霍頓房屋 (DHI) 2002 Q3 法說會逐字稿

Good morning. My name is Holly and I will be your conference facilitator today. At this time I would like to welcome everyone to the D.R. Horton third quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star and the number one on your telephone key pad. If you could like to withdraw your question, press the pound key. Thank you. Mr. Comlets [phonetic], you may begin your conference.

Thank you, and welcome to the third quarter D.R. Horton conference call. With me this morning I have Sam Fuller, our CFO, Stacey Dwyer, our EVP of investor relations, and Bill Weeks, senior vice-president and controller. Before we get started, Stacey.

I would like to remind you that some statements we make on this conference call may be forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements are based on reasonable assumptions. There is no assurance actual outcomes will not be materially different. All forward looking statements are based upon information available to D.R. Horton on the date of this conference call. D.R. Horton does not undertake any obligation to publicly update or revise any forward looking statements. Factors that may cause the actual results to be materially different from the future results may be found in our annual report on Form 10(k) and our most recent quarterly report on Form 10(q) which is filed with the Securities and Exchange Commission.

Thank you, Stacey. D.R. Horton just completed its 99th consecutive quarter of growth and increase profitability. It was another very strong quarter for us. We are proud to announce the following highlights. Net income increase 54 percent to $105.9 million. The first time in company history our quarterly earnings have exceeded $100,000,000. Consolidated revenue increased 61 percent to $1.8 million. Homes delivered increased 44 percent to 7,877 homes. Sales backlog. Our future revenue increased 30 percent to $2.9 billion. Stockholders equity exceeded $2.1 billion. Home building debt to capitalization, net of cash improved to 55.9 percent from 57.9 percent. Financial services pretax income increased 99 percent to $14.2 million. All these accomplishments contributed to our earnings per share of 67 cents, a 12 percent increase. It's interesting in fiscal year 2000 at the end of our third quarter our quarterly sales exceeded $1 billion for the first time in company history. Now two years later, our third quarter sales have doubled to $2 billion or 9,065 homes, a 68 percent increase from one.$2 billion for 6,014 homes in the year ago quarter. This is the third consecutive quarter that our percentage increase in sales has substantially exceeded the increase seen by our top five peer group. Furthermore, our same store sales dollars increased 22 percent in the third quarter reflecting exceptional growth in our quarter core division. Net sales for the nine months of fiscal 2002 increased 41 percent to four.$9 billion or 22,000 826 homes. Stacey?

Our strong sales contributed to our all time record backlog, 13,586 homes with the sales value totaling $2.9 billion. A 30 percent increase over last year. Our backlog of 13,586 homes is the largest domestic backlog in the industry. With our record backlog we are confident that our fourth quarter in the ending September 30th will be our 100th consecutive quarter increase growth and profitability. We are focused on delivering this backlog while continuing our strong sales performance to ensure another record year in fiscal 2003. We had exceptional sales in our top five home building states. The percentages of our assets in each of these states are as follows. California was 27 percent, Texas was 18 percent, Colorado and Arizona was 11 percent each, and Florida was 4 percent. Now our sales in those states on a same store and total sales increase basis are in Arizona 78 percent on a same store basis, 135 percent including acquisitions. In California 28 percent and 145 percent. In Colorado 25 percent and 147 percent. In Florida 8 percent and 30 percent, and in Texas 5 percent and 19 percent.

From that I think that you can see that our core divisions have significant sales increases based upon these substantial same store sales increases. Sam?

Thank you, Don. Our third quarter home building revenues increased 61 percent to 1.8 billion from 1.1 billion in the year ago quarter. Home sales revenues also increased 61 percent with 7,877 homes closed. Our third quarter deliveries represented an unusually high percentage of our backlog at the beginning of the quarter, 64 percent of the homes and 66 percent of the dollar amount. As a result, our third quarter home sales revenues and earnings were higher than we originally expected. Our average sales price for homes closed increased 11 percent to 222 ,$200 largely due to the 1,000 91 homes closed by the former Schuller Division at an average price of $319,800. Excluding the former Schuller divisions, our average sales price for the quarter was up 4 percent to $206,500.

Before cost of sales adjustments associated with the Schuller acquisition, our gross margin on home sales revenues in the third quarter of fiscal 2002 was 19.9 percent, very consistent with the level for the year ago quarter. The reported gross margin of 19.1 percent for the quarter includes 14 million in charges related to the Schuller merger. We expect to report similar charges in the fourth quarter of approximately $13 million, ring bringing the total recognized for fiscal 2002 to $61 million. After September 30th, 2002, we do not anticipate that any material similar charges will impact our gross margins.

Home building SG and A expense for the quarter was nine.9 percent of home building revenues which is consistent with the prior year. For the nine months ended June 30th, our home building SG and A was nine.9 percent compared to ten.3 percent a year ago. The 200 two-year to date percentage continues to benefit from Schuller's heavy home delivery volume in the last five Weeks of our March quarter. Our company goal is to continue to maintain our annual SG and A and the percentage of home building revenues at 10 percent or less.

Other expense for the current quarter includes a $5.7 million charge related to the change in the fair market value of our interest rate swaps during the quarter. For the nine months ended June 30th, the net charge related to the swaps is $800,000. Bill?

