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.