When it comes to protecting the business from the bite of the pandemic, Meritage Homes CFO Hilla Sferruzza makes it clear that her primary focus remains on cash flow and preserving whatever she can of it to help the home builder weather what lies ahead.
“It’s a pretty long cycle, and there is a substantial cash outlay at the start of the life of a community versus at the tail end, which is really when it is cash flow positive,” reports Sferuzza, who estimates that the cash outlays for most of Meritage’s communities run two to three years before becoming cash flow positive.
“We have to buy the land, which is expensive, and we have to develop the land, which is expensive. We have to build the models and then we have to build the homes,” adds Sferruzza, whose top-of-mind cash flow priorities are not unlike those of other finance leaders whose businesses were pursuing steep growth trajectories.
Still, Sferruzza explains that “it’s actually not as stressful a scenario for us as it might appear to be. We become extremely cash accretive during a downturn because we stop spending money on new land, and everything on our balance sheet converts to cash.”
Guest: Hilla Sferruzza
Company: Meritage Homes (NYSE MTH)
Headquarters: Scottsdale, AZ
CFOTL: What will distinguish your CFO tenure at Meritage?
Sferruzza: … I love the forecasting and budgeting component of the role. I think it allows us to steer the ship. This is a long (cycle) business. If you think about when you buy land and then you develop it and then you build a model and then you build all the homes and then you start selling, it’s a very long trajectory.
So, having a confident outlook on cash, I think is critical. If you are out of cash, obviously it’s problematic. You’re going to (opt) out of communities and if you have too much cash, it’s a wasted opportunity. You could have done more. So I think we’ve really, as a team here and I don’t want to say I, because I have an amazing team. Some of them have been with me the entire 14 years. I have one of the longest tenures in my group, which I’m extremely proud of.
It’s probably one of my favorite accomplishments of my career here, it’s my tenure with my team. We really have focused on tightening and improving our understanding of the cashflow process in our business and I really feel that’s allowed us to get comfortable with the pre-building of the inventory, right?
It’s very expensive to build homes, so if you think back to what we just talked about on having the inventory, that’s ready for our customer to walk into, that’s a very expensive proposition, right? To have a whole bunch of homes ready in 250 plus communities across the country.
So you can only do that if you’re confident that your team has correctly helped you in assessing the cash flows. And I think we’ve put up heightened focus on that process.
And then the other component is again, just the integration of ops into accounting and finance. And for me, I always tell my team, because the dollars that we deal with in home building are so large. And I always have to remind them that’s dollars, that’s just not numbers, right? Those billions are dollars. So let’s make sure that we understand all the components of what goes into it.
And I make my teams go out on site visits, where we touch the dirt and we walk through a home construction process with our builders. You have to really live it and breathe it to understand how to model it correctly. It’s not just numbers on a piece of paper.
So I would say that’s maybe the difference of where we used to be and where we are today. I could probably do a whole other segment on my IT team, which is probably my pride and joy right now. But if you want to get into that, we can talk about IT as well.