Our financial services division had another incredible quarter. Financial services revenue for the quarter-inch creased 52 percent to $28.9 million from 19 million in the prior year and for the nine months ended June 30 increased 63 percent to $77.7 million. The revenue increase is driven by an increase in loan volume from the home builders volume and an increase in our capture rate and divisions where we have mortgage offices to 70 percent from 61 percent in fiscal year 2001. Financial services pretax income for the third quarter grew 99 percent to $14.2 million from 7.1 million and for the nine months into June 30th increased 123 percent to $36.5 million compared to 16.3 million in the year ago period.

We expect to see continued growth in financial services as we increase our capture rate and expand our market presence. We have added mortgage offices in Portland and Sacramento, and we plan to open C.H. Mortgage branches in all of our California locations. This will replace the joint venture operation that we currently have in Southern California and allow us to capture 100 percent of the revenues and profits generated by these branches. Quarter consolidated net income increased 54 percent to $105.9 million from 68.8 million last year. Once again, this is the first time we have exceeded $100 million in net income in a single quarter. For the nine months ended June 30th, 2002, net income increased 58 percent to $268.3 million from 170.2 million last year.. The diluted earnings per share for the quarter of 67 cents again exceeded the consensus estimate. The 67 per share represents a 12 percent increase from 60 cents last year. For the nine months ended June 30th, diluted earnings they are share increased 31 percent to a dollar 94 per share from a dollar 48 a year ago. Bill?

Stacey?

In reference to our press release, the company expects earnings for the fiscal years to be in the range of $2.77 to $2.82 approximately 142 million diluted shares. This will be a 24 to 25 percent increase over our fiscal year 2001 earnings per share of $2.23. This earnings estimate is based on fiscal year 2002 closings of approximately 29,000 homes. We expect our gross margins after the impact of charges related to Schuller of approximately $61 million to be in the range of 19 to 19.11. Our SG and A will be around 9.8 percent per year, once again leading our company goal of 10 percent or less. Our guidance for the fourth quarter is in the range of 82 cents to 87 cents per share on approximately 159 million diluted shares. In our guidance at the end of our second fiscal quarter we had expected to earn 40 percent of the balance of our years' earnings per share in the third quarter and 60 percent in the fourth. Since we delivered an unusually high percentage of our backlog in the first quarter that breakdown will now be closer to 44 percent in the third quarter with 56 percent in the fourth quarter and a slight increase to our estimate for the full year. For the first quarter of fiscal year 2003 we are issuing preliminary guidance in the range of 64 to 66 cents. Our goal for the entire fiscal year 2003 is to earn $8 billion in revenue and to grow our earnings per share 15 percent. Our historical earnings pattern has been to earn approximately 40 to 45 percent of our annual earnings per share in the first half of the year with the first quarter only slightly stronger than the second quarter. Don?

Thank you, Stacey. There are three groups of drivers impacting our industry, and D.R. Horton specifically in a very positive manner. First group I referred to are sales drivers. First, the home is viewed today perhaps more than ever as a safe haven as an investment. Mortgage rates are still near a 30 year low. Housing affordability is near a 30 year high. New home inventory is near a 30 year low.

The second group is demographic drivers. There are 30 million new immigrants who have entered the United States in the last 30 years. We have 30 million baby boomers who are entering their peak home buying years. And the baby boomers have children [inaudible] 25 echo boomers who are entering their first time buyer years.

Third group consolidation drivers. Currently 80 percent of the U.S. housing industry is outside the top ten builders. This is contributing to the consolidation of less efficient builders in the industry by larger builders like D.R. Horton who have some of the following advantage. One, due to our reputation and access to capital, D.R. Horton is often able to secure the best land deals at the best price in each one of our markets. Our increasing national purchasing power. Our significantly lower cost of capital, as well as our access to capital. With these favorable drivers, our strong balance sheet and a record backlog which our backlog, by the way, is the largest domestic backlog in the industry and frankly 12 percent greater than the closest competitor, D.R. Horton is well positioned for another record year in fiscal year 2002 our silver anniversary year. But more importantly, our goal is to continue our strong sales pace as we have experienced in the last three quarters, which is positioning us well for another record year in fiscal year '03. Our strategy on a going forward basis is clear. We're going to continue to grow our existing markets with the focus of being the number one or number two builder in each of our markets until ultimately achieved a 10 percent market share in each of our markets, while continuing our tradition of bottom line growth out pacing our top line growth. We are going to continue to grow financial services as bill indicated increasing or capture rate and expanding into additional markets.

We will continue to evaluate acquisition opportunities. D.R. Horton. Is the leading consolidator in the home building industry with 18 acquisitions since 1994. We have proven that we can integrate acquisitions seamlessly and we can grow acquisitions and become more profitable contributors to our customers. We will continue to access capital markets as necessary.

We will continue to improve our home building debt to capitalization rate which we have done, net of cash which was 55.9 percent of June 30, 2002 compared to 57.9 percent at June 30th, 2001. We will continue to partner with our suppliers, vendors and subcontractors to mutually capitalize on the economies of scale as we grow together.

