霍頓房屋 (DHI) 2003 Q1 法說會逐字稿

Good morning and welcome welcome to DR Horton teleconference call.

My name Marian and I will be your conference facilitator today.

Welcome to the DR Horton 1st quarter 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 you would like to ask a question during this time, simply press star and then the number 1 on your telephone key pad.

If you would like to withdraw your question, press the pound key.

Thank you.

Mr. Tomnitz, you may begin your conference.

Thank you.

Good morning or good afternoon as it may be.

This morning I have Sam Fuller, Executive Vice President and CFO with us.

Stacey Dwyer, Ex Vice President Investor Relations and Bill Weeks, Senior Vice President and controller.

Before we get started Stacey will you please read the forward looking statements disclaimer.

Some comments made on this call may constitute forward looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Although DR Horton believes any such comments are based on reasonable assumptions there is no assurance the actually outcome will not be materially different.

All forward looking statements are based upon information available to DR Horton on the date of this call.

DR Horton is not undertake any obligation to publicly update or revise any forward looking statement whether as a result of new information, future events or otherwise.

Additional information about issues that leads to material changes in performance is contained in DR Horton's annual reports on form 10-K which is filed with the Security and Exchange Commission.

Thank you, Stacey.

DR Horton closed more homes in America than any other builder based on the latest data reported on the trailing 12 months.

It was another record quarter for us as always growing the bottom line faster than the top line.

We are proud to announce the following quarterly highlights.

Home sales increased 66% to $1.7 billion on 7252 homes sold.

Sales backlog, our future revenue, increased 56 percent to December 31record of $2.9 billion.

Consolidated net income increased 52% to 111.8 million dollars.

Consolidated revenue increased 50% to 1.7 billion.

Home building pretax income increased 50% to 158.8 million dollars.

Homes closed increased 32% to 7514 homes.

Diluted EPS increased 21% to 75 cents.

Home building debt to total capitalization, net of cash, improved to 51.5% from 55.9% a year ago.

Additionally we had approximately $900 million in dry powder at December 31, 2002.

Our net sales orders for the quarter increased 66% to $1.7 billion or 7252 homes.

This is the 6th consecutive quarter that our percentage increase in new homes sold has substantially exceeded the increase seen by the other top three builders.

Furthermore, our same store sales dollars increased 22% on the 1st quarter reflecting exceptional growth in our core divisions.

Our strong sales contributed to our record December 31 backlog of 12435 homes with a sales value totaling $2.9 billion, a 56% increase over last year.

We are focused on delivering this backlog while continuing our strong sales performance to insure another record year in fiscal year 2003.

Sam?

Thank you, Don.

Our fist quarter home building revenues increased 50% to 1.7 billion from 1.1 billion in the year ago quarter.

Home sales revenues increased 48% with homes closed increasing 32% to 7514 homes and a 12% increase in average selling price to $221,800.

The increase in the average selling price is largely due to the 1,077 homes closed by the former Schuller divisions at an average selling price of $316,200.

Our operating gross margin on home sales revenues in the 1st quarter of fiscal 2003 was 20%, a 60 basis point improvement from our reported gross margin of 19.4% in the last quarter.

We plan to continue to increase our gross margin for efforts to control our costs as we partner with our suppliers and subcontractors on a national, regional and local level.

Home building SG&A expense for the quarter was 10.5%, consistent with 10.4% last year.

We continue to focus on controlling our costs and we expect our fiscal 2003 overhead to remain at our historical 10% or better.

Bill?

Thank you, Sam.

Our financial services revenue increased 53% to $38.2 million from 24.9 million in the prior year.

This revenue increase is driven primarily by an increase in our loan volume from the home builders volume.

Financial services pretax income for the first quarter grew 75% to $20.1 million from 11.5 million in the year ago quarter.

We expect to see continued growth in financial services as we increase our capture rate and expand our market presence.

For the quarter, our consolidated net income increased 52% to $111.8 million from 73.4 million in the year ago quarter.

Our diluted earnings per share of 75 cents for the quarter represents a 21% increase from the 62 cents reported last year.

