29% year-over-year for the second quarter, contributing to the 50% growth in net earnings for the first half of the year. The primary drivers for this growth were increases in home closing revenue and gross margin, as well as the benefit of lower tax rates in 2018.

SG&A was a little higher than last year's second quarter, as we expected. We explained last quarter that we would incur additional compensation expense in the second quarter of this year that we didn't have last year due to a change in the structure of certain equity awards to a more advantageous tax structure for the company.

All equity awards for executives are now performance-based rather than time-based. And the timing of the expense is variable based on when the performance targets are considered likely to be achieved. Certain awards were considered probable to be earned as of the end of the second quarter of 2018.

So we recognized approximately $1.3 million of expense at the end of this quarter with no corresponding expense in 2017. We also benefited from a lower effective tax rate of 24% for the second quarter of 2018 compared to 34% a year ago.

And diluted EPS benefited from the approximately 2 million share reduction in our diluted share count after the retirement of our convertible notes last year. Turning to the balance sheet and cash flow items on slide 10, our net debt-to-cap ratio came down to 40.4% at June 30, 2018 from 41.4% at the beginning of the year.

Under our newly authorized share repurchase program, we're planning to repurchase up to $100 million of shares over the next several quarters, depending on market and other conditions and may begin early as this quarter. As we repurchase shares, our net debt-to-cap will increase a little, but remain well within our target of below 40%.

Total land and development spending was around $221 million in the second quarter of 2018, about $58 million less than last year's second quarter of $279 million, but still in line with our full-year target of about $1 billion.

We added approximately 2,600 new lots under control during the quarter, with 85% of those for entry-level communities, aligning with our strategy.

Our total lot supply at June 30, 2018 was relatively flat year-over-year in terms of total lots, which increased by just 260 though that translated to 4.2-year supply of lots based on the trailing 12-month closings for this year compared to 4.5-year supply of lots at June 30, 2017.

We own about 70% of our total lot inventory with 30% options as of June 30, 2018. Slide 11.

Based on our results through the first half of the year and our expectations for continued demand, we are maintaining our projections for full year 2018 home closings of approximately 8,450 to 8,850 closings and total home closing revenue of roughly $3.5 billion to $3.65 billion. That's about 10% to 15% growth over 2017.

We are also slightly increasing our expectations for home closing gross margin to 18% to 18.5% for the full year compared to last year's 17.6%. The high end of that range is tempered by potential future increases in material costs due to recently proposed tariff.

While we have been able to offset rising costs through price increases, the potential for additional cost increases in markets where affordability is already strained may prevent us from passing on those costs. We're adjusting our earnings expectations based on better-than-expected margins in the first half of 2018.

Pre-tax earnings for the year are projected to be roughly $295 million to $315 million with strong growth in the second half of the year. Our effective tax rate remains at 25% for the balance of 2018. For the third quarter, we're projecting 2,050 to 2,250 closings for total home closing revenue of approximately $850 million to $925 million.

We're expecting to maintain our home closing gross margin roughly in line with the second quarter of 2018 and last year's third quarter, generating pre-tax income of approximately $70 million to $75 million, which would be 10% to 20% higher than the third quarter of 2017. With that, I'll turn it back over to Steve..

Thank you, Hilla. In summary, we are pleased with our second quarter results and the progress we've made on nearly all key metrics this year. We believe there is more to come. The economy remains relatively strong and demand for new homes remains healthy, especially for lower-priced entry-level homes.

We are strategically positioned to capture the demand for additional growth, while also leveraging the growth for greater earnings through gross margin expansion and operating efficiencies.

We're mindful of the affordability concerns and the potential that further cost increases could drive home prices even higher, which could slow the market in some areas. We're carefully monitoring affordability trends and their impact on our markets.

I'm proud of our entire Meritage team for putting our customers first and working hard every day to make the company successful. We're confident in our abilities to make the most of the opportunities ahead of us. We expect to continue to grow and deliver increased shareholder value. Thank you for your support of Meritage Homes.

We'll now open it up for questions, and the operator will remind of the instructions.

Operator?.

Thank you. The first question will come from Alan Ratner with Zelman & Associates. Please go ahead..

