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Operator
Good morning my name is Elizabeth and I will be your conference facilitator for today.
At this time I would like to welcome everyone to the D.R.
Horton Inc. fourth quarter and fiscal year-end 2002 earnings release conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers' remarks there will be a question and answer period.
If would you like to ask a question during this time, simply press star, then the number 1 on your telephone keypad.
If you would like to withdraw your question, press the pound key.
Thank you.
Mr. Tomnitz, you may begin your conference.
- Vice Chairman, Pres, CEO
Thank you.
This morning, I have Sam Fuller, our Chief Financial Officer, Stacey Dwyer, our Executive Vice President of Investor Relations and Bill Weeks [PH], our Senior Vice President and Controller.
Before we get started, Stacey?
- Executive Vice President of Investor Relations
Thank you, Don.
One matter of business.
Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.
Although D.R.
Horton believes any such statements are based on reasonable assumptions, there's no assurance that actual outcomes will not be materially different.
All forward-looking statements, particularly our earnings guidance, are based upon information available to D.R.
Horton on the date of this conference call.
D.R.
Horton is not undertaking obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Additional information about issues that could lead to material changes and performance is contained in D.R.
Horton's annual report on form 10-K and our most recent quarterly report on form 10-Q which are filed with the Securities and Exchange Commission.
- Vice Chairman, Pres, CEO
Thank you, Stacey and good morning.
D.R.
Horton just completed its 25th consecutive year of growth and increased profitability, clearly establishing D.R.
Horton as the leader in the home building industry.
On a trailing 12-month basis, D.R.
Horton closed more homes in America than any other home builder.
It was another record year for us, and we are proud to announce the following highlights.
Fiscal year-end, our consolidated revenue totaling $6.7 billion, a 51% increase over fiscal 2001.
Record net income of $404.7 million, a 57% increase over fiscal 2001.
Sales backlog, our future revenue, increased 46% to a year-end record of $2.8 billion.
Diluted EPS increased 28% to $2.87.
Stockholders equity increased 82% to $2.3 billion.
Home building debt to total capitalization, net of cash, improved to 51.3% from 54.0%.
Our fourth quarter highlights include outstanding home sales, which increased 93% to $2.0 billion on 8,665 homes sold.
Consolidated revenue increased 41% to $2.2 billion.
Net income increased 57%, to $136.4 million.
Homes closed increased 31% to 9,554 homes.
Diluted EPS increased 24% to 92 cents.
Net sales orders for the quarter increased 93% to $2.0 billion or 8,665 homes.
This is the fifth consecutive quarter that our percentage increase in new homes sold has substantially exceeded the increase seen by our top five peer group.
Furthermore and most importantly our same-store sales dollar increased 46% in the fourth quarter reflecting exceptional growth in our core divisions.
Net sales orders for the year increased 53% to $6.9 billion or 31,491 homes.
Our strong sales contributed to our record year-end backlog of 12,697 homes with a sales value totaling $2.8 billion, a 46% increase over last year.
We are focusing on delivering this backlog, while continuing our strong sales performance to ensure another record year in fiscal 2003.
Stacy?
- Executive Vice President of Investor Relations
Our asset [INAUDIBLE] corresponds with our top five home building states.
The percentage of our assets in these states are as follows: California with 26%, Texas with 18%, Colorado with 12%, Arizona with 11%, and Florida with 4%.
We are currently in the process of entering the Tampa market because of the exceptional returns our business model has produced in Florida.
And then our same-store sales and our total sales dollar increases in our top five home building states are: in Colorado 104% same-store sales dollar increase, 338% total, in California, 65% same-store increase, 246% total.
The other three states are all in the same-store basis now.
So, in Arizona we increased 56%, in Florida 46%, and in Texas 26%.
Our quarterly same-store results for some specific markets where we've heard other builders or analysts talk about weakness are in Austin it increased 76% in sales dollars in Phoenix 58%, in Atlanta 42%, and Las Vegas 79%, and in Minneapolis 81%.
Obviously, we're not seeing weakness in these markets.
And I will turn to you Sam to talk about revenue.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Thank you, Stacey.
Our fourth quarter home building revenues increased 41% to $2.1 billion from 1.5 billion in the year-ago quarter.
Home sales revenues increased 42% with homes closed increasing 31% to 9,554 homes and an 8% increase in average closing price to $221,800.
The increase in sales price is largely due to the 1,444 homes closed by the Schuler divisions at an average sales price of 329,200.
On the same-store basis, our average sales price for the quarter was up 6%, to 209,800.
For the full fiscal year '02, home building revenues increased 51%, to 6.6 billion, from 4.4 billion a year ago.
This reflects a 39% increase in homes closed and a 17% increase in our average sales price.
Again, the increase in average sales price is primarily due to the 5,283 homes the Schuler divisions closed with an average sales price of 285,300.
Our operating gross margin on home sales revenues in the fourth quarter of fiscal 2002 was 20%.
The reported gross margin of 19.4% includes the final purchase accounting adjustment of $13 million in charges related to the Schuler acquisition.
Our operating gross margin on home sales revenue for the fiscal year improved to 20% from 19.6% in fiscal 2001.
The reported gross margin of 19.1% includes 61 million of purchase accounting charges related to Schuler.
There will be no further material impact on our margins from purchase accounting related to the Schuler merger.
We plan to continue to increase our gross margins through our efforts to control our costs, as we partner with our suppliers and subcontractors on a national, regional and local level.
This year we saved over $2,000 per home through our national purchasing program, compared to our savings of $1,700 per home in fiscal '01.
Home building SG&A expense for the quarter was 9.5%, compared to 9% last year.
When we announced the merger with Schuler, we had expected higher SG&A from the Schuler divisions.
While the timing of the merger in February actually led to a lower SG&A percent from those divisions for the March quarter, the increase this quarter is more in line with our original expectations.
As we continue to focus on reducing costs and Hortonizing the new divisions, we expect our overhead to remain at an historical 10% or better level.
For the year, we improved our SG&A expense to 9.8% of home building revenues, compared to 9.9% for fiscal 2001.
We are proud to be the low-cost operator in the industry, and we will continue to focus on controlling our costs.
Other expense for the current quarter of 13 million and for the fiscal year of 17 million, is primarily related to change in the fair market value of our interest rate swaps which are clearly not part of our core business operations.
Bill?
- Senior Vice President and Controller
Thank you, Sam.
Our financial services region had another incredible quarter.
Financial services revenue for the quarter increased 47% to $35.9 million from 24.4 million in the year ago quarter, and for the year-ended September 30th, financial services revenue increased 58% to $113.6 million.
The revenue increase is driven by an increase in loan volume from the home builders volume and an increase in our capture rate in divisions where we have mortgage offices, to 72% from 64% in fiscal year 2001.
This takes our company-wide capture rate to 55%, up from 50% in fiscal year 2001.
Financial services pretax income for the fourth quarter grew 88% to $19.9 million from 10.6 million in the year-ago quarter and for the year ended September 30, financial services pretax income increased 109% to $56.9 million compared to 27 million in the prior year.
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 are in the process of opening C.H. mortgage branches in Hawaii and in all of our other California locations.
This will replace the joint venture operation that we had in Southern California, and allow us to capture 100% of the revenues and profits generated by those California mortgage offices.
With the elimination of the California mortgage joint venture, all of our remaining joint ventures, which are all home-building-related are consolidated in our financial statements.
For the quarter, our consolidated net income increased 57% to $136.4 million from 86.8 million in the year ago quarter.
Our diluted earnings per share of 92 cents for the quarter represents a 24% increase from the 74 cents reported last year.
In fiscal year 2002, net income increased 57%, to $404.7 million from 257 million in the prior year, with diluted earnings per share increasing 29% to $2.87 from $2.23 a year ago.
Three items on the balance sheet that we would like to highlight are our shareholders equity, our lot and land position, and our home building leverage.
Shareholders equity grew 82% during fiscal 2002, to $2.3 billion.
Even with this significant growth, we earned a 22.4% return on average stockholders equity.
Our lot and land position is at approximately 151,000 lots owned and controlled.