Two items on the balance sheet that we would like to highlight are lot and land position and our home building leverage.

Lot and land position is approximately 154,000 lots owned and controlled. 53% 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 3.6 year supply a year ago, reflecting our commitment to bring our land supply closer to three years and improve our inventory terms.

Our home building leverage ratio, net of unrestricted cash, improved 440 basis points to 51.5% from 55.9% 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%.

At December 31, we had approximately 900 million dollars in dry powder with approximately 200 million dollars in cash and $689 million available on our home building revolver.

Stacey?

The company expects diluted earnings per share for the quarter ending March 31, 2003 to be in the range of 73-76 cents.

This estimate is based on 159 million diluted shares for the 2nd quarter.

The company is raising it's fiscal year 2003 guidance to a range of $3.50 to $3.55 based on 157 million diluted shares.

The fiscal year guidance represents a 22-24% increase in earnings per share over the $2.87 reported in fiscal year 2002.

Our goal for the fiscal year is to achieve $8 billion in revenue on approximately 35,000 homes closed.

We expect to earn approximately 45% of our earnings per share in the first half of the year and approximately 55% in the second half.

This guidance assumes that the convertible debt will be in the money for the remainder of the year and that we will add back approximately $3 million of tax effected 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 our stock price to rise to a level where the shares related to the convertible debt are included in our share count.

Thank you, Stacey.

This concludes our 1st quarter conference call.

We will entertain any questions 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.

Your first question comes from Steve Fockens of Lehman Brothers.

Hi guys.

A quick question on the conversion or the convertibles.

At what price would those things be in the money?

About $23 a share.

About $23 a share.

Okay.

And secondly more broadly speaking in California, we have seen a lot of recent news about budget issue and budget fights and water rights. s Do any of those things going on do you see impacting you guys any time soon or maybe better ask at what point would those types of issues impact you, do you think, in California?

I think those issues clearly impact us today and they have impacted us in the past and they will impact us in the future.

Primarily they will impact our pieces of land that we have under contract, but we don't own yet that we're working out the entitlements on.

And the issue really is probably a longer entitlement period then in the past to work through those issues.

Do you think that generally means then that would actually favor bigger builders?

Because if that limits the amount of building that can go on because of reduced water rights land prices go up and therefore make it easier for you guys to squeeze out the little guys?

Yes.

I think it's nothing more than reflective of constraining the supply of lands and lots as we're seeing in a lot of our major markets today.

And on a going forward basis the large builders like DR Horton have the staff, the time, the expertise, the reputation and the money to work through those entitlements we have done.

And we clearly, being the number one builder in California as we are, we will continue to aggregate our land and lot supply as we need it and get it approved.

Great.

One quick - Are there any concerns that if governor Davis decides that he has to close the budget gap through higher taxes, either income or consumption-related that that would impact purchasing power related to homes?

I think it will impact the purchasing power, but I will tell you that we've reacted to every tax increase every interest rate scenario in California and the rest of the United States and we will do so even if governor Davis chooses to increase taxes as he's talking about.

Great.

Thank you very much.

The next question is from Timothy Jones of Wasserman and Associates.

Good morning.

How much did Schuller contribute to your sales last year in the 1st quarter?

And when is that anniversary?

It's pretty close to it?

Tim, the anniversary is on February 21.

So it didn't contribute anything to last year's 1st quarter.

It would have in January and February?

To the 2nd fiscal quarter.

Not the first one.

It just pasted.

Wait a minute.

February last year, right?

Yes.

Then it did contribute last year.

What would it have contributed if you owned it?

That's the question I have.

In other words, you obviously you weren't up 130% or something.

Roughly what were the sales from Schuller last year, do you have them?

I don't have those, Tim.

We can look those up.

What we have done for more apples to apples comparison is disclose what they contributed this year so you can see what DR Horton stand alone would have done this year compared to last year.

I do understand what you are asking.

I can give you a call with that information.

Okay.

It's impressive that that's the only one of all the acquisitions that you've made that has an anniversary, is that right?