Hey, guys. Good morning. Nice job in the quarter and congrats on the progress in the East. It's good to see. So on the order front of 5 – I think, obviously, a little bit softer growth than we've seen in the last few quarters, and I think that's generally been the trend that we've seen in a lot of the macro data through the quarter.

I guess, as you sit here in the middle of the year and you look at your business, your community count, the pipeline of growth, the comps you've got coming up here, and just generally, the demand environment today, what degree of confidence do you have, maybe not this quarter or next, but that growth can eventually reaccelerate back to that high-single, low-double-digit range the industry was enjoying for the last several years? And what needs to happen in order for that to occur? Thank you..

Well, Alan, we're very confident in our business. And we're really confident in the demand for our products. We had a really consistent quarter. We didn't really see a drop-off in demand.

In June, we debated whether to give monthly order numbers, but I can assure you that the orders that we received in June were very consistent with what we received in April and May. The biggest challenge for us really was California.

We've had many communities that we've been playing to open this last quarter that have gotten hung up for a variety of reasons, getting final approvals and development work completed. It's been tougher than anticipated and it slowed down our community count growth there.

And if it wasn't for that, we would have better results in the West, which would drive better net order growth. I think our net order growth in the other regions was pretty decent and definitely around the double-digit number. So we're really confident in our business. We haven't seen a lot of pushback on interest rates.

I think this summer is probably a little bit more seasonal in the last couple few years because of the higher prices and higher rates. But I don't think overall, there's a cause to be concerned..

That's helpful, Steve. So it sounds like it's just the key is getting those communities to the finish line, and that should solve a little bit of the challenges, I think, you and others are feeling as well. I guess, just in terms of the pricing side, so you mentioned the affordability concerns and constraints several times.

But at the same time, it seems like on the margin front, you're still having success offsetting the cost pressures that you're experiencing. Is there any color you can give just as far as looking at the material side of things? Obviously, lumber went up a ton earlier in the year. It sounds like maybe that's starting to pull back a little bit.

How should we think about that flowing through your business as far as when you lock in the prices, when – if there is any relief over the last few weeks, when would we start to see that showing up in your actual delivery numbers?.

I will let Phillippe or Hilla take that.

Would you guys want to?.

Yeah. This is Phillippe. We usually lock lumber 30 to 60 days right now because it's been rising quite a bit and we wanted to stay flexible. We've seen a little bit of a pullback here, but I wouldn't say it's super meaningful at this point. But we do expect it to continue to go down as this (20:30) work through the system.

And so we'll probably be relocking depending on the division over the next quarter here to try to capture some of those savings back to our business. So that's how we're managing it..

Got it. All right, thanks, guys. Good luck..

Thank you..

The next question comes from Michael Rehaut with JPMorgan. Please go ahead..

Good morning. This is (20:55) on for Mike. I just wanted to follow up on the entry-level homes, representing 44% of your 2Q orders. It's a little bit of an acceleration from 1Q when it was 38%. And you mentioned that you ended 2Q with, I think, 34% of your total as entry-level.

I was just wondering if there is any upside to that 35%, 40% by 2018 and for your community count?.

Might be a slight bit of upside. A few extra communities, probably not a lot, but there's probably more upside to the number of entry-level buyers that we're getting because we are getting some entry-level buyers that are buying in some of our first move-up communities.

So probably – we're probably gravitating more towards 50% of our orders in total being from entry-level buyers than that 35% to 40% of the communities, because we are getting entry-level buyers in other communities. So we welcome that. We think we want that to be a bigger part of our business.

And we think that's where the market is going to be over the next many years. And that's where we're really trying to get to..

So that 50% – okay. Go ahead..

I'm sorry. As we get closer to that 40% of the community count, the absorptions pace that we're seeing with the entry-level buyer is also accelerated compared to the move-up product that we still sell, the first time move-up. So as we get closer to that 40%, that 50% of volume that Steve referenced, it becomes much more achievable..

Okay. Great. Great. That's helpful. Just one more. On SG&A, it seems to be normalizing to some extent around the 11% level. I know it's a little bit up year-on-year because of some of those compensation expenses that you guys had called out.

But how should we be thinking about SG&A over the next 6, 8, 12 quarters? Is this about where you think it should fall out on a steady-state basis? Or do you see room for additional improvement?.