Fifty three percent of these lots are owned and 47% are optioned.
Assuming a 15% growth rate in homes closed, this is approximately a 3.3 year supply of land.
This is down from our 3.5 years supply at the end of fiscal 2001, and it reflects our commitment to bring our land supply closer to three years.
Our home building leverage ratio, net of unrestricted cash, decreased to 51.3% from 54% a year ago.
Our goal for fiscal 2003 is to continue this improvement with a year-end home building debt to cap target of less than 49%.
To do this, we are focused on internal growth, rather than growth through acquisitions in fiscal year 2003.
We plan to fund this growth with cash from operations, and we will only access the capital markets opportunisticly.
We start the fiscal year in a strong position with $697 million available on our home building revolver at September 30th.
Now, Stacey Dwyer will outline our guidance for fiscal 2003.
- Executive Vice President of Investor Relations
Thanks, Bill.
For the first quarter of fiscal year 2003 we are reiterating our guidance of 64 to 66 cents per share.
This assumes that our backlog conversion rate stays in our historic range of 55 to 58% of September 30th backlog dollars.
It also assumes that we maintain our home building growth margin around 20% and that our SG&A is in our historical first quarter range of 10.4 to 10.5% of home building revenues.
We're using a share count of approximately 159.5 million shares, which assumes that our convertible debt will be in the money, and that we will add back approximately $1 million of tax-affected interest expense to our reported net income number for the EPS numerator.
The convertible issue is not currently in the money.
We feel it is prudent to assume the shares will be outstanding in the guidance that we give.
We also think it's important to point out that if the convertible debt had been in the money in the first quarter of 2001, reported earnings per share would have been 58 cents.
So using the midpoint of our first quarter guidance, that would represent a 12% increase on an apples to apple basis.
The company is raising its fiscal year 2003 guidance to be in the range of $3.40 to $3.45.
This range represents an 18 to 20% increase in earnings per share over the $2.87 reported in fiscal year 2002.
Our goal for the entire fiscal year 2003 is to achieve $8 billion in consolidated revenue on approximately 35,000 homes closed.
We have budgeted only a modest increase in our gross margins and we expect to maintain our SG&A at 10% or less of home building revenue.
We expect to earn approximately 40% of our net income in the first half of the year and approximately 60% in the second half.
Our earnings per share estimate is based on 160 million shares which, again assumes that the convertible debt will be in the money for the entire year and that we will add back approximately $4 million of tax-affected interest expense to our reported net income for the EPS numerator.
We realize that this is a conservative approach to our EPS guidance but we expect and hope that our stock price will rise to a level where the shares related to convertible debt issue are included in our share count.
- Senior Vice President and Controller
Thank you, Stacey.
There are three groups of drivers impacting our industry and D.R.
Horton specifically in a very positive manner.
The first group is sales drivers.
The home, more than ever, is perceived as a safe haven investment.
Housing affordability remains at a 30-year high.
New home inventory is near a 30-year low, while mortgage rates continue to be at a 30-year low.
The second group of demographic drivers, 30 million new immigrants have entered the U.S. in the last 30 years.
There are 30 million baby boomers who are entering their peak home buying years, and there are 25 million equi-boomers who are the children of the baby boomers who are entering their first-time home buying years.
The third group of drivers is the consolidation drivers.
Currently over 80% of the home building industry is represented by those builders outside the top 10 largest home builders.
This is contributing to the consolidation of the less efficient builders in the industry by larger builders like D.R.
Horton who have significant advantages which include, our reputation and access to the capital markets, we're able to secure the best land deals at the best price, our increasing national purchasing power, our significantly lower cost of capital and our access to capital markets.
With these favorable drivers our strong balance sheet and our record backlog, D.R.
Horton is well-positioned for another record year in fiscal 2003.
Our strategy going forward is to grow our existing markets with the focus of being the number one or number two builder in each of our markets and to ultimately achieve 10% or double digit market share in each of our markets while continuing our tradition of bottom line growth outpacing our top-line growth, continue to grow financial services by increasing our capture rate and expanding to additional markets.
Stacey?
- Executive Vice President of Investor Relations
We'd like to continue to improve our net home building debt capitalization ratio, as Bill mentioned earlier, with a goal of 49% or less at the end of fiscal year 2003.
We want to continue to partner with our suppliers, vendors and subcontractors to mutually capitalize on a [INAUDIBLE] scale as we grow together.
My favorite, we want to start our next 25 years.
We just finished 25 and D.R. constantly reminds us that we can't rest on our laurels.
We're focused on the next 25 years and we want to continue to create value for our shareholders.
Since we became a public company, we've outearned our [INAUDIBLE] capital each and every year.
- Senior Vice President and Controller
And finally, the focus on our internal goals, to earn $8 billion in revenue and grow our EPS 20% in fiscal year 2003 without any acquisitions.
We also strive to be the first builder to 50,000 units with revenues of $10 billion by fiscal 2004.
While we can achieve 9 billion without any acquisitions, 10 billion will require one acquisition smaller than Schuler.
These goals can be accomplished by continuing our successful acquisition strategy and continuing to internally grow our existing divisions 15 to 20% a year.
Our clear goal is to continue to be the number one builder in America.
Thank you and we'll entertain any questions you may have.
Operator
At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone key pad.
We will pause for just a moment to compile the Q&A roster.
The first question comes from Margaret Wheeland with UBS Warburg.
Good morning, guys.
Congratulations on the quarter.
- Senior Vice President and Controller
Thank you.
Good morning, Margaret.
And could I double check the average home price for sure.
I thought you said 329.
Is that right?
- Executive Vice President of Investor Relations
For the fourth quarter.
Yeah. 329?
- Senior Vice President and Controller
Yes, 3--.
thousand 200 -- and it was up a little bit from the prior quarter from 320?
Can you give us just an idea of pricing in general, what kind of incentives you are using or how much pressure there is right now?
- Senior Vice President and Controller
Yes, we can.
And we get that question quite frequently and I will tell that you we offer incentives 24/7, 365 across the country.
Obviously, with our gross margins having increased over the last four to five years and we're also budgeting for our gross margins to increase in fiscal year 2003.
We're comfortable that our pricing power will overtake any incentives that we have or we're going to offer in the marketplace.
Okay.
And then in terms of the $8 billion number, Stacey, the guidance, is that just pure home building revenues?
- Executive Vice President of Investor Relations
That is consolidated revenue.
So a portion of that will be financial services and we generally have some figure that is land sales, which, you know, they're hard for us to budget.
Sure.
- Executive Vice President of Investor Relations
But that was all of the revenue on a consolidated basis.
What is the average home price you are assuming for the year.
- Executive Vice President of Investor Relations
I left it relatively flat.
We've been running between about 218 and 220 on a companywide basis.
Great.
Thank you very much.
- Senior Vice President and Controller
Thank you, Margaret.
Operator
Our next question comes from Steven Kim with Salomon Smith Barney.
Thanks very much.
Strong quarter, gentlemen and Stacey.
- Senior Vice President and Controller
Thank you.
I had a few questions, if I may.
First of all, for housekeeping, the convertible strike price next year, probably going to be, what, $32?
- Senior Vice President and Controller
No.
You're looking at it on a presplit basis.
Oh, right.
Got it.
Okay.
- Senior Vice President and Controller
Closer to $23.
$23.
Got it.
Okay.
I was going to say, that was -- as much as I would like to see it -- yeah.
Okay.
Great.
And then in terms of your gross margins, any reason to believe that the, you know, the gross margin won't rise materially for the next two quarters above and beyond what you reported in the fourth quarter, you know, given that -- given that you've got the 60 basis points basically of purchase accounting?
- Senior Vice President and Controller
Well, obviously, we're trying to guide everyone to 10 basis point increase.
Right.
- Senior Vice President and Controller
--Postpurchase on accounting.
To answer your question directly that's our guidance, but we are experiencing -- economies of scale as Sam pointed out on national purchasing and to be quite frank, with the supply/demand relationship that still exists in the marketplace, we still have some good pricing power in a number of our markets so I would be disappointed if it didn't increase more than that but we prefer you stick with the the guidance.