Yes, that's correct.

That's pretty good that the other markets were up.

You talked about the 23 cents a share price on your conversion or convertible.

What does that - If the stock is not $23, what does that add back to your shares?

We assume the converts are in the money.

If you use that in the divisor, it adds 10 million shares to our divisor..

I understand that, but if God forbid that the stock does not go to 23 what effect would that have on your earnings per share.

The effect this quarter, Tim, was basically 4 cents.

That's 4 cents a share.

That's the number I'm looking for?

Yes.

I think that is -- have you seen -- one last thing.

The increased competition from either sort of a flattening out or moderation in existing home prices or an increase or decrease in the price of rentals?

Is that a factor around?

I don't believe - I think it's a factor, Tim, but as we develop new pieces of property and we bring new products online, we are constantly trying adjusting our product and our land and lot deliveries as well as product to comply with whatever factors are out there in the market place.

As we've always talked about from a rental perspective, we don't really -- the rental people are easy people to compete with just simply from the tax effective basis of the rent.

So the bottom line is even though they are offering bigger and bigger incentives to rent apartments today, which they are in a lot of the parts of the country, typically those incentives, as Stacey likes to say, are always at the tail end of the lease and not significant in terms of the tax benefit associated with owning versus leasing.

They really haven't had that much of an effect on you yet?

Sure.

OK.

Thank you.

The next question is from Steve McClinten of Ft. Worth Star Telegram.

Congratulations on another stellar quarter.

Thank you, Steve.

On Tuesday Ft Worth zoning case that cleared the way for your company to buy land and build a new corporate Headquarters there, I was wondering if you will proceed, I understand it's just under contract and if so, what will it mean to be a Ft Worth based company instead of Arlington-based company?

Well, first of all we are just doing our due diligence on that piece of property and we only have it under contract and we don't own it yet.

Clearly we have not made a decision whether we're going to relocate from Arlington to Ft Worth..

Although I'll tell you that since Don Horton lives in FT Worth, it might be an easier commute for him..

It would be longer commute for Thomas and a shorter one for DR.

Thanks.

It's strictly in the evaluation stage right now.

We have plenty of room and we like our location here, but we are evaluating opportunities two to three years down the road.

Hello.

Mr Nejmeh your line is open.

Oh, I'm sorry I didn't hear you.

Good morning.

Don, question for you.

When you look at returns on capital employed in your major markets..

Is there much variability around the mean either if you look at it by price point, if you look at it by geography and finally, if you look at it broken out in terms of those markets where there's a concentration of share among large builders as distinctly markets that are more highly fragmented?

I don't think there is any doubt as we've talked before where we have higher market penetration and captured a larger percentage of the market.

That there certainly economies a scale associated with that.

As Stacey has talked about before, clearly one of our major advantages is simply we see the best land deals first at the best price.

Clearly like we are in 70% of our markets, we are one of the top five builders, we have the best subcontractors at the best price.

So clearly we believe as we continue to penetrate our markets that there are definitely economies a scale associated with that.

As you go to geographic regions, I don't think there's any doubt that the West and the Southwest continue to generate some of our very best ROI's although we are very impressed with what our 3 division presidents have accomplished in the state of Florida over the last couple of years to the extent that they almost doubled their return in the state of Florida.

So basically, if you just take a look at the Southeast, the West and the Southwest on a geographical basis that's clearly where we are getting our best returns.

And you will notice that we got out of a lot of those smaller mid-western markets like Cincinnati, Louisville, Nashville and those kind if markets where there was a very poor return for us.

You indicated I think on the last call that your present intent is to more fully integrate the acquisitions you have concluded and perhaps slow the pace of acquisitions at least for the time being in 2003.

Is that a reflection, Don, of the fact that acquisition prices in your judgment have become too high and if so, do you think that relates to the good will accounting and the fact that some companies are perhaps paying more for acquisitions then they would have otherwise had the change in accounting not taken place.

First of all let me be clear about one thing as we have been in the past.

Schuller is fully integrated and has been for quite some time.