Well, we really expect it to be a little bit less. We really want to be in that 10% to 10.5% area. This quarter was a little bit of an anomaly for a couple of reasons that we already articulated. So we think it should come back down to around that 10.5% number, and that's what we're expecting over the next several quarters..

Got it. Okay. Thank you..

The next question will be from Stephen East with Wells Fargo..

Thanks. Actually, this is Paul Przybylski on for Stephen. If my memory serves, I believe your West margins have been comparable to the East. And over the past several quarters, you've spent quite a bit of time elaborating on a plan to raise the East gross margins.

Do you have a similar plan for the West? Or is that really just a case of pricing catching up with land costs?.

Well, I'll let Hilla respond after, but the margins in the West have been rising, particularly in Phoenix, or in Arizona, we've been pushing prices hard. And some of the newer communities definitely we're opening in Colorado are coming in at higher margins.

So I think we're on track to improve margins in the West the remainder of this year and into next year..

So, Paul, our East region increased, I believe, Steve mentioned over 200 basis points this quarter – second quarter of 2018 over 2017. Our Central has kind of maintained steady. They're still at above 20%. They're pretty normalized and continuing to hold the line. The West actually also had some improvements this quarter over last year's Q2.

You'll see that when our 10-Q comes out and we break everything up by region.

But the strength of the entry-level markets in Arizona, the continuing strength in California and Colorado, as well as the drop-off of some of those FHA-impacted communities in California and Arizona that we talked about a couple of years ago, as that impact is muted, we're starting to see the margins creep up in the West as well, much back into more normal territory..

Okay. And one more on the West, I know you mentioned four to six quarters, I believe, to get the California communities open. But it sounded like if they were delayed this quarter, that may be on the shorter end of the spectrum than the longer end.

Am I reading that correctly?.

Yeah. This is Phillippe. We definitely are expecting growth in community count, especially both in Colorado and Southern California. As fast as we're opening them, we also are closing out other ones because sales are so strong. So when we have community delays, we're chasing that community count, to some extent.

But it could be on the shorter side of things, but four to six [quarters] is a good metric to assume that we're going to see that community count growth in California..

Okay.

And one final one, any color on July orders?.

Go ahead, Phillippe..

Yeah. It's really too early to tell. July is always a very weird month because the first two weeks of July are always very slow and then we see a lot of demand come back as people return from vacation. So it's much too early to tell and typical seasonality, as Steve mentioned earlier..

Okay. All right. Thank you..

The next question will be from John Lovallo with Bank of America..

Hey, guys. It's actually Pete Galbo on for John. Thanks for taking the question. I guess, Phillippe, very helpful color around the California communities. I would think – and I just want to get clarity for this. You had said you'd be opening more, I think, in Southern California than in Northern California over the next four to six quarters.

But I just wanted to confirm that and also see if the 5% to 10% overall community count that you had talked about for the company for this year still held..

we're going to open up – we're going to see more community count growth in Southern California because we're coming from a lower base. We'll actually be opening up more communities in Northern California like total growth, but the net community count growth in Southern California will be higher than Northern California..

Got it. Got it. Okay. And maybe a question for Steve. Just thinking about as you do shift the portfolio more towards entry-level, I think a lot of times people would think that that would actually lead to a degradation of margin. We would almost argue the opposite in some instances.

Can you just bucket the efficiencies that you see from shifting the portfolio more to entry-level, whether it's on the labor side, the material side, underwriting land and getting a process faster? Just any color there would be helpful..

Well, it's all the above. So number one, we're able to get better cost and better reception from our trades. They love us line building, spec building, 100% spec. It's easier for them to build. They're able to keep our people up – people on our job sites longer. So our trades love it. They love that segment of the business.

Generally, the land that we use for the entry-level market is a little bit farther out. So it's easier to process. It's easier to get a title. The buyer cycle is quicker. From the time the buyers come in, make first contact with us to the time of the sale it's much faster. So our salespeople like it. The buyers like it. It's a simpler process.

And we think the way that we're approaching it, which is it's got some nuances that are little different than some of the other larger entry-level builders is unique, and the customers like it. And we don't believe there's margin degradation. And we think it's just the opposite.