- Executive Vice President of Investor Relations
Steve, let me just clarify.
You're asking should we expect it to increase from the 19.4 we reported this quarter?
I'm basically saying there's just no way it's not going to increase.
- Executive Vice President of Investor Relations
We've been running right at 20% before purchase accounting.
Right.
And there's no reason to believe that that's not going to continue for at least the next couple of quarters it sounds.
- Senior Vice President and Controller
Yes.
Right.
Okay.
Simple answer sounds like it's yeah.
- Senior Vice President and Controller
Yes.
Okay.
And with respect to the internal growth here, 15 to 20%, this does appear to be somewhat of a shift in strategy and I was wondering if you could comment on what -- what the company's approach towards growth is going to be.
Do you have targeted markets, or is it going to be fairly opportunistic as you go through the year that you are going to just sort of see where the strength is and then do capital asset allocations or do you have it in mind right now where you are going to look to expand?
And there is -- and is there anything in there for maybe expenses to consolidate some of your systems because I know that's something that's come up, you know, over the years, given all the acquisitions have you made.
- Senior Vice President and Controller
Well, we've already put our money in place in our various markets.
Obviously for our fiscal '03 revenue, Steve.
Mm-hmm.
- Senior Vice President and Controller
And those -- that's a really -- in California, Texas, Colorado, area and Florida where most of the home building activity still exists.
Mm-hmm.
- Senior Vice President and Controller
We'll continue to evaluate them on a quarter-by-quarter basis.
On a going-forward basis, I don't see us extricating ourselves from many other markets, if any.
As you know, over the last three years, we've extricated ourselves from some of the smaller underperforming midwestern markets and we're very pleased with all of our markets, where they are performing today.
As far as systems, we're very pleased with the system that we have.
Our people came up here with what we call a DHI 1 system and we've integrated the J.D.
Edwards systems.
We've integrated the Continental system and we've integrated the Chicago system and we're very happy with what we've got and we're going forward with really a three-fold approach, a sales automation tool that we're rolling out to all of our divisions and we have a purchasing system and a scheduling system.
And those are the three modules of our system and we're not planning on spending any significant money in that area at all.
Okay.
Great.
Also another question.
I understand, Rick Beckwitt is not really active with the company right now.
I guess he's on sabbatical for about a year.
That would seem to scare up with your approach to pursue more internal growth versus acquisitions.
Can you comment a little bit on sort of, you know, how that -- how that -- how your decision to focus on internal growth evolved?
Are you seeing acquisition pricing in the marketplace at levels that you are not comfortable with?
Or did you feel that for other reasons it was important to focus on internal growth.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
They call me around here a balance sheet boy.
And to answer your question directly, we felt very comfortable mid-year last year, that we could achieve a 20% EPS growth in '03 without any acquisitions.
We felt it was an opportunistic time for to us strengthen our balance sheet and that's where we are going with it.
Obviously, to go from 54% to 51.3% debt to cap and then we have a goal of getting below 49% on a going-forward basis.
Our clear goal is to self-fund ourselves, have no capital markets issue a plan for us unless they are opportunistic.
And we have calculated that we can end the year with over $1 billion in cash and a debt to cap ratio in the below 49% and be an extraordinarily strong company to do what we need to do or want to do in fiscal year '04.
Okay.
Great.
Any comment on Rick's departure?
Or --
- Chief Financial Officer, Executive Vice President, Treasurer & Director
No.
Rick is still around the office from time to time, and he will be more than likely a player as we go forward in '04.
Great.
Well, certainly sounds like a strong strategy.
Thanks very much.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Thank you.
Operator
Your next question comes from Mike Rehah with JP Morgan.
Hi, good morning.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Hi.
On the other expense line, I was wondering if you could go into what your expectations are vis-a-vis the interest rate swaps for 2003 and then I had another quick question.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Sure.
Actually, Mike, we ought to be asking you guys where the interest rates are going. [ laughter ] As you know, Mike, the valuation of that swap is totally dependent on the shape and the level of the [INAUDIBLE] futures curve and we're not very good at predicting where that's going to be.
We think -- we think that the worst is behind us.
You know, unless we get in zero interest rate environment, which a lot of folks have expressed fears about.
But, basically, we have two $1 billion notes that require us to pay 5.1% and we [INAUDIBLE] under those.
Under [INAUDIBLE] 33 which was issued long after we entered into them, they do not qualify as cash flow hedges and we are therefore obligated to record their changes in fair value in income in each quarter.
I would say that although they were originally intended to protect us against possible future increases and interest rates on our variable rate debt, the quarterly changes, as I indicated earlier and their fair market value are clearly not a part of our core business operations.
- Vice Chairman, Pres, CEO
I can say one thing -- or two things, Mike.
One is we're not in the swap business anymore.
I don't want to hear the word "swap" around our office.
Secondly, it is difficult to predict, but I truly believe the worst is behind us and we're moving on.
Okay.
Also on the -- just wondering if you could comment on what your average LTV has been for your customer throughout this year, if there's been a trend going one way or another.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
We're running right at 87% LTV. on our mortgage company this year.
That compared to a range of about 85 to 86% in the prior year.
So we're not seeing any changes in that.
Okay.
And, again, I'm sorry if this is repetitious from the last quarter, but any percent of refinance activity that your mortgage business has been able to service?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Actually, our refi percentage this year was 6% of our total volume.
That's one thing we're pretty focused on.
We're not stacking up to capture the refi business.
If we can capture it with our existing staff that's great.
But if the refi business does go away we don't want it to impact our earnings.
Okay.
And in your captured mortgage business, do you have an idea of FICA scores for this year, versus last year.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
The average FICA score has been around 700.
In the past three years range has been 698 and 702.
So we're right in the middle of the range.
Great.
Thanks a lot.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Thank you.
Operator
Your next question comes from Joseph Voca with Merrill Lynch.
Good morning, everybody.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Good morning, Joe!
Now, switching more to an organic growth focus rather than, you know, an opportunistic acquisition focus, does that mean you are really not targeting entering any new markets in '03, or do you think there's some attractive markets that you could enter in an organic base nice.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
First of all, let me say clearly in the -- the two previous fiscal years, we grew the company internally.
At the EPS line, 20% or greater, without any acquisitions, and fiscal year '02 was the first time that we had a significant acquisition, so we're comfortable growing the company internally, and achieving a greater than 20% EPS growth internally.
We are targeting other markets as we mentioned, we are moving over into the Tampa market from Orlando because of our successful Florida model and we will target other markets.
But frankly, if you look at our geographic diversification today, we believe we're the most geographically diversified builder.
We think the low-risk approach to drawing is to continue to penetrate those markets deeper where we have a proven operator and a proven business model.
Okay.
Fair enough.
Switching to the financial services, just to follow up on Mike's questions, do you know what the fixed to adjustable mix was in the -- what the fixed to adjustable mix was in the quarter?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Yes.
Let me find that.
Hold on just a second, Joe.
And Sam, you spoke too fast for me when you went over the Schuler numbers and I know Margaret asked you. $329,200 was the average Schuler price in the quarter and what were the unit closings in the quarter, 1,444?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Right.
And then it was 5,283 unit closings for the year and what was the year average price.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
2,853.
And if Stacey has it for me --
- Executive Vice President of Investor Relations
I don't have it but I can call you with it.
Okay, fair enough.
Thanks.
Operator
Your next question comes from Larry Horan from Parker/Hunter.
I imagine you are not completely out of the acquisition business.
I imagine you are still talking.
I was wondering if you can comment on if there have been any changes -- obviously it's a regional market, any markets in terms of acquisitions have terms gotten more difficult.
Are buyers more reluctant or are they more anxious to sell?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Actually, the terms haven't changed dramatically for us, Larry, and post the Schuler deal, that -- post the Schuler deal, we believe that we have made a good decision with Schuler and going forward in 2003.
We haven't seen significant changes.
Our hurdles for doing acquisitions is clear it would be accretive in the first year 12 months past closing the deal.
Okay.