We will capitalize on having properly positioned D.R. Horton to achieve 25 consecutive years of growth and profitability in fiscal year 2002 and continue to work toward reaching 100 consecutive quarters in our fourth quarter 2002 when we will [inaudible] Wal-Mart's record of 99 quarters. We will continue to out earn our cost of capital. Since we went public in 1992, we have had a positive EVA each and every year.

Last year focus on our internal goals. As Stacey mentioned to you earlier, we anticipate earning revenues of $8 billion in fiscal year 2003 without any additional acquisition. And to be the first builder to 50,000 units with revenues of $10 billion by fiscal year 2004. We can achieve the revenue growth in fiscal year '04 without any acquisitions except for the second half of the $2 billion increase which we'll make an acquisition typically somewhere around the size of Schuller or smaller. These goals westbound can be accomplished by continuing our second successful acquisition strategy and continue to internally grow our division 15 to 20 percent a year. Our clear goal is to continue to distance ourselves from our competitors as we have done. This concludes our conference call. We will entertain questions.

At this time I would like to remind everyone in order to ask a question, please press star 1 on your telephone key pad. We'll pause for just a moment to compile the Q and A roster.

[Pause.]

Our first questions comes from the line of Joseph Rocca [phonetic], Merrill Lynch.

Good morning, everyone.

Good morning.

A little clear up on some of the Schuller comments you made. I think it was Sam, you said, $13 million in charges to gross margin in the fourth quarter. Are those administrative related or does that also include Mark in the backlog of market?

That's backlog and inventory to market, a continuation of that process, Joe. That represents 100 percent of those charges. There are no administrative charges in those amounts.

Okay. And then I can I think Sam, you said there was a number of Schuller homes that averaged $319,000. What was that number? I just missed it.

1,091 in the third quarter.

Okay. And then Bill, on the financial services side, do you know what your fixed to adjustable underwriting mix was roughly?

Our adjustible is a percentage of total was 15 percent for the quarter. For the year to date period it's 14 percent.

Okay, great. And lastly, Don, you mentioned you could anticipate giving another acquisition going forward. Do you think that's more geography or product based and do you have any thoughts about what would fit nicely?

Actually, Joe, what we focused on recently, are acquisitions which would supplement our existing operations. As you are aware, very well geographically diversified and we have some of the best operators in the business. Frankly what we're looking to do as with the Schuller acquisition to supplement our already strong position in the west and that's what we anticipate look at in other acquisition.

Okay. Great. Thank you.

Your next question comes from the line of Larry horn Parker hunter.

Yes. One question for you on terms. To first time buyers. There has been some discussion around I think this rather ridiculous subject of a real estate bubble that there were - there are a lot of loans being made at very low down payments and I'm just wondering if you would talk about sort of the range of terms as well as the average terms you're giving to first time buyers.

Our average loan to value is 87 percent, and I know that there are some programs out there that are less than your traditional 5 percent. Larry, I have to call our mortgage company to get an exact answer and give you a call back on that.

Okay. I would appreciate that.

One other interesting thing that was in a research paper by one of your competitors that I happened to read recently, and that is that the average loan to value across the country was 76 percent down, from a high of 81 percent in '94. And mortgage loan to value was over 90 percent of running about 20 to 22 percent of the total compared to 94 when it was 29 percent. So based on this report and other things that we're seeing in the marketplace, I think that we're frankly even more conservative than we were 7, 8, 9 years ago.

I agree. I'm not finding any material evidence of it either. It's just boiling a standard question for me to ask.

We'll get the answer to you.

Thank thanks a lot.

Sure.

Your next question comes from the line of Steven Kim, Salomon Smith Barney.

Thanks very much. Good quarter, gentlemen.

Thank you.

And Stacey, of course. Quick question I had for you related first to accounting. Did I hear you correctly indicate that the first accounting adjust many was roughly 14 mill in the third quarter and to the third to be 13 million in the tug third quarter?

That's correct.

Given that, my understanding of the way those things usually work there is a little bit more of a trickle down, so that a little bit more tapered, and yet you're looking for a pretty comparable out in the fourth quarter. Can you talk about why that is? Is it just timing of delivery of certain kinds of homes? Can you give us an idea of what's going on there?

The one thing I would say before I give that question to Bill, Steve, I we did trickle down quite a bit from the last quarter when we knocked it for about 36 mill. Bow I do want to -

Yeah. Steve, it really is based on timing and delivery primarily, and typically our September quarter and as well for the former Schuller Division, the September quarter is a stronger delivery quarter than the June quarter. And so the sheer dollar amount that is coming through on these closings will be - the number of closings related to that is stronger in the September quarter so you don't see as strong of a drop from the June quarter to the September quarter.

But we do anticipate being by it completely by September 30.

Great. Okay. So on the basic point impact it would be less. Second question is in this most recent quarter you had a 20 percent increase in your orders, and your guidance for the '03 year, which is pretty much almost upon us now is to be up about 15 percent which I understand is kind of a longer term goal for you guys. Given the fact your order is up about 20 percent, I assume the demand has remained fairly strong so far this quarter, is there any reason to believe that you can't turn 20 percent unit volume growth into something better than 15 percent bottom line growth?

