Meritage Homes' first quarter of 2010 marked a major milestone for the company. After three years of talking only about losses, company executives were finally able to return the word "profits" to their vocabularies. The company posted earnings of $3 million, or $0.08 per share.
"We're operating in the black for the first time since the downturn began," CEO Steve Hilton told analysts during an earnings call Thursday.
Throughout the call, Hilton seemed committed to preventing any of the company's progress from backsliding, even in the wake of the federal tax credit expiration at midnight Friday. His remarks to participating analysts focused mainly on growing volume while holding on to, if not improving on, the margin gains the company already had achieved.
At quarter's end, the company counted gross margins of 18.9%, compared with 7.5% a year ago. "We can add significant volume without significantly adding overhead, allowing us to grow our bottom line faster than our top line," Hilton said.
The CEO's strategy for boosting volume focuses more on growing its market share within its existing footprint and less on expanding operations geographically. Consequently, Hilton said divisions are concentrating on leveraging their higher-velocity communities even as community counts remain mostly flat through the remainder of 2010. However, Hilton said he expected the number of Meritage developments to increase in 2011.
Consequently, the push at the divisional level is to close out less profitable, older communities and open up new, higher-velocity, higher-margin communities. Although less than 20% of the company's closings came from new communities, management said it would like to see that figure grow to 35% to 40% of closings by the end of the year. In the first quarter alone, Meritage opened 16 new communities and has plans to open 20 more new communities in the next six months.
And although executives have been out aggressively tying up lots to restock community counts, Hilton said good deals on finished lots have gotten much harder to find lately. "There's a lot of action, but prices are going up," he explained.
This dearth of good deals in the good locations has the company considering the purchase of parcels that still need some development work. The move, while requiring more up-front capital and time, would yield higher returns down the line, Hilton said.
But even as senior management begins to look into the future, its operational focus is on moving fast--from acquiring lots to closing units--to get achieve velocity and volume. Hilton said divisions can typically get a new community open in three to four months, if there's no development work to be done. Moreover, reduced construction cycle times are contributing to a backlog conversion rate of 74%, which Hilton called a "historically high level." And with no immediate plans to back off on its spec level, which is running at about 600 units or four specs per community, Meritage's management seems to have a good recipe for efficient inventory turn.
Sarah Yaussi is executive editor of BIG BUILDER magazine.