Thank you very much.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Yes.
Operator
Your next question comes from Greg Nejmeh with Deutsche Banc.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Good morning, Greg.
A couple of questions, as well as just a few points of clarification.
Sam, the purchase accounting adjustments in the quarter amounted to how much on the gross margin line?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
$13 million, Greg.
On a basis point measure, that would amount to what?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
60 basis points.
And that's -- this would be the last quarter where you expect that to be an influence?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
That's correct.
Yes.
Okay.
Have you publicly detailed what the combined savings that you've realized from integrating Schuler have been and where are we relative to your future expectations in terms of integration savings?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Well, I think we mentioned that post the deal, closing on 2/21, that we were going to -- it was going to be accretive 12 to 13 cents in the first 12 months post the deal, and that we would save somewhere to around $30 to $40 million in the two years post the closing of the deal.
Right.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
And we're -- we're far ahead of where we thought we were going to be.
In terms of those savings and we think those savings will begin to be realized, obviously, here in the -- specifically in the second and third quarters of next fiscal year.
So can you say, Don, how much of the anticipated savings you actually did realize in the last several months and what's -- what's still to come?
- Vice Chairman, Pres, CEO
The biggest thing that we have yet to come to me yet, Greg, is national purchasing because we've been working on getting Schuler divisions on the programs that we already have in place and obviously their volumes help the incentives that we receive so that's really the thing that we have to look forward to the most.
In terms of quantifying what we've got, 50, I am not sure that we've put the numbers -- we've got, I'm not sure that we've put the numbers to it.
We've combined some operations and we've realized some of the savings from the cost of sales.
One of the things that's in front of us is benefiting all of those mortgage offices in California.
That's going to -- that's still in front of us.
We haven't yet achieved much with respect to that, but we're excited about the prospects that gives us too.
Implicit in your earnings and margin guidance, I take it is the anticipated savings and benefits from the mortgage growth, as we move forward?
- Vice Chairman, Pres, CEO
Yes.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Yes.
All right.
The -- the savings per unit trend, Sam, that you mentioned, and Stacey just alluded to with regard to further integrating Schuler, what were the savings per unit that you realized in fiscal 2002?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
$2,000 per home closed.
$2,000?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Yes.
Up from, what, approximately $1700?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
1700 a year ago.
Now is that $2,000, when you look at the number of units that you closed.
Are you deriving that from 100% of your closings or given the -- given the timing of the Schuler integration, are you realizing that just from -- you know, a lesser portion of your closings and, therefore, you can expand not only the savings per unit but do so on a much wider base as we move forward?
- Vice Chairman, Pres, CEO
Answer your -- the last two questions are yes.
Okay.
Can you quantify that?
What -- what was the --
- Vice Chairman, Pres, CEO
As an example, I can tell you that just recently, Schuler finally got rid of all of their brand x appliances and have gone with either Whirlpool or Maytag.
And to the extent that we are putting another 6,000 plus units into our national purchasing program, where all of your divisions will benefit in addition to the Schuler divisions, in terms of our -- our cost -- our discounts, as well as our volume discounts, and our volume rebates, those are numbers that are not even working their way through the system.
Was the $2,000 computed, Don, on, say, 80% of your closings and -- and you expect the dollar amount per unit to increase as will the base level upon which it's calculated?
- Vice Chairman, Pres, CEO
That's basically an average number, Greg.
We took the total savings divided by the total number of homes closed.
There are some divisions that save more and there are some divisions that save less.
Mm-hmm.
What's a reasonable estimate of what the savings per unit can be in fiscal 2003 and fiscal 2004, based on negotiations that you are engaged in currently?
- Vice Chairman, Pres, CEO
Clearly, what we're saying for 2003 is that we can take the $200 per unit savings up to $2,300 per unit, and if you look at our increase over the years, we've had more dramatic increases than that.
But I feel comfortable that we can continue to increase our per unit savings about 10% a year.
Mm-hmm.
Is there a -- is there a specific area or, perhaps, two or three specific areas, Don, where those savings are being realized now on an incremental basis?
In other words, you know, you've been engaged in this program for sometime.
Presumably the early years were characterized by picking the low-bearing fruit.
From this point forward, where -- where are most of the incremental savings to be derived?
- Vice Chairman, Pres, CEO
Really, two places.
There is just a variety of new deals that we've signed.
I'll use fireplaces as an example because we entered into that this year that we haven't had before.
The incremental dollars from each sale will be small but they will add up.
The other thing that we've done is taken our national purchasing to a regional level.
We have regional purchasing directors who are working on structuring regional contracts for things that we don't have international contracts that aren't available to us.
So, we think those two will combine for an increased savings.
I think as an example, we have a spreadsheet here from our V.P. of national purchasing and it lists the new deals and the revised deals.
So, I think you have to look at two things.
Ones is that most of these deals on here are new deals and they go from anywhere from blinds to low-voltage contractors to roofing shingles, the things of that nature, but also, Greg, as we continue to increase our volume as we have, we are reworking our partnership agreements with our suppliers to the extent that we're realizing more of a per home discount or rebate for using their materials.
Mm-hmm.
Hmm.
One final question it was mentioned that your goal is to reduce your lot supply to about three years from just under 3.5 years currently, I believe.
I'm just curious about the rationale for that in a climate where your sales and others have mentioned the regulatory process becoming more time consuming, more cumbersome to -- to navigate.
I'm just trying to reconcile those two seemingly contradictory approaches.
- Vice Chairman, Pres, CEO
Well, first of all, we're focused on inventory turns here and we're going to increase our inventory turns.
One way that we can increase our inventory turns is by decreasing some of our lengther land positions.
Also, though, over the past -- recently as three years ago we upsized the size our land development teams in most of our divisions and we're comfortable and confident that they can continue to deliver lots, but in a more efficient manner closer to the time that we need them.
So I think it's the focus of those two factors.
Clearly we are not going to put ourselves in the position of not having enough land [INAUDIBLE].
But the other way that we're focusing on getting our inventory turns and decreasing our land and lot positions, is to focus more on rolling option-type contracts and less inventory on our balance sheet in the form of owned deals.
So, it's really a [INAUDIBLE] approach.
Is the incidents of options or the use of options becoming more challenging, Don, in your judgment or has that element of the market changed in any way?
- Vice Chairman, Pres, CEO
It depends upon the part of the country you're in.
It's still challenging in places like, California, Las Vegas, Chicago, markets like that, but there are other markets where D.R.
Horton is penetrating our markets deeper, i.e.; in Florida, in Atlanta, places in Texas, where rolling option contracts are a standard in the industry.
So we feel like that because we're penetrating some of those rolling option markets deeper, we can increase our rolling option or option opposition easier than what we have in the past.
A lot of that has been just a function, like Stacey mentioned Florida.
We've got three excellent operators in Florida, and we're growing that market down there.
Because that's a successful business model we have.
But, frankly, we've found some good third-party developers who are willing to sell lots to us on a take-down basis.
Mm hmm, mm hmm.
- Vice Chairman, Pres, CEO
And we performed for them over the years so their risk associated with doing a third-party deal with us is a lot less than it is with some other builder.
All right.
Okay, thanks.
- Vice Chairman, Pres, CEO
Sure.
Thank you.
Operator
Your next question comes from Carl Dorf with Dorf Asset Management.
Good morning, gentlemen.
- Vice Chairman, Pres, CEO
Good morning.
Can you give me an idea of what kind of price increases you've had on average in some of your major areas and can you discuss if there has been any price weakness at all?
I've heard some areas at upper-end pricing, there has been some weakness.
- Vice Chairman, Pres, CEO
Stacey?
First of all, I will tell you that across the country, D.R.
Horton has a standard operating policy and that is as we sell a certain number of homes we raise the price and we raise the price in each release and if we've got a subdivision of 100 lots, we sell 10, we're going to raise the price.
We sell another 10, we're going to raise the price. [INAUDIBLE] always to find out where the maximum price is for our product.
In terms of weaknesses, we really don't see any markets in our portfolio today that are weak.
We pointed that out because even the markets other builders are reporting as weak, we don't find as weak at all.