Possible. I guess one of the things is that, you know, we're conservative, Steve.

Right.

And we've always grown the bottom line at a faster pace than the top line. I guess if you want to back into those numbers, you can. We're just focused really on being conservative as we always have been. You're right, our sales have been the strongest in the industry, again for the third consecutive quarter. You back in the number, I guess you can imply it would be, yes.

Okay, great. And lastly, could you just provide us some color on what your order trends did by region if you were to perform for Schuller, have Schuller in both periods? Just sort of the salient regions, the west.

The only region that Schuller would have impacted would have been the west region.

Okay. So how much was that on a pro forma basis?

We have it on a total number. We haven't put it down to region. Hold on a second. We can get that for you.

While you're look for that, the southwest growth 43 percent was pretty much organic?

In the southwest we would have - that would be included in Phoenix.

Right, okay, got it.

We'll have to get back to you on the same store for the west.

Hello?

Yes.

Okay, sorry.

Were you looking for the west number or did you already give that?

No, we're looking for it.

Okay. I'll pass it on to the next person. When you get the information -

It's going to be about 32 percent, Steve. Okay. Great. I appreciate that. Thanks very much.

Next question comes from the line of John Stanley, UBS Warburg.

Good morning, ladies and gentlemen. Great job.

Good morning, John.

Couple questions, first Don or anybody, can you update us on what's your anticipating in terms of merge early costs savings from Schuller, whether you tweeked that number and kind where we are in the proand he is when you would expect to pretty much realize what you're targeting?

As we mentioned, on February 21st is that it would be in the immediate 12 months following the acquisition, John, and it is already accrete I have. Although very, very small. And on a going forward basis in the second year that we definitely will be accreted. Furthermore, whether he mentioned we're going to have 30 to $40 million worth of cost stays in the zero to 24 months post of closing of the deal and we're still very confident we'll be able to achieve those 30 to $40 million in fact are in the process of doing so now. One of those areas clearly is on national purchasing and as you know Schuller two years ago was a 2,500 unit builder and a year ago 2,500 build early, we're now merging them into our national accounts. Secondly we're in the process of subleasing our El Segundo office which was their corporate office. And we've we've completely finished the integration of the organization. We've merged their Portland office and our Portland office. We've merged their Phoenix office into our Phoenix office. They have consolidated three of their San Francisco area divisions into two. We consolidated two of our San Diego divisions into one, so now we have two San Diego divisions. And we're got the staffing in place. We've regionalized the country from an operating perspective. We now have all the California markets under a California region headed by calm noon who has been with our company since 1993 [Carl], has an excellent number two person in the region, nap. So the two of them are running the California region.

Given what you've dug up so far, would you feel comfortable that number could be close tore 40 than 30, Don?

To answer your question directly, yes.

Another question is, what's the total lot up to now?

140,000 lots.

And what percent of that is owned versus optioned?

We have about 57 percent that's owned and about 42 percent that is controlled. You have to realize that relative to growing our company as we have done at a minimum of 15 percent a year, take a look at the years lot supply, that's basically running three.5 lot supply for us. Not range of three to four years.

Do you have the earlier figure, Don?

We'll have it shortly here.

While you're hunting that one down, I have a question for you. Do you have the interest of cost in sales?

I do. For the quarter is 37,811,000 year to date. Do you mean year to date?

No. I can add those up, thank you. Based on the numbers you gave for Schuller's orders for the quarter and looking back at my old model, looks like their orders were actually down about 3 percent in the quarter which surprised me a little considering how strong California is and how important that market is for them. But could you shed some light on that are there some community town issues that kept them from showing a gain?

Absolutely. The division which is headed by John Stannick [phonetic] in the L.A. area which includes Ventura county and that area, basically is sold out of most of his subdivision and community count is significantly reduced from what it was last year.

And when does he hope to get that turned around?

Toward the end of fiscal year '03.

Okay. It will continue to have limited growth or -

Sales in his division, but overall in California our California region, if you add up Schuller and ourselves, we anticipate significant growth in that market next year we're well positioned on land and lots in that area. We have a record year in California.

Last question is do you know any change in kind of the price or cost environment from when we did the last conference call?

Well, on a national purchasing basis I can tell you that our goal - what we achieved last year on national purchasing was $38 million cost on our cost of goods purchased. Goals pretty sure this year was 35 million post Schuller was 55 million and we anticipate

In terms of your ability to push your home prices up?

John, a lot of markets right now, even in markets outside of California, having camp outs, I was surprised in one of our Virginia markets the other day I got visiting with the division president and we have camp outs in that market. It's a function really as you know better than I, supply and demand. And the issues with delivering lots is only becoming more and more difficult, and that's one of the things that's driving our pricing power is a function of this limited subdivision from the time period that you can bring them - it takes to bring them on and a lot of markets once you finally do bring a subdivision on there is such a pin up supply in that market over a two to three time period you could if you wanted to in a number of instances sell out the entire community in the first 60 days but we choose not to do that. raise our prices if we sell so many units.

Perfect. Thanks.

We have the number for you. A year ago June 2 001 our total lots controlled was 89,000, and we were at 55 percent owned, 45 percent option at that point.