And there are no integration issues associated with Schuller.

Secondly we stated before that the reason that we have chosen to focus less on acquisitions in fiscal year 03 than we have in the past is because, first of all, clearly we've been able to - we've told the street tha we can increase our EPS greater than 20% 03 over 02 and we're comfortable we can do that..

And frankly we are comfortable we can do that in the next year.

The bottom line is that with our stock price where it is today, it's not a good medium, it's not at a good value for us to continue acquisitions at the rate that we did in the past.

But don't be confused about our acquisition strategy.

We constantly are looking at deals.

We are still looking at deals and if there is a good deal that takes place, we've said - or comes about - we've said we would do that deal this year.

In terms of acquisition prices, do you think there has been a detrimental effect on acquisition values given the change in accounting?

I'm not sure.

The whole issue of the good will accounting not amortizing it and the requirement to use purchase accounting, I don't think materially changes the outlook.

We are obligated, as you know under the new rules, to periodically evaluate our good will for impairments and the net effect of any impairment right now would arguably be the same as amortization.

Now having said that, we've done those impairment evaluations and there's absolutely none on the horizon.

But also, Greg, if you take a look at the way we've looked at acquisitions over the past, we are applying the same metrics on a going forward basis as we have in the past.

Specifically we want to make certain that it's accretive in the first 12 months and basically any premium we pay over book we want to earn back in the first 2 years.

So, we have been pretty solid in terms of our metrics and in terms of approaching acquisitions and I don't see that changing going forward.

Terrific, thanks.

The next question is from Joseph Sroka of Merrill lynch.

Good morning, everyone.

Don, you mentioned that Shuler is fully integrated, but were there still any accounting adjustments in the quarter that we maybe won't see after the anniversary?

I guess Sam.

We're past the purchase accounting adjustments, Joe.

But, we still think that we've got room to grow our margins going forward.

As we begin fully getting past that whole process, but there were none in the first fiscal quarter of 03.

I think we mentioned last conference call, we are pretty much, we told people, the street, that we were going to be 10-12 cents accretive in the first 12 months post the deal and we are working toward that goal.

We also told people we would save $30-40 million in additional cost saves and we are clearly over halfway there in terms of our cost saves.

In terms of integration, it's integrated and are there more economies a scale to be recognized and achieved?

Yes, there, but we told people we would achieve those $30-40 millions in cost saves in the two years post the deal.

Sounds good.

If you're going to focus less on acquisitions, unless something ideallic comes along, how do you spend the dry powder and What are the priorities?

We have several alternatives.

One is that we do have some converts that could come back to us, Stacey .

$213 million accreted value on the convertible debt could be put back to us in May.

We are planning for that.

In addition to that, we have some tens?

We have about $149 million worth of 10% that will be callable at par after April 15.

Which would be another alternative for us to look at.

Obviously the other thing that's on a lot of people's minds is clearly something that's under consideration that dry powder will do for us is put us in a position to do stock buy backs.

And where does that sort of rank on the [UNINTELLIGIBLE]?

Obviously you have to assume if you are going to make the assumption that the converts will get -- if you're making the assumption that the converts are going to get put back to you, this is the same convert that you're assuming that's going be in the money?

We are not making an assumption they're going to be put to us.

We simply believe that it's prudent to have a little bit in our war chest to handle that eventuality should it occur.

I guess for clarity on 03 we have an event coming up in May that we will get better clarity on how things are [UNINTELLIGIBLE] for the year..

Exactly.

That's fair.

But then, Don, other than that, I mean would you say you are more or less receptive to share repurchase than you were last quarter or this time last year?

I'm more receptive today than six months ago.

I think I have been pretty adamant about our industry and the fact that it seems like it's difficult to do an equity deal at a decent price without getting crammed down and it's interesting to me that it's so hard in our space to do an equity offering and but then now people are looking toward us to buy it back.

So, I am more sensitive to it and reflecting more upon it than what I was before.

And certainly at these multiples and knowing that we can grow our EPS at greater than 20% this year is a pretty compelling investment.