We just find just the opposite.
We're strong in those markets today.
Is there any -- can you give me any idea what kind of price increases, on average, you have seen at least in a few of your strong markets or a few of your major markets.
- Vice Chairman, Pres, CEO
Well I can tell you, for instance, in Texas and in Austin, in particular, which has been for everyone else a very depressed market, a very strong market for us.
Our division president there, it's not unusual for him to on a $150,000 home to increase his prices every 10 homes $500 a house.
But it's relative to the sales price of the home, whereas, in California we may have a release of ten, we may sell those and we may be selling $300,000 homes an all of a sudden we're going to increase the next release by $2,000.
So it depends upon the market, the market price and where we perceive we can take our prices.
Let me try the question, I guess, another way.
On same-store-sales type increase that you had last year, what kind of a -- how much of that do you think came from price?
- Vice Chairman, Pres, CEO
Oh -- you're asking a question that we really don't calculate.
We let our division presidents operate as local entrepreneurs in their market place maximizing the return that they can generate for us.
In some markets where we're able to get significant pricing power and other markets where the pricing power is weak or we're having marginable ability to raise prices.
But I think if you look at our gross margins, I think it's a function of two things, clearly pricing power and driving down our cost of goods purchased in national purchasing, as well as by being a larger volume builder in each one of our markets getting better costs from our suppliers and our subcontractors.
So, I can't answer your question specifically.
Thank you.
- Vice Chairman, Pres, CEO
Yes.
Operator
Your next question comes from Jim Wilson with JMP Securities.
Hi, good morning.
- Vice Chairman, Pres, CEO
Good morning.
Could you maybe outline how much on a community count basis, and even if you have it regionally, to some degree, what your community count increase has been or was for fiscal '02 and then any thoughts on how you expect to increase it regionally in '03?
- Vice Chairman, Pres, CEO
Well, as you know, we don't report community counts because of the fact that we operate, because of our low overhead structure and smaller communities [INAUDIBLE] most other builders because we have less overhead to spread amongst those.
So, we can go out and do a 20-lot subdivision or a 50-lot subdivision where as our competitors can't spread their overhead cost on that few of lots.
Our community count, doing a rough calculation here, just compared to the third quarter at the end of June, we base it on a lot count.
Our lot count has increased over 6% just on a quarter -- just in one quarter compared to the prior year, our lot count has increased 30% over the previous year.
- Executive Vice President of Investor Relations
Which the previous year didn't include Schuler, so we didn't have subdivisions and lots that came online when we merged with Schuler.
Okay.
Maybe another way to think about it, how about looking at how you expect to allocate capital regionally or where you expect to step it up over the next 12 months, you know, maybe that takes into account where you think you would like to grow much bigger that you aren't, Florida, for instance and things of that nature, just sort of where you call it a capital allocation, that question.
- Vice Chairman, Pres, CEO
Well, I can tell that what we've done for fiscal year '03 is we've allocated capital pretty much equally amongst our six regions because our six regions are pretty much performing equally as well.
California a little bit better as a region than other parts of the country.
But the bottom line is that so far what we've done for fiscal year '03, we've given our regional [INAUDIBLE] of inventory growth target that is a percentage number over what they ended the fiscal year at that is the same for all of our six regions.
And then they are going to allocate the capital amongst their regions, as they see fit which is what they ought to be doing.
Okay.
All right, great, thanks.
Operator
Your next question comes from David Jitt with Credit [INAUDIBLE] Securities.
Hi.
Good quarter.
- Vice Chairman, Pres, CEO
Thanks.
Two questions.
In the financial service area, in the quarter your capture rate jumped from 64 to 72% where you had offices but the overall company only went up from 50 to 55%.
Was that correct?
Because you don't have offices in many of the areas?
- Vice Chairman, Pres, CEO
Those are our fiscal year numbers.
Oh, those are the fiscal year.
- Vice Chairman, Pres, CEO
Yeah, that's correct.
And that's where you have offices?
- Vice Chairman, Pres, CEO
The 55% is our companywide capture rate.
Our 72% is where we have offices.
Okay.
- Vice Chairman, Pres, CEO
Our companywide [INAUDIBLE] adversely affected by bringing Schuler on which didn't have any mortgage offices.
Right.
But that -- those percentages should jump up rather significantly this new fiscal year, correct?
- Vice Chairman, Pres, CEO
I would think toward the end of the year, yes, it will take a us a full year, David, to implement the new California mortgage offices, so I am conservative and tell people that, really, we're looking forward to those major contributions in California coming in fiscal -- early parts of fiscal year '04, more so than '03.
Now when you bring those onstream, I assume your fixed overhead will not change that much, so there should be even better growth margins in that area, would that be correct?
When they are fully on stream.
- Vice Chairman, Pres, CEO
Yes, the growth margins should be better, but there will be a time period, just like it was when we entered Chicago and Atlanta about a year and a half ago where our operating expenses went up because we operated -- or opened two large divisions in both of those markets and didn't have one prior to then and it takes a while for them to build their backlog in each one of those markets before we actually start to get closings.
Because you go into the market, you don't get -- if you do write a mortgage, you usually don't get any revenue from that for two to three months later.
So basically it's a slow process, but we should have higher operating expenses unless we achieve some leverage someplace else in the financial services area by virtue of going into the state of California but that will average out and it will become more efficient in '04.
Okay.
One thing which I was a little bit perplexed by, when I was going through Rockefeller center yesterday, there are a number of banners up right now promoting a food fair and right at the bottom there was D.R.
Horton Inc. as a sponsor.
Now, that's a real puzzlement.
- Executive Vice President of Investor Relations
When you were there, David, did you see the portable kitchen that Rockefeller Center is using for the Farmer's Market in their cooking demonstrations?
No, there was not -- there wasn't anything up there right now.
- Executive Vice President of Investor Relations
They do cooking demonstrations on Friday and Saturday mornings, and our New Jersey office coordinated with professional builder and with Samsung to actually build the kitchen that's being used for the -- the cooking spots.
Okay.
- Vice Chairman, Pres, CEO
We're not paying any dollars to be on that show, David.
Okay.
I wouldn't expect that.
Okay.
Thanks a lot.
- Vice Chairman, Pres, CEO
Thank you.
Operator
Your next question comes from Kent Green with Boston American Asset.
Yes, there's been some speculation about specific promotions and in entire industry.
Since you are the most diversified builder, you would obviously see that.
And my question really pertains to, you know, I understand about the margins offsetting and the cost, but do you really see any more heightened promotions in the last month or two over what you saw say three months ago, or nine months ago or even a year ago?
- Executive Vice President of Investor Relations
No, not really, Kent.
Basically, as Don said, we offer incentives across the board and they may be higher in one market at a point in time, they may be higher in another market at a point in time.
But we haven't heard anything from the divisions across the board that they are offering more incentives or promotions to get increased sales.
And that's the other thing I point to, is we're seeing incredible sales increases, 93% in the quarter and I don't think that we would be seeing 93% if we were having to offer significant incentives.
- Vice Chairman, Pres, CEO
As a matter of fact, one of the things working against incentives and I guess that's why we're confused as a builder, when we hear some of the other builders or the analysts talk about other builders giving incentives is that, one, us the supply of new homes available across the U.S. is an historic 30-year low, and our inventory of available homes is also at a low, and the bottom line is that we have got pricing power because of that limited supply.
So we -- again, forth right, I can tell you that we are offering incentives 24/7, 365, every year for the last 25 years.
The bottom line is that we look at our gross margins and say, how do we balance that with pricing power.
And I say we've been very effective at it as we've raised our prices and raised our gross margins over the years.
The second question pertains to, say, first-time buyers versus step-up buyers.
With the Schuler acquisition, do you have any updated and, say, rough estimate of what that is across all of your divisions?
- Executive Vice President of Investor Relations
Actually, the Schuler business didn't change our mix much.
We target about 35 to 40% first-time and another 35% move-up buyers, the first-time move-up buyer and then the balance is going to be active adult and the second and third time move up buyers.