Great. I'll look forward to the hundredth anniversary next quarter.

Thank you very much.

Your next question comes from the line of David Jarrett, Credit Lamiase [phonetic].

And the question, if we were to focus on next fiscal year, I assume we can eliminate the 61 million of purchase to time adjustments and add back perhaps another 40 million of cost savings from Schuller. Wouldn't that bring you up about a $100 million without doing too much?

The 61 million would be definitely an adjustment to next year. The 40 million is something that we looked at on a historical basis if we just combine our SG and A with Schuller's SG and A. So our company has always continued to keep our SG and A over 10 percent which was over what Schuller had run.

Okay. Schuller's gross margins have been what, 22 percent, yours have been close to 20, so wouldn't that be a blended gross margin somewhere between that this coming fiscal year?

Yes, but don't forget Schuller was one-third the size of our company, David.

Right, I know that.

So yes, I think that we'll have margin - we've had margin enhancements so far this year without purchase accounting and we will have it on a going forward basis. You guys come back into these models, but we're trying to be conservative in this stage of the game for fiscal year '03.

Okay.

Don't forget the 30 to $40 million as I told John, it's closer to 40 when he asked the question in terms of cost stays on Schuller is to be realized in zero to 24 months post 2-21-02, realize 100 percent of that $40 million of that in '03.

Does that include any structural changes to Schuller's debt?

We don't don't anticipate that, David. I mean [inaudible], but the premium is pretty high. As you know, part of the purchase accounting, we wrote Schuller's debt up to market. So our effective interest cost on that is pretty consistent with our own debt.

Okay. Thank you.

Sure. Thank you.

Your next question comes from the line of Mike Bender, Salomon Smith Barney.

Yes. My question has been answer. One question on your revolver. What was the balance at the end of the quarter?

255 million.

Okay. And how much unused availability does that give you with the current - borrowing basis was?

About 470.

Great. That's all I had. Thank you.

Thank you, Mike.

Your next question comes from Mike of Carl Weicher, Bank of America Securities.

Good morning, guys.

Good morning, Carl.

Penetration rate for for the mortgage company both in those markets where you have operations and total company?

Where we have operations total of 70 percent and the total company it was around 50 percent.

Fifty, okay.

That 70 was up from 61 percent, I believe.

Right. 50 is about right, and we did expect that. It will take us a little while to capture the Schuller business. We're counting up closing in the denominator haven't realized any benefit yet.

All right. And refresh my memory. On core down or is there anything you haven't written up on encore?

We still have 500 million on the books related to those investments. They're written down to estimated market value at this point.

Okay. All right. And Don, could you comment on insurance costs, last quarter and for the companies that reported earlier this quarter there has been quite a bit of complaining about rapidly increasing insurance costs. Can you talk a little about the about the bit about the trends you've seen and specifically what elements of insurance have been impacting you and if you can quantify in some fashion that issue I'd appreciate it.

Yep. We have a gentleman who is in charge of risk management for us Steffan Pearson who just finished renegotiating if you want zero call it that [to call it that, renewing our insurance contract is a pretty one sided transaction these days. Is he shared with me the exact numbers. I can't recall it off the top of my head but I'll have him call you. The bottom line is our insurance costs are up, and the bottom line, though, is that they're not going to impact our SG and A in a significant way.

Okay. And in terms of the markets, you guys talked about a 22 percent same store sales increase for Q2, is that trend effectively continuing in July?

I can tell you that I visited with four, one regional [inaudible] this morning early and then my Las Vegas division manager Tim Fraser Sunday evening, and I will tell you that conservatively our traffic count which, you know we don't count but they're telling me their traffic count is up significantly in the last two or three Weeks and our sales are up in the last two or three Weeks pretty nicely..

I was concerned with the stock market the way it is, and the impact it may have on home building, but it looks like it's all very, very positive for our company.

Okay. And then last question, Tom, what are the two or three weakest metro markets from your standpoint in terms of pricing power and let's say inventory overhang?

I would say to you we have really three weak markets out of 52 operating divisions. One of them is Greensboro. The other two are Richmond Williamsburg and Louisville, and those last two we've pretty much extracted ourselves. We have very few assets in either one. And Greensboro we're staying in. It's a good market for us and we're making profit there but we're just not getting the return that we wish.

Greensboro had has should some water issues that they have now resolved with the city and there is a lot of optimism for us in that market.

The reason we have so few weak markets, I think it's a function of two things. We have a strong healthy market, but more importantly Carl over the last two years we have closed down 7 or 8 divisions where we could not get our return and be really cleaned up anything that wasn't giving us a 15 percent ROI or better. That's reflected on our company return on inventory for the first time during the past three or four quarters been greater than 22 percent.

Terrific. Just trimming hedges, huh. Thanks a lot.

One this can about this business. If you can't get your returns in a decent time frame, redeploy the asset.

Amen. Thanks a lot guys. Appreciate it.

Thank you.

Your next question comes from the line of Greg Meshna [phonetic], Deutsche Banc.

Thank you. Good morning.

Good morning Greg.