It's more stability, and it's a better place to be in a rising price and a rising demand environment..

Got it. Thanks, guys. And maybe just quickly on the last one.

Any color around what stick and brick costs were up this quarter year-over-year?.

Yeah. Yes, probably around 6% actual cost inflation, not as a percent of ASP but through cost inflation about 6%..

For the year..

For the year. Yeah..

Full-year, not a quarter..

Yeah..

Got it. Got it. Thanks, guys..

Thank you..

Our next question comes from Susan Maklari with Credit Suisse..

Hi. This is Chris (29:49) on for Susan. Thanks for taking the questions. So my first question is just on your capital allocation priorities following the share repurchase announcement.

How should we think about the pace of share buybacks over the next several quarters? And how does that stack up relative to your other internal investments and debt pay downs?.

Well, we're definitely keeping liquidity for our refinancing 2020 when it begins.

Is it 2019 or 2020, Hilla?.

It's 2020..

Yeah. 2020. So we're keeping liquidity aside for that. But we're going to be opportunistic. We're going to spend that $100 million as the opportunities present themselves. But at these prices, today, it could be sooner, but we're definitely going to get into the market, buy back some shares.

At the same time, we're keeping our land spend steady to a little bit less where it was less the couple of years. But we expect to generate free cash flow in 2019. And that's our plan..

Got it. Thanks for that. And then, just following up on the inflation question earlier, could you guys break out the inflation you're seeing in land, labor and materials for us if that's possible? Thanks..

Yeah. We don't have the detail of all that. Like I said, I think our costs are up around 6%. Most of that is materials and specifically lumber, but not all of it. And there's certainly a labor component as well..

And then, just a reminder. Phillippe touched on this before. The component of our costs in the sticks and bricks area is about 50% on the revenue equation. So it's a 50% relationship. So a 6% increase in materials and labor only needs a 3% increase in revenue to offset.

So that's how we're able to still maintain and improve our margins even in a rising cost environment..

Got it. Thanks..

The next question will come from Stephen Kim with Evercore ISI..

Hi. This is actually Chris (32:18) on for Steve. Congrats on the quarter. You previously mentioned that you expect full year 2018 closing ASPs to be down year-over-year.

But, obviously, with all the respective affordability constraints and some signs of emerging softness, do you expect this to be down significantly or just reflect the shift more towards the entry-level?.

It's entirely the shift of the entry-level..

Okay..

We're not. We're not – ASPs are not going down because we're lowering the prices or giving discounts. ASPs are declining because of our shift to lower-priced homes..

Okay. Thanks very much..

The next question comes from Nishu Sood with Deutsche Bank. Please go ahead..

Hi. This is actually Tim (33:07) on for Nishu. Thanks for the question. So I guess, just digging into the regional margins there. So East came up about 200 basis points to around 16% in the quarter. So just curious as to how are we positioned into the normalized range that this region can get to? Steve, you mentioned a bit of an inflection point.

So just curious, are we past that inflection point or midway through it? How much headroom is left to get to your March (33:38) levels?.

We're not there yet. We still have quite a bit of room to run on the margins. But some of the other parts of the business are getting to more normal levels. But, definitely, the margins are an area that we expect to see continued improvement from in the East and the South particularly..

And there's no reason for us to expect the margins in the East to not be normal. So if they're around 16%-ish, mid-16s, there's clearly still headway to go. They should be earning something closer to your expectation for the entire company which is 18% to 20%..

Got it. Now, that's very helpful. So just – I guess, as well similar on the margin topic. You guys did mention a lot about the benefit that you're getting from the spec build. I guess, the shift towards more spec build.

So could you help us understand the spread between the spec margins and the build-to-order margins that you saw in this quarter? Was that different on a regional basis? Yeah. Just any sort of details there would be helpful..

There's no difference in margin because in the entry-level segment within our communities, that's the only way that we build. So there's no difference in margin. And we could argue to our customers that we should be able to charge a premium for our houses-ready versus the house you have to wait six months to build.

I think in a rising interest rate environment, people want to move quicker because they want to lock in their rate. But we don't see a gap in margin between specs and build-to-order..

Great. Thanks for the time..

The next question will be from Jade Rahmani with KBW..