Even though Schuler's price point is higher than ours, it's more because of the markets they're in, rather than a different focus on the buyer.
We still largely are primarily a first and second-time builder.
Thank you.
- Vice Chairman, Pres, CEO
Yes, sir.
Operator
Your next question comes from Carl Reichardt of Bank America Securities.
Hey, guys, just a couple of follow-ups.
With the SG&A sales going from 92 to 95, you know, on a basis point or dollar basis, how much of that was associated with the rising insurance costs.
- Vice Chairman, Pres, CEO
The SG&A going from 9 what?
Nine two to 95, just on the home building side, Don.
- Vice Chairman, Pres, CEO
Well, let me talk specifically about insurance because that's a question and I don't -- first of all, we don't have a figure for how much it increased our SG&A on the basis point, Carl.
Okay.
- Vice Chairman, Pres, CEO
I can tell you that we are experiencing increased costs on our insurance side and the bottom line is about a year and a half ago we pointed a gentleman as a risk manager for the company, and in the process he is negotiating with a number of our carriers, and we're moving carriers in order to get the most competitive bids.
It's not our insurance costs increase for last fiscal year and this fiscal year, it won't make a significant impact to our SG&A percentage.
Okay.
Neat.
And then just a clarification on the -- when you're talking about asset percentage per state, you are talking dollar value, not lots, correct?
- Executive Vice President of Investor Relations
Say that again, I'm sorry.
If you're talking about 26% of your --
- Executive Vice President of Investor Relations
yes.
Of your assets -- that's dollars not lots.
- Executive Vice President of Investor Relations
Yes.
Okay.
If you look on a year supply basis at current absorption levels where are you -- what state are you guys longest land in?
- Vice Chairman, Pres, CEO
Oh, I would suggest we're probably longest land in Texas, which is our home state.
And clearly probably, to a certain extent, in Colorado and Arizona in the secondary situation.
Okay.
Great.
And then just last question, related to this incentive thing, I mean, this time of year, I'm guessing that you guys are talking about 24/7, 365 on incentive structure but basically we're looking at a seasonal time of year when we expect incentives to be increasing in Q4 calendar.
Is that, I mean basically, your experience that that's what you see out in the marketplace and the seasonal basis is the time of year when incentives increase?
- Vice Chairman, Pres, CEO
I tell you that -- I know you may say, well, those guys don't know their business, but we do know our business --
I would never say that Don.
- Vice Chairman, Pres, CEO
We let our division presidents run their businesses and we measure them on a month-by-month basis on their gross margins and their SG&A.
And I can't say to you that, you know, from a theoretical perspective it makes sense that Christmas and the holidays are the slowest time of the year and then typically the home-building business starts to build in the spring.
But I will tell you that if you look at our sales increase, in the fourth quarter of this year, typically we've not had our largest sales increase in the fourth quarter of a fiscal year.
So, I think really what you're seeing more out there today as opposed to -- and I know people want to find the negatives in the home building industry and they are trying to say well those guys are offering a whole bunch of incentives.
That's the only reason their sales are up.
That's not the case with D.R. Horton.
I think it's more strictly a function of supply and demand and the supply being limited, the demand being good on the -- due to immigration, baby boomers, as well as the fact that people are looking for an alternative form of investment.
And I think that's what we're seeing in the home building industry today.
Perfect.
Thanks a lot, guys.
- Vice Chairman, Pres, CEO
Thanks, Carl.
Operator
Again I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone key pad.
Your next question comes from Armando Lopez with Morgan Stanley.
Yeah, good morning.
- Vice Chairman, Pres, CEO
Good morning.
Just a couple quick questions.
I got on the call late, so I apologize if you talked about this.
Did you guys go over what you are seeing in current traffic patterns and cancellation rates?
- Vice Chairman, Pres, CEO
Traffic patterns we don't track at the corporate level.
We track that at the division level.
And rates we can talk about clearly, Stacy.
- Executive Vice President of Investor Relations
The cancellation rates [INAUDIBLE] 17 to 19%, we're in there.
Okay.
And how should we think like -- have you guys put out like a community count number by the end of this upcoming fiscal year?
- Vice Chairman, Pres, CEO
No, we haven't and we, traditionally have not released community counts because people have used that against us since -- because we have more subdivisions than the other top five home builders because our overhead is lower and we can afford to open a community of 20 lots or 20 homes or 50 homes because we've got less overhead to spread.
So we have a higher community count than the other top five builders but we do it because we have got a lower overhead count.
Okay.
- Vice Chairman, Pres, CEO
We just don't think it's a meaningful part of our business.
We look at our lot count.
Mm-hmm.
Okay.
And one other quick question.
I guess with respect to maybe focusing more on internal growth going forward, so is -- just to clarify, is the 50,000 units, and, like -- still the target for '04?
- Vice Chairman, Pres, CEO
Correct.
- Executive Vice President of Investor Relations
The other thing I need to point out there, though, is we're talking fiscal year '03, focusing on internal growth and we're not abandoning our acquisition strategy.
It's just this year we're building our balance sheet and focusing on internal growth.
Okay.
All right.
Thank you.
- Vice Chairman, Pres, CEO
Thank you.
Operator
Your next question comes from Jim Jones with Wasserman & Associates.
- Vice Chairman, Pres, CEO
Good morning, Tim.
Good morning Horton.
I know he's on the line too! [ laughter ] Anyways, first of all, Don, I didn't understand -- I didn't realize that B.S. boy stood for balance sheet boy. [ laughter ]
- Vice Chairman, Pres, CEO
It does in my vernacular, but in your vernacular, it probably doesn't.
I probably stand corrected as I relate to you.
A couple of things.
Now, by Hortonizing Schuler, without killing anybody, could you give us a couple of -- in areas -- remaining savings 40 million or 60 million?
- Vice Chairman, Pres, CEO
No, what we said post deal on 2/21, when we closed Schuler, Tim, was that we said in the first 12 months post the deal it would be accretive 12 to 14 cents and then in the two years post the closing of the deal that we would achieve $30 to $40 million of cost saves.
So we still have additional cost saves to achieve.
Yeah, but roughly how much? $40 million or $30 million or --
- Vice Chairman, Pres, CEO
I would put a target on it of about $20 million.
Okay.
- Vice Chairman, Pres, CEO
We're about halfway there.
Now, when you had that deal on the interest rates swapped about a year and a half ago and you had those two quarters where you got hit and then you swore up and down to God and everyone else that that was the end of it, what went different?
Is it that the fed funds went so low that you just didn't -- that really caused them to continue?
Is that the thing that really happened?
- Vice Chairman, Pres, CEO
Basically, Tim, as you probably know, I don't have to tell you this, the whole Lieber curve has dropped 2.5 percentage points since that time, which makes the present value of our future net obligation higher.
It's a drop in short-term interest rates then.
- Vice Chairman, Pres, CEO
Well, it's a drop in the projected rate over the entire curve, you know, from out to their maturity in 2008.
Now, if this -- if fed funds stay roughly the same where we are, will that then be -- stabilize it to roughly break even or not?
- Vice Chairman, Pres, CEO
If they stay -- if the shape of the curve stayed where it is, there would be no -- there would be no further changes in their fair market value, in fact, it would improve as we got closer to the maturity.
Which is what we, at this stage, anticipate.
All right.
Because they can't continue to keep dropping there forever.
- Vice Chairman, Pres, CEO
You wouldn't think so, but I can tell you that we didn't think they would drop this far either.
No.
I don't think anybody else did on that.
- Vice Chairman, Pres, CEO
It all goes to show you, as Sam, said, it's not a part of our core business and I guess we've learned two valuable lessons in the last couple years, [INAUDIBLE] one of them, the banks know more about interest rates, we're they're going than we do, so we're not swapping anything with anybody.
Okay.
I'm a little surp -- you said your -- your savings per home went from 1,700 to 2,000 and certainly that makes sense on the D.R.
Horton side.
But, given the fact you had a half a month of -- half a quarter -- half a year of Schuler, I'm a little surprised.
Can you give me what the savings are per home on Horton and the savings per home right now on Schuler so we can get an idea of how much leeway you've got there.