Fair enough.

The next question is from Michael Rehaut of JP Morgan Chase.

Hi, good afternoon .

A couple of questions.

One, if you could just discuss region by region how order trends are and if you are seeing any change in terms of pricing or incentives and then I just had a follow-up.

First of all, let me address the incentive issue as I always do. 24-7, 365 somewhere in DR Horton land we are offering incentives .

The only thing that I can tell you is gross margins have continued to increase or stay at their already high level that we have seen for the last 3 and 4 quarters irrespective of those incentives.

As far as regions in the country, I would suggest - I would say to you that the only markets where we are showing any weakness at all is what we refer to as the upper Carolinas which basically is in the Charlotte and the Raleigh and Greensboro market.

Other than that we have no weak markets And those three markets, by the way, have been weak for us for the last 12 to 18 months.A

Okay.

If you can just -- I missed a little bit at the beginning of the call.

You mentioned ASP's were up 12% and that includes a 316,000 ASP from how many Schuller homes?

Also if you can just give us an idea of backlog, volume and dollar value ex-Schuller?

On the closings, that was on 1077 closings from Schuller.

The back log associated with Schuller is 1798 homes.

Do you have a dollar value for that as well?

The dollar value on that would be $601 million.

Great.

Thanks.

One last question on the financial services.

The capture rate and what was contributed if any of the REFI activity.

The REFI activity was 8-9% , our capture rate on the company wide basis remains flat at 55% and our capture rate in markets where we had the mortgage company is running at 73%.

And versus a year ago?

Versus a year ago.

Or last quarter?

While she is looking that up, I might point out to you that Stacey mentioned to me in between calls here is that even though our upper Carolina markets are weak, we are still making money in those markets.

Great.

Thank you very much.

We have your number for you.

Great.

1st quarter last year our capture percentage was 77 where we had mortgage companies Compared to 78.

Company wide it was I believe 62%.

We are up a little bit to the 55%.

Largely that's a function of the fact that we've integrated Schuller into the operation and largely they're a California builder and we do not have, we're just now setting up our mortgage company in California.

And you will see at the end of the fiscal year 03, but particularly the fiscal year 04 those capture rates go up.

Especially company wide.

Okay.

And the REFI activity last quarter or a year ago, if you have anything like that?

REFI a year ago was right at 10%.

Decreased.

Very good.

Thanks so much.

Your next question comes from Alex Barron of Franklin Templeton.

Good morning and congratulations on a great quarter.

Good morning to you.

I just have a couple of questions.

One was can you give us the interest incurred for the quarter?

58.8 million

Thanks.

Did you buy back any share this quarter ?

Not this quarter.

Last, I guess I was looking here at the orders from Schuler and by the numbers I have, it seems they were up 5% compared to last year which is I guess much less than for the rest of your company.

I'm wondering if theres only specific areas that maybe aren't doing too well and if you can elaborate on your expectations for going forward.

Actually the Schuller divisions are doing very well.

The issue is post closing of the Schuller acquisition back on Feb 21st..

It's no different than most acquisitions we have done is they ran their land and lot inventory down pretty dramatically toward the end, the closer to closing them and post the closing of them, all of a sudden we began replenishing their land and lot inventory and we are in the process of doing that.

I would say to you in the next 12-18 months you'll see those sub-divisions coming online.

So there no weak markets, just the fact that typically deal when a builder gets ready to sell a company typically they run their inventories down.

Okay.

And I guess you did talk about the dividends.

I guess as a possibility of that.

Is that something that you think you would consider pretty strongly if the legislation was enacted or that would be maybe not?

We are paying the dividend.

We paid our first cash dividend in 1997, almost six years ago and have increased that dividend payout both in [UNINTELLIGIBLE] and relative terms every year since.

Right now today of the home builders, publically held home builders, we're the top dividend-paying yield company in the entire space.

And we see no reason to change our dividend policy.

We have always been very confident in terms of our cash flow and our profit generation to pay a dividend and that's why we started it back then and our philosophy is to continue that on a going forward basis.

