With the reporting of its fourth quarter loss of $11.1 million, M/I Homes came up short on its goal of returning to profitability in 2010, losing $26.3 million for the year. CEO Bob Schottenstein said while the federal home buyer tax credit gave the industry a good "head fake" in the spring, demand continued to be depressed through the fourth quarter.
"We, along with most other builders, largely bumped along the bottom for the balance of the year," he said.
While disappointed in the shortfall, Schottenstein told Wall Street analysts during a conference call Thursday that between some signs of improvement in the economic market and a what they felt was a solid execution strategy, he was "cautiously optimistic" about the company's ability to meet that goal in 2011.
:Driving some of that measured confidence is the company's ability to sell, giving hope that the company can rebuild its backlog, which was down 15% year over year at 532 homes at the end of the year. In the fourth quarter, M/I counted a 3% increase in new orders, becoming the second builder in the public builder set to log an increase.
Although some of the company's bread-and-butter Ohio markets continued to struggle during the quarter, there were some notable improvements in other markets. Executives said the company was taking share in Chicago, where not only had sales doubled but the margins were the highest in the company. The mid-Atlantic region performed well with an 8% increase in sales. The Washington, D.C., metro market led the region, with a 50% uptick in sales and margins that came in second only to those in Chicago. With demand rather solid in the region, management increased community count there by 30%, opening 17 new communities while closing out eight.
Most noteworthy was the 66% jump in sales out of the company's Florida region. Company executives largely downplayed the sales spike, attributing much of the surge to an extremely easy comparison period a year ago when sales were extremely slow and pointing to the 14% increase in orders for the year as a more accurate gauge of improvement in the region. However, as one analyst noted on the call, even with an easier comp period, the company still sold more homes in the quarter out of fewer communities.
:Although the company's new Houston operations have not yet contributed to sales or closings, executives said the company has lots in four communities, which are only recently opened but have some homes currently under construction.
Despite the sales increases in the quarter, gross margins shrunk both sequentially and year over year to 16.1%. Executives pointed to a number of factors contributing to the quarterly declines, including the fact that third quarter margins were higher than management had anticipated. Moreover, executives said some increases in materials costs were eating away at margins as well.
However, the big ding to margins mostly resulted from the company's push to sell through some of its legacy communities, which in a number of cases are in less desirable areas and/or on higher priced dirt.
"We were pleased to see our margins grow through the year, but we weren't pleased to see them decrease in the fourth quarter," said CFO Phil Creek. "But, on the other hand, we were glad to see some of our legacy communities close."
"As new communities become a greater percentage of our mix, we would expect that to be reflected in the margins," added Schottenstein.
At the end of the fourth quarter, roughly 45% of the company sales were coming out of its new communities, meaning those opened on land acquired since 2009. The company counted 110 communities on its books, up from 101 in 4Q2009. The plan for 2011 is to grow net community count by around 10 to 12 communities, executives said.
Further eroding profitability on a per house basis was the company's higher concentration of specs in its sales mix. Creek estimated that between 40% to 50% of company sales were specs, which typically carry a lower margin than to-be-built homes. Management would usually like to have about a third of company sales coming from specs; however, Creek said Realtors often are very focused on finished specs, so the company needed a larger inventory of specs to be able to effectively sell through that channel.
The other headwind to being profitable in the year ahead was the company's overhead. Although SG&A was down roughly $4 million in the fourth quarter from the same period in 2009, the company struggled to keep its G&A in line with fewer revenues. Executives said the company had some layoffs during the fourth quarter and also in 1Q2011. However, the savings would be partially offset by the need to higher people in Chicago and Houston. When asked if additional layoffs were planned, Creek said, "Based on how our spring selling season is, there could be changes then."
Although the company failed to finish 2010 in the black, executives were pleased with much of the progress during the year. As Creek pointed out, "We reduced our operating loss by half while closing about the same amount of homes."