Thanks. This is actually Ryan on for Jade. Thanks for taking the question.

Just in terms of the land market, are you seeing any changes there based on increased construction costs and slowing home sales, maybe less competition or perhaps a pullback in pricing?.

It's market-by-market, but any changes that we're seeing are subtle. And they're not very dramatic. But some markets, there's a few more opportunities to buy parcels than it were maybe a year ago. But generally, it hasn't changed that much..

Okay. And in terms of the absorption pace, can you quantify how the LiVE.NOW.

piece compares with your other product lines in terms of maybe absolute and year-over-year growth rates?.

Yeah. This is Phillippe. On average, our LiVE.NOW. product is about 12 per quarter or month. In the first move-up, we're closer to 8. And then, when we're priced above, the first move-up we're seeing around 6. So those are kind of the absorption pace on average for the company for those three segments.

And maybe can you give that on a year-over-year basis, growth rates?.

On the LiVE.NOW., it's pretty steady. For the first move-up, it's been increasing a little bit, because we're seeing second move-up buyers migrate to first move-up. And then, on the second move-up, it's a little slower..

Great. Thanks for taking the questions..

Thank you. At this time, we just have a couple of more questions left. Next question will come from Jay McCanless with Wedbush. Please go ahead..

Hey. Good morning, everyone. Steve, what finally changed your mind on the stock buyback? A pleasant surprise to see that..

Our ability to generate excess cash flow and the low price of the stock. I really expected the stock to be higher right now, but we have a lot of confidence in our business. We have a lot of confidence in the next several years where things are going. And it doesn't seem to be reflected in our stock price.

And I think buying back shares is accretive to the shareholders. And it's a good investment to invest we have on our books. And so we think it's the right time and the right opportunity right now..

Good. And then, Hilla, a quick question on some of the other line items to get to the pre-tax earnings guidance for the year.

What are you guys expecting either from land sale profit or from other income profit? Just wondering if there's going to be something in there to make up for what looks like a little bit of SG&A to leverage (38:33) in the back half of the year..

There's not really anything forecasted in either other or land sales. We are expecting to see some material improvement, and the SG&A leverage is highly correlated to the volume of revenue. So as the revenue and units increase in the back half of the year, we'll see some leveraging on the SG&A..

And then, the last question I had, in terms of cycle times, where are you guys now from – I don't know how you all measure it, either contract to close or if you could give us any color there, just wondering what labor availability looks like and how that's affecting or not affecting your delivery times..

Yeah. This is Phillippe. Depending on the region, again, depending on how much exposure we have to a LiVE.NOW. product, which the cycle times are much shorter than our first move-up or second move-up communities. But we've reduced our cycle times year-over-year probably 15 to 25 a day depending on, again, those variables.

In Phoenix, we're down probably 30 days since last year, just because of all the LiVE.NOW. products. Denver is another story where we've started pivoting to LiVE.NOW. and we're seeing big cycle time reductions. But it's probably somewhere around there..

And then, for us on LiVE.NOW., it's a dual benefit. Number one, it's an easier product to build, so the cycle time is less; and it's a repeatable product. But also, with over nine specs per community in the ground, the cycle time becomes a little bit less.

The metrics that we're monitoring, when 44% of your volume is coming from homes that are already in some stage of construction, the ability to turn that becomes much quicker..

Okay. That sounds great. Thanks for taking my question..

Our next question will be from Carl Reichardt with BTIG. Please go ahead..

Hey. Thanks. Sorry about that. I wanted to ask about the next year or three, Steve. When you're looking at the new land you're buying now and looking at LiVE.NOW.

entry-level, which regions do you expect to see the most significant mix change in towards that product and away from your more traditional product? We know obviously Arizona is already pretty high, so I'm a bit curious about the others..

Well, we've got a lot of LiVE.NOW., a lot of entry-level in Phoenix, but we can still do quite a bit more. We're looking for some more in Tucson. Certainly, Colorado could do a lot more. In Texas, we've got quite a bit in Austin, but we could do more in Houston. We could do more in Dallas. Really, everywhere, we could do a lot more.

We don't have very much in California. We need to get more there. So there's a lot of opportunities for us in a lot of markets. But I'd say it's pretty broad-based across the entire country..