Got a couple questions. Two follow-ups, slam really. Sam, there was a question related to encore. I'm not sure if you or Bill answered -t I guess the response was you've written it down to 5 million. Could you tell us the cumulative dollar amount of write downs that occurred year to date in fiscal 20020

The amounted to a lot in 20020 but [They haven't amounted to] but the original total was 26 million, most of the which was written down in fiscal 2001.

Okay. So there hasn't been much of an impact incrementally '02 to '01?

It's really been about $22 million year to date in the current year.

Okay. Don, question for you, and I guess this was touched on earlier, but obviously there is a great deal of concern that the last bastian of strength in the economy the consumer generally and housing specifically may succumb to weakness given the equity market melt down. Could you take us through perhaps some of the hot spots in locales where some large corporations have announced big write-offs, either related to accounting scandals or just the economy generally, and what you're seeing in some of those markets specifically where some of these companies have been headquartered?

The first one that comes to mind obviously is Enron in Houston, and we've seen no significant impact in our business in Houston. As a matter of fact, our Houston divisions, emerald, Beach Crane and D.R. Horton have all got year to date sales increases and significant year to date increases, so to the extent Enron had 35,000 employees in Houston, Greg, and population of Houston is over 5 million people. So to the extent that it has some negative effect, yes, but we're not seeing it in our business, in the housing business in Houston, Texas.

Worldcom?

I don't know where they're head quarters, someplace in Mississippi and fortunately we're not building in there I looked at some of the other, obviously in the Northern California markets where there are a lot of .com and technology layoffs. As you know, the San Francisco market in particular has become a lot stronger and we had Schuller under contract pretwo-21-02 and they were offering some pretty good incentives to sell homes. Although they were still making gross margins far north in the San Francisco bay area than what we were as a company, and that was really reflective of their terrific land buys and the length of the entitlement process in California so they had some great built in profits and now they're taking away those incentive. Sales are increasing in fact our north bay division of San Francisco is one of our ten divisions in sales in the last month. And then obviously if you go down to San Diego there have been some technology layoffs in that market, but again, it's a very, very constrained land market down there, and we have seen no impact on that business. As a matter of fact our California calf sales or San Diego sales or San Francisco sales are all very solid.

And those trends, the economy earlier about trends in the month of July although I thought that was select divisions. Could you make a generic comment about what you've seen quarter to date?

Well, we're three Weeks into the quarter. I can tell you that our sales are very solid out there. I am absolutely astounded at our people's performance. If you look at the last three quarters when we absolutely blown away the other top five home builders in terms of sales for the last three quarters, and I can tell you that the reports I'm getting from the field and the ones I talked to this week were Las Vegas and the California region which included all of our markets, 8 different markets in California have been very strong. I anticipate our sales would continue, certainly at the same pace as what they were in the third quarter.

And finally, there was a comment relative to anticipating 15 percent bottom line growth '03 to '02. Is that on an EPS basis or on a net income basis and if on an EPS basis, am I correct in assuming that the differential and share count will be about 159 or 160 million versus 144?

When you called us on that question last quarter, we have got the right answer for you.

Okay.

That's 16 percent, Greg, was specifically on the earnings per share.

And that, Stacey, is assumed to be the share count next year is assumed to be about 160?

Right, 159.

We're about 159 for this year. We a little bit in term of stock option ands employee stock purchases. So yes, a little bit higher than that, so 160.

Versus an average of about 144 for this fiscal year?

Correct.

Right.

And finally, Don, any consideration obviously your stocks come under pressure for reasons that appear to have little or nothing to do with the fund a.m.als. The balance sheet has improved a little bit. Any consideration to deploying capital to repurchase your equity at this point in time? Could you refresh my memory with regard to any existing authorization?

I think our authorization, we had an authorization of about $100 million, and I think we spent somewhere around $30 million so far. So we've got about $70 million still authorized. We don't have any plans on repurchasing stock at this time.

Could I ask why that's the case given the weakness that the stock has endured?

Well, one thing, Greg, we're mod I still had the negative outlook on us. I think that would be kicking sand in their face if we were to commence doing that at this moment. [moody]

I will tell you we have reduced our debt to cap year over year 55,9 and we're often record saying we will get the debt to cap down low 50s by fiscal year-end.

All right. Traffic. Thanks very much.

Thank you.

Your next question come from the line of Kent Green, Boston American Asset Management.

Yes. Great quarter, fellows. There's been a lot of pressure on corporations for you know, throwing any stock at any plans into the cross couple major corporations have announced that. One, do you see any need to do that, or are you obviously transparent enough and open enough with it that people could do their own calculations? And two, if, in fact, you did that, what would be the impact by expensing stock options as an expense against operations on a per share basis?

It's clearly our disclosures, make it transparent and we'll tell you that any impact we had followed pass 123, less than 1 percent of our net income.

I'd like to point out pass 123, it's just that statement as you know permits like 99 percent of the corporation in accordance with the old APB press release, opinion number 25. So in any event, in the effect of our earnings [inaudible] effect on net income is disclosed on each day, I believe last year that was per share on a presplit adjusted basis, penny and a half [inaudible] and it will continue to do that going forward if [inaudible] if it changes, we'll pretty obviously comply with them. It's pretty significant.