- Vice Chairman, Pres, CEO
I don't have that number.
I will get that number.
Rick Rohaus is our V.P. of national purchasing.
I will tell you that we have gotten very little incremental savings from Schuler, only from a perspective that -- that we just got them on our national accounts deal, starting in March.
And, frankly, it took them about two months to get all the brand x appliances out of their homes.
As an example, and to begin purchasing from our appliance manufacturer, Whirlpool and Maytag, goes to the extent that they got those out, we probably at the most, one quarter of some benefit, just on the appliance side, not to mention all the other things, plumbing fixtures and that sort of thing which are going into the houses.
So, we have got very, very little contribution at this stage in that $2,000 number from Schuler but I will get you the exact number.
You've mentioned this savings in Whirlpool and Maytag twice now.
Are you implying that you're going -- I think most of your business is with G.E.
I mean is it a factor of going to G.E. or what?
I know -- did you beat your wife last night?
- Vice Chairman, Pres, CEO
Say the word G.E., because we -- those guys were not interested in partnering with us in mid 1998 when they had 50% of our appliance business so we brought Whirlpool and Maytag in to be our sole appliance.
Oh, you've gone from G.E. to Whirlpool and Maytag.
- Vice Chairman, Pres, CEO
Yes sir.
Oh, it's the opposite way.
- Vice Chairman, Pres, CEO
I can -- what word did you say?
In other words, you've mentioned -- are Whirlpool and Maytag now going to be the suppliers of the entire D.R.
Horton and Schuler operations?
- Vice Chairman, Pres, CEO
Yes.
Oh, okay it's the other way around.
Okay.
Whatever you get the better price.
All righty.
Thank you.
All right.
Hookum horns.
Operator
Your next question comes from Carlos Rivero with Credit Suisse First Boston.
Hey guys and Stacey, congratulations on the quarter.
- Executive Vice President of Investor Relations
Thank you.
A couple of quick items.
Your [INAUDIBLE] to quarter end?
Do you have that number?
- Executive Vice President of Investor Relations
We're running around the high 20% range.
20% of total deliveries?
- Executive Vice President of Investor Relations
I'm sorry, of our total inventory.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Total inventory.
Total inventory.
Okay.
And relative to last year?
- Executive Vice President of Investor Relations
Right.
Where it was last year.
Okay.
You guys gave us the number of deliveries for '02 from Schuler.
Can you give us the number of deliveries from Emerald and the Fortress Group as well for the full year '02?
- Executive Vice President of Investor Relations
Carlos, we can give that to you.
I don't have that in front of me.
Okay.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Hey Carlos, tracking back to our spec count, two things I know that you realize, one is that we do very little advertising.
Mm-hmm.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
But we do keep two or three specs per neighborhood to do business with the Realtors since they sell a large percentage of our homes and the other thing is that, as you know, 90% of our specs are sold before they are completed.
I do know that.
Thank you.
In terms of -- of -- excuse me, here.
Land acquisitions for next year, in terms of raw land that you are going to invest in, given that you are not going to be making acquisitions, what's that number?
What do you have projected for that number next year?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Well, frankly, I can tell you that on the land side, we're looking at basically increasing our land and lot inventory by around 12%.
Is that a unit number or --
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Dollars.
Dollars.
Okay.
Do you have a number for this year, Don.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
That's what I'm saying for '03.
No, I know, but I'm saying for '02 what was the dollars spent on land for '02, excluding acquisitions.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
I would say -- Bill can get you the exact number.
I think it's probably clearly in excess of 20%.
Okay.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
That's one of the ways that we decided that we wanted to self-fund ourselves is basically we were going to decrease our land purchases, as we've done on a percentage basis of dollars, and basically bring our land and lot down to more conservative level which already at the most -- in my humble opinion, the most conservative in the industry.
We just wanted to be a little bit more conservative.
Okay, fair enough.
For next year, you are still seeing about 6 cents from Schuler.
Is that correct?
Is that included -- that's including your guidance?
Do you have, what, four, five months left with Schuler?
- Executive Vice President of Investor Relations
I'm sorry, Carlos, say that again, please.
For next -- for '03 earnings, that 340 to 345, that includes approximately 6 to 7 cents of Schuler?
- Executive Vice President of Investor Relations
You know, Carlos, I've got to tell you, I didn't break that down by entity.
I just took our projected closings and looked at average sell price and our operating metric.
Okay.
Cause I think you had a previous [INAUDIBLE] that would be 12 to 14 cents accretive the Schuler [INAUDIBLE] accretive over the next year and considering obviously the acquisition's anniversary isn't until February of '03, I'm just cutting it in half.
- Executive Vice President of Investor Relations
Yeah and we would expect, you know, continued accretion from them as their operations grow.
Okay.
By the minimum probably somewhere at a nickel to six cents?
- Executive Vice President of Investor Relations
Carlos, I don't feel comfortable.
I don't have the number in front of me.
Fair enough.
Fair enough.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
The other thing to remember, Carlos, is we are past the 61 million in purchase accounting so I think between now and the end of February, the first anniversary, we're going to see a pretty significant accretion.
Okay.
And, Sam, just one final question, the $13 million, in [INAUDIBLE], that was all interest rate swaps?
Was there anything else in there?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Oh, the -- in other expense?
Yes.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Yeah that's the --
that's all swaps.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
The vast majority of that is interest rate swaps right now.
Okay.
The va -- okay.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
There are tiny amounts of other stuff that doesn't matter.
Got you.
Thanks a lot, guys.
- Executive Vice President of Investor Relations
Thanks.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Thank you.
Operator
Your next question comes from Steve Prococo with Lark Research.
Thank you.
Could you go over the same-store sales figures, say, with closings and with new orders?
The acquisitions that you have in this year's figures that you didn't have in last year's figures were Schuler, Emerald and Fortress.
- Executive Vice President of Investor Relations
That's correct.
Are there any others?
- Executive Vice President of Investor Relations
No sir.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
That's all.
And so, if we look at closings, you reported 9,554 units closed in the quarter.
What would the pro forma number be for last year?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
All of those entities, except Schuler, were part of our fourth quarter last year.
Okay.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
On a comparison basis the only thing you have to pull out is the Schuler deliveries.
Okay.
And I had 1,308 units, I believe, for Schuler last year.
Is that the right number?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
We -- in this current quarter, we had 1,444 units that Schuler closed.
If you want to compare this year to last year's quarter, you would you deduct that amount from this year's quarter.
Okay.
It was 1,400 --
- Chief Financial Officer, Executive Vice President, Treasurer & Director
44.
44.
And what about the orders?
- Executive Vice President of Investor Relations
The sales orders?
Right.
- Executive Vice President of Investor Relations
We're shuffling, Steve.
Hang with us just a second here.
- Vice Chairman, Pres, CEO
Okay.
Steve, for orders in the quarter, the Schuler number was 1,488 orders in the quarter, in this year, in the fourth quarter of this year.
Okay.
And can you talk a little bit, the pro forma numbers that you gave are same-store numbers that you gave, obviously we've heard from other builders who have said that Colorado, for example, has been a tough market.
Texas has been a tough market.
Certain parts of California have been as well.
Can you -- can you go through and talk about the figures where you've shown strength against the market and talk about specifically what you are doing there.
Are those new communities that you've opened up?
Are they new products that you're offering?
What are you doing in those markets to get those kind of numbers?
- Executive Vice President of Investor Relations
I think the best answer, Steve, is that we leave the local decision-makings, in terms of product and where to build and what price points to hit, to our local entrepreneurs who are making adjustments to the market conditions they see in their markets on a daily basis.
So I -- I can't tell you specifically what Austin, Texas is doing to make adjustments to what they are seeing in their market.
We just know they are doing it because sales are up 76%.
But I would think that on the corporate side, with that type of a number, the -- especially if it's so much against what is happening in the market, that that would raise some questions in your minds, to understand what specifically they were doing in those markets to achieve those results.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Well, you know, actually that's a good point, Steve, because we've seen what Rob is doing down in Austin, Rob and Larry, and we've had one of them give a presentation to the rest of our division presidents on how to outperform in a basically flat market.