So conceptually you still see better opportunities for using your capital for growth over the next few years?

Frankly we see a lot of opportunity for our capital, but let's make clearly, Alex, we are focused as we've told you many times before in your office, is to grow our company on the EPS line 15-20% a year, year after year after year.

We're going to continue to invest in our business because frankly our returns justify that kind of investment, so yes.

Thanks.

You're welcome.

The next question is from Ivy Zelman of Credit Suisse First Boston.

Good morning everyone.

I wanted to ask you, Don, with respect to a few items.

In Atlanta, with the Tori acquisition, what's roughly the average home price there?

I don't have that off the top of my head, but I think it's somewhere around the $156,000..

Okay.

And therefore at that low price point you are not seeing the weakness that the mid-to higher end areas within Atlanta are suffering with?

No.

As a matter of fact our sales in Atlanta actually Stacey just gave me a number and I'll give you the correct number.

Mine was a rough number and hers is $189.

Secondly with respect to where you are on cancellation rates relative to last quarter and a year ago, can you give us an estimate, please.

A year ago we were still dealing with the aftermath of September 11th.

So we are down year over year and we're back in our 17-19% range which is where we were last quarter.

Speculative inventory, what percent of your over all inventory would be spec roughly?

Bottom line is that our specs are running at one of the lowest levels in the history of the company.

We're running something right around 28-29%.

But as - you know about our specs, 90% of our specs are sold before their completed.

And in looking at that as compared to last quartet is it down or is it up or what?

It's up slightly from last quarter.

That's seasonal,Ivy.

You see that historically going from September 30 to December 31 for us.

Okay.

And, Don, you had once said to me that you were not looking at buying back stock.

And we had a conversation not to long ago.

You changed that view and you actually opened more open minded to buying back stock?

There is one thing about me, I am an involving person and I do pride myself on being open minded and to answer your question directly, yes.

I appreciate it and I guess you had already answered - Mike asked a question about the regions.

I guess I would just follow-up on Mike's question with relative to price increases and markets where it's a bit more competitive, are you successful in raising prices in all of your markets or is it more selective but still successful obviously, but more selective?

I think it's more selective.

Clearly we don't have the pricing power that we had two years ago, but what we do have is that we have power in terms of negotiating on our cost of goods purchased and we are seeing that as some of the markets slow.

And the smaller builders in those markets slow that we were able to hire our subcontractors more cost-effectively and clearly as you are well aware our national purchasing we're continuing to increase our savings per unit which were at $2200 per unit last year..

That's as the market slows, and some of those markets both on a regional and national basis, we believe that we can offset any lack of pricing power with increased cost sales.

If you look at the margin improvements on a go forward basis assuming that the pricing is again, as you said, not as prevalent as it was two years ago and assuming you may have the benefits of costs improvements, do you expect that gross margins can actually increase in fiscal 03 or would you anticipate roughly flat margins to be conservative.

Well, I can tell you where Stay is coming from on that issue.

She is projecting pretty flat gross margins for this year..

My goal is from the operational side clearly our goal is to try to increase those, Ivy.

Absorptions for community or your subdivisions, I mean, you are assuming a pretty healthy demands to get to that scenario, Stacey?

I'm assuming demand that's consistent with what our division presidents have projected.

They have the luxury of knowing what's happening in their market and also what product they have available when.

Right, but I'm saying basically everyone is anticipating that your absorptions are going to be up year over year in your subdivision, correct?

I'm not so sure that our subdivision absorptions are going to be up on a subdivision by subdivision basis, but I will tell you that, because obviously some of our growth is coming from adding additional subdivisions in various markets.

Just tell you that most of our -- virtually all of our divisions are projecting and have projected beginning October 1 for this fiscal year to close more units in 03 then they closed in 02 and that's going to come from a function of both absorption and subdivisions as well as adding new subdivisions..

And then lastly and then I will let others ask questions, you had indicated that your over all land expenditures in fiscal 03 would be up from 02, but at an accelerated growth rate..