The next question pertains to the financial division. What other areas besides [inaudible] are you capturing, and then I mean what percentage title are you doing anything on insurance in there or joint ventures, you know, anything else you might want to disclose to buildup that particular endeavor?

Frankly we're focusing strictly on mortgage and title and Bill can give you the break^down between the two.

Right. The total mortgage revenue the percent of our overall revenue is 2 percent. Mortgage pretax income is about 8 percent of our total pretax income.

Within financial services itself right now we have mortgage and title operations, mortgage contributes about 85 percent of the pretax income, mortgage contributes about 15 percent of the pretax income [Inaudible] I'm sorry, title.

Have any insurance revenues strictly mortgage and title. And.

And frankly we are marginally active mortgage company. We have our mortgage company and our title company really as a service to our buyers to the extent that we have outside buyers using our mortgage company, it's very a very small part of our business. Our mortgage company is not staffed nor will it be to secure much outside business. It's really just a service to the homeowner.

Finally, you have two different types build to suit and/or built, ready built and then the customized your margins have much higher in the customized. Has that percentage been changing any and what percentage is that?

We're only about half of our revenues come from the customization and production homes on the D.R. Horton side and the other half comes from production, strictly production home. Our margins on the customization and production homes runs 150 or so basis points higher than the production side though really we turn that inventory slower so our total return on both businesses is about equal.

Anything about it and one of the reasons I think that we out sell our competitors over the last three quarters because we do permit the buyers to change the home to meet their needs as opposed to trying to sell them a home that we didn't commence and buy a home that they want. No one else that you know in the industry does what we do.

The final question is, you know, has there been any change in getting land approvals? Is that getting worse and does that give you a long-term benefit obviously, but is it getting worse out there for the small builders?

I ask people the rhetorical question of, How many more homes do you want in your neighborhood, how many children do you want going to your already crowded schools. The answer to those usually is no, and I don't see any dramatic change. Environment for the United States, other than it's going to get worse. Large builders like ourselves who have the capital and the people and the reputation with the land buyers are going to be able to aggregate land in locked positions and the small medium sized builders are not.

Thank you.

Yes, sir.

Your next question comes from the line of Jim Wilson, Jill so is merchant partners.

Thanks. Good morning. Most of my questions have been answered. I just have one more maybe analysis on the margin as you look forward which really relates to what kind of incentives you had to offer during the first few months after 9-11, and if you have any sense of how much that might have negatively impacted the margins you just reported in the June quarter? And if I assume all of that returned to normal in the last five to six months?

It has, and as I say, somewhere in our company, 24, 7, 365 we're offering incentives. And for that all comes due to our gross margins. As you will recall, in our fiscal year 2000 we had grosses of 18.4 percent and last year we had margins of 19.5 percent. First couple quarters of this year we were right at 20 percent with we had a continued increase. I think we probably had some diminution in our margins from 9-11, but not significant. Obviously our margins were consistent. Third quarter over second quarter. I would anticipate with national purchasing and us collecting large amount of our rebates and our incentives in national purchasing, in the fourth quarter our gross margins would work their way up.

And I just one other. I know you sort of answered both the California question as well as your three weakest markets but outside of California what would you consider your three strongest markets?

I can tell you our three strongest markets, [inaudible]. One market, Jim, and we're really impressed with is coastal Carolinas market where we took Myrtle Beach, Hilton Head and Charleton, South Carolina, and put under one division president and had three different city operators. That just consistently increased dramatically in sales. That division is going to be double digit pretax income for us in terms of millions of dollars on a going forward basis. That's impressive to me. The Dallas market still remains very strong. The Austin market is strong. New Jersey, Virginia and Chicago.

Okay. Great. Thanks.

That's more than three, but I tried to give everybody credit.

Okay. Thanks.

Your next question come comes from the line of Michael Kovaks [phonetic], Frontier Capital.

Hi, a couple quick questions, please.

Yes.

In terms of the Schuller acquisition, if I remember correctly, they did not have financial services prior to you buying them. Can you talk a little about your successes and what percentage of the homes were you able to provide financial services for with Schuller?

We'll say to you they did have financial services, a mortgage company in Denver with their large [inaudible] division. So we've merged that into our C.H. Mortgage company.

How about in California?

We had very minuscule, not much, and as you recall also, we had a joint venture relationship also with another mortgage company, post the Schuller acquisition. Clearly we've got the volume in California and as Bill mentioned to you earlier we're in the process, we've already moved the regional president out to California to set up that mortgage operation. But as it is in Chicago and Atlanta, do you want to really know why our mortgage company has had such dramatic increases, one is improving the capture rate for that existing operation. But also about a year and a half ago we also opened a new office in Chicago and a new office in Atlanta and it takes a while to build the back lock up here. The point is that a lot of the increase this year is because of those two new divisions being opened in Chicago and Atlanta respectively and they being big divisions for us and I would anticipate 12 to 18 months out in California that you'll see a strong capture rate out there and see very big increase in revenues and profits in the mortgage company because of that.

And the overall capture rate right now is 70 percent?

That's in the divisions where we have a mortgage company. On a company wide basis is about 50 percent. I think you're going to see the impact in that number probably into our fiscal second quarter next year because it will take a little while for us to build the pipeline with the mortgage company for the Schuller homes in backlog.