And so they shared some things, which basically we've used propri -- we view as proprietary and don't want to discuss.
Okay.
But I mean it would seem to me that -- that the differences -- I mean, either you are offering a better product at a better price, or you're in a better location.
I mean, or -- those types of things.
I mean, they would --
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Right and that comes back to our local guy making those decisions and since he is there he can determine what is the best product, what is the best price point for him to hit and where he needs to be buying land and, frankly, we think we're working harder.
Yeah.
Can you define what you mean by acquisitions?
When you say you're not going to make acquisitions next year, what's an acquisition?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Yeah.
An acquisition to us is where we would buy the operations from another builder.
So, yes, we will continue to invest in land and lots because we do need that to fuel our growth but we won't pursue buying complete business operations from another builder.
Okay.
But what about -- I mean, there -- from time to time builders sell their assets, let's say, we seen at least one example of a large builder that's made a bulk purchase of lots from another builder, where you could say on the one hand it is a -- it's -- it is a purchase.
I mean, you could compare it to, say, a purchase of land; although, you may be buying subdivisions that are up and running that have model homes on them, that have housing under construction on them.
I mean, in many cases, that is an ongoing part of the business.
And so, at some point -- I mean, it's easy to say when you buy a public builder, for example, or you buy, as you say the operations of a -- a large private regional builder, that that clearly is an acquisition, but it seems to me that there's a -- there's a gray line there, and there may be many instances where you would continue to buy, say, lots and subdivisions that may be already up and running from -- from other builders that may be going out of business.
Is that -- when you say you are not going to make acquisitions next year, are you saying that you'd rule out those types of acquisitions too?
Or --
- Executive Vice President of Investor Relations
No.
We would not rule those out.
To me, just in -- in my definition of an acquisition, those would fall into the lot and land purchases.
You're right, the line is a little bit gray.
But, you know, the one thing that we're focused on is smart growth and controlling our balance sheet, and if those types of opportunities are available at favorable terms, we'll pursue them.
Okay.
When you say that you are -- you're going to make changes to purchase lots closer to the time that you need them, could you give us some examples of what you mean by that?
And how close to the time that you need them?
- Executive Vice President of Investor Relations
Yes.
On rolling lot options, we have the -- the opportunity to buy them, structure the takedown schedule so we basically are buying lots as we plan to build on them.
With land development, we basically have been buying tracts of land, developing the lots and delivering them to ourselves.
And in that situation you sometimes have more lots available and ready to build than you need at a point of time.
So, when we look at land development, particularly, we're looking at structuring the land purchase so that we can buy just the piece of land that we're ready to develop to fuel immediate delivery and then structuring the rest of the purchases so we're buying the land and developing, putting in the development costs only as we need them.
So -- are you -- are you talking about buying the lot right at the time that you start building a house on it?
Or -- or sometime before then?
Or --
- Executive Vice President of Investor Relations
On the option lot, the optimal business model would be to buy it the day you plan to start the house and that's the way we would like to structure everything.
Okay.
But then the question is, how do you structure that in terms of land development costs?
Where do the land development costs go and who is obligated for those land development costs?
- Executive Vice President of Investor Relations
If we're buying an option lot from a third-party developer, all of those costs are already incurred.
If we're incurring those costs, that's the thing I was alluding to earlier, we're going to try to structure the purchases so that we're only putting in those costs on as few number of lots as possible.
But then the question is at what point do you become obligated on those?
- Executive Vice President of Investor Relations
If we're putting in costs on lots, we own the lots.
We are obligated.
If -- well what about the land developer?
- Executive Vice President of Investor Relations
If we are buying the land and developing it ourselves, we are the land developer.
We're structuring purchases from a third-party.
The developer retains all obligations of development until we purchase the finished lot.
No, I -- I -- I say that because I've talked to banks that have financed, say, joint venture deals where it's clear that this development is -- is off balance sheet, but yet they have a -- a strong expectation that the builder is not going to leave them high and dry, that if -- if they started the subdivision, if you are developing it, if you have got model homes on it, that you are going to follow through and take down those lots.
You may delay them, but you still implicitly have the obligation and that's what I think is a big issue with the industry, and that's why I'm trying to get at, you know, when you say you are going to -- you are going to structure that.
That may help from a balance sheet perspective, but from a legal obligation perspective, aren't you still on the hook for a lot of those.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
As we indicated earlier, all of our home building joint ventures are on our books.
They are consolidated.
Every one of them we inherited from companies that we acquired and we are not interested in entering any more.
- Vice Chairman, Pres, CEO
We are not talking structured finance deals with financers.
We are not entering into any off-balance sheet financing arrangements at all or entering into any new joint venture arrangements at all.
What we are talking about in structuring our lot takedowns more according to our needs, are simply arrangements with third-party developers or with the original land owners, just simply structuring our time frame on when we actually purchase the lots more according to our needs rather than taking down more than we need, you know, earlier than we need it.
Okay.
I have one, I guess, other question and it gets to the disclosure of the number of subdivisions.
You know, I -- I can -- I accept that you haven't disclosed the number of subdivisions but when you were doing it, as I recall, back when, I mean, the number as you had pointed out, was relatively large, which implied that the sales velocity per subdivision was relatively low, especially compared with other builders.
And you point out that people may have used that against you.
But it seems to me it does raise a question of overhead and exactly where the tradeoffs are because even if it is a 20-home subdivision, I presume that most of the time, you'd have a model home on that, which represents some degree of overhead.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
That's absolutely not true, Steve.
Many of our in-fill projects are sold from either trailers or from other subdivisions that will show the customer that I have this available in this little 20-unit project.
Are you saying that most of them are that way?
Or --
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Smaller ones.
I mean, obviously, it doesn't make sense to spend, you know, 200 grand furnishing -- building and furnishing a model for a 20-unit deal.
Okay.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Talk about our overhead structure is a lot more efficient and we have proven an ability to work through a community like that very profitably and in very short time.
But you still have to advertise it, presumably.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
No.
We don't.
We don't advertise.
Well, how do people know that you have the home available to sell it there?
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Well --
- Executive Vice President of Investor Relations
What we do, Steve, is we have strong relationships with the realtors in each of our locations.
We probably rely more heavily on the realtor community than any other of the public builders.
Another thing we do is if you're in a in-fill position all you need is a sign and entrance to your subdivision cause you've got people driving by there all the time.
Another thing we do that's low cost advertising are the bandit signs that you see out on weekends with your name and arrows pointing the way.
People are out looking for a house, they will make that turn.
Mm hm.
And have you to staff it in some way, don't you?
I mean have you to have somebody on site to sell there.
- Executive Vice President of Investor Relations
Well, like Sam said if we're selling out of another model, we're generally using that sales person.
There's generally a number for the subdivision with a salesperson who is checking the messages there.
So, we don't necessarily have to have a salesperson at that location.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
Or, if we do, they could be selling from a trailer too.
That happens.
Mm hm.
And don't -- I mean I would imagine -- I accept the idea that there are offsets that you have that make you more efficient, maybe at the corporate level, but it also seems to me that there are some negative variances, if you well, with this type of a model where you do have some additional costs.
I mean, have you paperwork you have to get filed separately to -- to have that project up and running, you know, building permits that type of stuff.
- Executive Vice President of Investor Relations
What we can give you, Steve, is look at our performance.
- Chief Financial Officer, Executive Vice President, Treasurer & Director
The other thing I would say is that that is -- that is all within the purview of the individual entrepreneur who is running that division.
The guys that do that are extremely successful at it.
We have a handful who are better than others at it, and they've proven over the years they know what they are doing.
Like I said, look at the results.
Okay.
Thank you very much.
- Executive Vice President of Investor Relations
Thank you.
Operator
At this time, there are no further questions.
Mr. Tomnitz, are there any closing remarks?
- Executive Vice President of Investor Relations
We'd just like to thank you all very much for joining us on our fiscal year 2002 conference call and if you have any follow-up questions, we'll be in the office.
Thank you.