And when looking at the dirt supply that you have today, let's say, over the course of the next year, where do you expect that mix shift to be most significant as a percentage of total deliveries?.

Think about that.

Phillippe, do you have an answer for that?.

Yeah. I think you're going to see – we're buying a lot of entry-level dirt in the South region and Florida region. So you're going to see a big shift there, but Texas, too. Just you look at the land – when we bought the land over the last couple of quarters and what percent is LiVE.NOW. as Steve just said.

We see opportunities everywhere to grow that part of our business. And we really think that's the strategy. That's what we need to do right now and that's where all the demand is..

Yeah. Okay. And last one. Let's think about the long-term future. Where would you guys say you're comfortable peak-wise as a percentage of your business sell-in LiVE.NOW.

entry-level? Is it 70% of the total business, 50%, 100%? Where would you put it sort of big picture long term as you look at it today?.

Well, it's at least 50%. And when we get to 50%, we'll assess it and view how we're doing with it and re-evaluate them, but I'd say, it's at least 50% and potentially could be more..

Okay..

But we also – also, the other part of our strategy is the first move-up piece. And we think that's the second strongest segment in the market. All the second move-up buyers, they're very sensitive to interest rate prices going up. So we think there is a lot of strength in that first move-up buyer as well.

And so those are our two markets that we're going after and we think there's a lot of opportunity there..

Okay. I'm sorry.

Can I just ask one more? If you look at LIVE.NOW., what percentage do you think is going to that entry-level buyer – that first-time buyer versus say a move-down customer? Is there some high percentage of that product that's selling to that customer as well?.

There's probably 20 – as much as the third of those people that are buying those communities are move-down buyers, baby boomers, which is somewhat surprising, but it's nice to see..

Great. Thanks so much..

Thanks, Carl..

The next question comes from Alex Barron with Housing Research Center..

Thanks, guys and congrats on having the four sites to move in this direction of the entry-level. I was curious how you guys are thinking about the pace versus price particularly for that type of buyer.

Are you more focused on trying to maximize the price or maintain the pace by not raising the price too aggressively?.

Well, the entry-level buyers are certainly a lot more price-sensitive than a move-up buyer. So you have to be more careful certainly with your pricing. But overall, as a company, we're really focused on getting our margins to where they need to be. So we have to give up a little bit of pace in certain places to get the price.

We think that provides better long-term benefits by increasing our gross margin 1%, we can increase our bottom line less than that. (45:16). So we can grow the earnings of our business pretty substantively by focusing more on driving price versus pace. Of course, we want to get growth. We're still up, I think, 7% to 8% for the year right now.

And I expect it to get better or, if not, more for the full year, but at the same time, we need to push our margins. And that's what we're doing..

And, Alex, Phillippe mentioned earlier that the pace – our sales pace this year versus last year in entry-level is about the same. So even though we are able to still push pricing, we're not seeing a pullback on the entry-level buyer.

And a big part of that is by design where we underwrite these communities to be below the FHA limit, we give ourselves some breathing room to allow for some pricing increases. So despite price increases, we're still under the FHA limit, making it an extremely affordable offering..

Got it. Thank you. And my second question, I guess, is with regards to M&A. Obviously, some other builders are seeing some merit in being bigger, I guess, because it attracts labor, it attracts more land opportunities, so forth.

I'm curious on your thoughts and whether you feel there's any interest in maybe acquiring some other private guys or versus just continuing to grow organically through land acquisition..

Our eyes are always open. But as I've said on the last several quarters, we have a lot of opportunities in the markets that we're already in.

And if we can find some end market acquisition opportunities where we can tuck under some builders to grow our lot count and grow our market share in certain markets, we're certainly going to be – keep our eyes open to those. And we're also having our eyes open to some new market opportunities as well.

But it's not our primary focus, but we're certainly open to it and keeping our eyes on it every quarter. (47:33)..

All right. Best of luck, Steve. Yes. Thank you..

Thank you, Alex. And I believe that's our last question for today. So I think we're going to wrap up our call here. Appreciate everybody being on the call for our second quarter and support in Meritage. And we look forward to talking to you next quarter. Thank you very much. Have a great day..

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