And what is the capture rate in California?

That's a question we're probably going to have to get back to you.

We'll call you back with that, Mark. We don't know.

Okay, thanks. And in terms of following up on the Sherwood [phonetic] purchase, how do you think about the trade-off of buying back your own stock with six multiple - using your conservative guidance versus doing an acquisition where certainly there are some execution risks? Implied pretax return on six multiple is close to 17 percent which -

With our current stock price, obviously we haven't announced any deals yet. That's something clearly that we're focusing on. I can tell you that on a historical basis, we've never given away our stock at a multiple. I hate to always say never in this business, but right now it doesn't - our stock price doesn't look fully priced to do an acquisition.

Right. But also I'm talking about not necessarily using your stock for an acquisition, but how do you look at the trade-off between doing acquisitions and repurchasing your stock?

Well, one of the things that I think we've done very successfully over the years is we've continued to grow our company, grown it consistently. We've also enhanced shareholder value. We did a chart here just the other day that showed what we've done with our stock price, bring the shareholders relative to the other top five builders since we've gone public and we've out paced them. So I noted a number of people would like for us to repurchase our stock, but at this stage we believe we have a very successful business model that's produced a great return for our shareholders. We're continuing that right now.

Okay. Then two more hopefully quick questions. Longer term two to three years out, how much opportunity do you believe that you have on the gross margin line?

Well, I've been very, very pleased with our improvement on our gross margin line [inaudible] from 18.four to 19.5 to 20s, now, 1.15. But the bottom line is we continue to aggregate market share and we continue to partner with our suppliers and our vendors. We should be able to continue to drive down our cost of goods purchased and they are no different than we. Whirl pools and may tags of the world. To the extent that they can do another 5,000 units with D.R. Horton, that all drops to the bottom line because it's above their break even. The result is they have a lot of incentive to work with us, so I think we can continue to save mob I money on our cost of goods purchased. If we continue to save money on our cost to capital and I believe we can continue to save money on our land and lot deal.

And if you look at the - if you try to break out the improvement in your gross margins, how much of it has come from land depreciation versus purchasing?

I think that varies from market to market. I think obviously, we are the beneficiary of good land prices because we work our deals hard and negotiate our deals hard and we're also creating value out there when we're titling the land. The second part of that gross margin improvement, though, and we've realized quite a bit of gross improvement just strictly on pricing power. With the constrained land and lot supply that's out there, the lengthening of the entitlement process, and the more constricted land and lot supply on a going forward basis for the building industry, not necessarily the larger builders like D.R. Horton. I think the prices are on a going forward basis. And prices continue to work their way up. I think on a very conservative basis, but it's pretty much reflective on our ability to raise our prices because of limited supplies.

Okay, great. And then one last 00:59:06 question. You said several times in the call that 00:59:08 your outlook for the 15 percent earnings per share 00:59:11 growth next year is conservative. Do you feel 00:59:16 that your fourth quarter guidance is conservative 00:59:18 given that your high end of the range matches the 00:59:22 current consensus? 00:59:24 00:59:24 >>UNKNOWN SPEAKER: When we look at our fourth 00:59:27 quarter, Mike, it wasn't historical then. We 00:59:30 think that our guidance is really in line. 00:59:32 00:59:32 >>ANALYST: Okay. Thank you. Good quarter. 00:59:35 00:59:35 >>UNKNOWN SPEAKER: Thank you very much. 00:59:35 00:59:35 >>OPERATOR: Our last question comes from the line 00:59:39 of Matthew Moyer, A.G. Edwards. 00:59:42 00:59:42 >>ANALYST: Good morning, everyone. Just some 00:59:45 quick questions here. 00:59:46 00:59:46 With regard to land deals, are you still seeing 00:59:49 from your division guys a good velocity of land 00:59:52 deals and in general what is pricing doing there? 00:59:55 00:59:55 >>UNKNOWN SPEAKER: First of all, I can say tell you 00:59:57 that there are plenty of land deals coming our way. Our people are doing a good job of replenishing their lot supplies out there. And more importantly they're tying up deals where they don't own them and they're titling them with very little money at risk or future land lot supply. I think the land and lot or the price of land and lots varies from market to market and some markets like in the southeast we're seeing flat pricing. In other markets like California we're seeing increasing pricing. So I would say on an historical basis in the last five years we've had some increase in land prices and we've always been able to absorb those. There's pressure out there, we'll be able to deliver our lots. Obviously we have our lot supply for the next two fiscal years now well under control and we're working on that third fiscal year out.

Okay. And in regards to your $8 billion revenue guidance that you offered, does that go with a closing number of homes delivered guidance? And if not, could you maybe just give us what you expect your average price delivered to do in '03?

Our average price for the last couple of quarters has been running north of where we were before Schuller. Last quarter it was about 222,000. More realistically going forward with the mix that we expect we're looking at between 218 and 220,000 for an average sale price.

In '03?

In '03.

Okay, great. Thank you very much and good quarter.

Thank you.

Thank you, Matt.

At this time there are no further questions. Please proceed with any closing remarks.

We'd just like to thank you all for joining us on our conference call and we appreciate your time. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.