Meritage Homes (MTH) Q2 FY26 earnings call: guidance and Q&A

What drove the better-than-expected Q2 gross margin, and should we expect further cost savings?

Hilla Sferruzza attributed the Q2 gross margin beat to improved volume leverage, a 6% year-over-year reduction in direct costs (labor and materials), and lower incentive costs during temporary interest rate dips. She noted that while current savings will flow through, further *incremental* cost savings are not being modeled due to potential lumber headwinds.

“So for us, it's a combination of a couple of things. The improved volume over Q1 obviously helped us leverage the fixed component in the gross margin composition. But we also had that 6% year-over-year improvement on direct costs, which is helpful. And then also, we mentioned this, but because such a high percentage of our homes sell and close in the same period, there was a nice dip in interest rates in the middle of the quarter, where we were able to sell homes at a lower incentive and still close them in the same quarter.”

asked by Trevor Allinson · answered by Hilla Sferruzza

What is the timeline for the shift to first-time move-up homes, and will the 60-day spec model change?

Phillippe Lord stated the shift will take time, impacting 2028 and beyond, as it requires sourcing new land. The operating strategy will remain aligned with the spec model (no design studios/personalization), but tweaks will be made for releasing homes earlier and realtor strategy, as move-up buyers may have homes to sell.

“It will take a little bit of time because we pivoted pretty meaningfully to entry level during the last 5 years. So as we pivot back to a more balanced 30% to 70%, it's really about sourcing some new land and bringing that land on the market. So more of a 2028 and beyond type of impact.”

asked by Trevor Allinson · answered by Phillippe Lord

Was the move-up shift always planned or opportunistic? How will the product change for 1MU customers?

Phillippe Lord clarified it was always an intentional goal, but the land market has now made 1MU land more underwritable. Hilla Sferruzza added it follows millennials' homebuyer journey. Phillippe emphasized it's not opportunistic, but a long-term strategy. Product changes will be "tweaks on the margin" like nicer cabinets/countertops, not personalization or longer build times for larger homes.

“Yes. It really was something we've already had always intended to be even when we rolled out our strategy 7 years ago and tweaked our strategy 4 years ago. We always believe that the second consumer segment for us was the first move-up.”

asked by Stephen Kim · answered by Phillippe Lord

Would Meritage consider M&A to accelerate its first-time move-up market share?

Phillippe Lord stated they would consider M&A through a strategic lens, looking for assets that provide move-up penetration or access to new, well-performing markets (e.g., Midwest), rather than just scale.

“So 100%, I think if we were going to do any M&A at the local or private level, we'd be looking for some type of move-up penetration or to get into markets that we're not in that are currently performing well.”

asked by Alan Ratner · answered by Phillippe Lord

When rates briefly dipped, did Meritage reduce incentives or did the cost of existing buydown programs just decrease? Can incentives be pulled back further?

Hilla Sferruzza explained that initially, the *cost* of offering the same buydown (e.g., 4.99%) decreased. If rates drop further, utilization shifts to different discount types, allowing for more significant incentive pullback. Phillippe Lord added that incentive wars are less prevalent now due to lower inventory and BTO builders shifting away from spec.

“So it's tranche. So the first step in rates pull back a bit, it's a lower cost offering. We're not -- if we're offering 4.99, if the rate drop, we don't start offering 3.99. It's just costing us less to offer the same incentive because the differential to the interest rate is still significant, not that it's an interesting incentive.”

asked by Alan Ratner · answered by Hilla Sferruzza

Why is Q3 gross margin guided around 18% after 18.6% in Q2?

Phillippe Lord and Hilla Sferruzza attributed it primarily to lower leverage from projected lower Q3 closings and increased incentive utilization due to rising rates since mid-June. They noted the "around 18%" guidance allows for volatility, similar to how Q2 exceeded its "around 18%" guidance due to favorable rates.

“Yes. I mean, it's primarily leverage and rates did increase through June. So you saw incentive utilization, rate buydown utilization increase in June, which can hit the 18% on the margin.”

asked by John Lovallo · answered by Phillippe Lord

Do starts need to pick up further to hit back-half delivery guidance, given flat backlog/specs? What's the community count cadence?

Hilla Sferruzza stated they don't give specific community count cadence but are comfortable with 5-10% YoY growth. She explained that starts already increased between Q1 and Q2 to build inventory for new communities, and with sub-110 day cycle times, they have what's needed. Phillippe Lord added that Q4's implied higher deliveries are driven by community count growth, not an expectation of market improvement or increased incentives.

“Our starts pace is -- our starts volume increased quite a bit between Q1 and Q2 as we're getting inventory ready for these communities. Again, that 4- to 6-month supply of available inventory is something that we're very focused on.”

asked by Rafe Jadrosich · answered by Hilla Sferruzza

Have you considered broadening the move-up strategy beyond first-time move-up to the broader move-up market?

Phillippe Lord said no, they intend to stay in the 1MU price point. He explained that 2MU or luxury buyers typically want choice and customization, which Meritage's operating model does not offer, focusing instead on value-focused 1MU consumers.

“No. I think, again, we've had this strategy in place for a long time. We feel like with our operating model and the way we want to play in the market and where the demographics are the strongest, we want to stay in that 1MU price point.”

asked by Jade Rahmani · answered by Phillippe Lord