I think you're roughly looking at 12%-15% increase on what you'll spend on land..

Correct me if I'm wrong, Stacey, but I have an average of about 950 million you will expect to spend in 03 on dirt, is that correct?

Roughly still the right estimate to be using?

Your percentage number is probably a little high.

Our internal goal is to increase our land and lot purchases by about 12%.

Okay. 12%?

Yes.

In looking at where you would allocate that land investment and what percent of it would be roughly just exercising options that you currently hold compared to actual dirt purchases on raw ground.

Roughly obviously it's difficult to say, but what do you thing the best ballpark answer would be on that?

I tell you I would have to - to be in the ballpark I'd have to call you back because that's not something I focused on but that's a good question.

We will call you back.

Ivy, you mentioned the Atlanta market with respect to average prices.

I would say that in the 1st quarter our sales, net sales were up 40% in that market.

So apparently we are doing something right.

Congratulations gentlemen, thank you.

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.

Your next question is from Margaret Whelan of UBS Warburg.

Congratulations on the quarter.

Most of my questions are answered.

Just wanted to follow-up, I guess you were saying that last year the cancellation rate was higher because of 9-11 and here you're saying it's still between 17-19%.

Is that accurate?

That is correct [UNINTELLIGIBLE]

Wouldn't you have expected it to be a bit lower?

No, I'll tell you, our historical range is 17-19% except the first two quarters post 9-11 last year, when it got into the low 20's.

But, on an industry-wide basis, you probably know the number better than I do.

I believe we run one of the lowest cancellation rates in the industry, so 17%-19% we're happy with.

Just [UNINTELLIGIBLE] acquisition expected savings of 30-40 million, are you still on tract or are you ahead of yourself with that?

I think we're pretty much on tract.

Stacey did a calculation a couple of weeks ago that basically shows that we've achieved about 50% of that $30-$40 million and we have about 50% yet to achieve.

Pretty much on track.

Thank you.

Your next question comes from Stuart Sprague of MFC Investments.

Good afternoon , Gentlemen.

Good afternoon.

I was curious if you are willing to buy stock, have you changed your views to what kind of leverage you people would like to run?> Clearly we stated from the beginning of this fiscal year and it has not changed.

Clearly we stated from the beginning of this fiscal year, and it has not changed, that At the end of fiscal year 03 which will be 9-30-03, we are pledging that our debt to cap will be 49% or less..

The next question comes from Steven Kim of Solomon Smith Barney.

Hi, gentlemen.

I jumped on the call just a few minutes ago so I apologize.

I thought I heard you indicate again that target growth rate was[UNINTELLIGIBLE] cent range plus ongoing for the next several years, is that right?

You are breaking up a little bit so would you repeat that please?

You indicated, I think, that your targeted growth rate for EPS is around 15% over the next several years?

15-20%, yes.

You have been running above that, haven't you, for the last several years?

We have.

And so therefore pretty much your target assumes a deceleration in your growth and EPS already, right?

So that target coming down shouldn't make the possibility of decelerating your growth intentionally to free up cash particularly [UNINTELLIGIBLE] here?

Right?

No.

Right.

And much of the improvement has come from the margin side.

I guess so it really comes down to the question of if we see some sort of a slow down in the market, do you get the sense that margins in the next 12-18 months could come off more than let's say 150 to 200 basis points versus the current trajectory?

What would it take for gross margins to sort of get hit over the next 12-18 months by an amount greater that lets say 200 basis points?>.

First of all I don't see anything on the horizon that would impact our margins negatively by that amount if at all.

What would it take?

It would take a bunch of division presidents out there and regional presidents and the corporate staff asleep at the wheel here.

And we are not asleep, I assure you.

As an example I can tell you that our - Stacey and I came out of Austin in December and one of our leading divisions is in the process of rebiddng and renegotiating every labor and materials contract.

Because in Austin, even though our sales are up, there is some margin compression going on in the Austin market, but nevertheless we are still achieving great margins there in that market.

The bottom line is we would have to be asleep at the wheel and we are not.

Here in DC it certainly doesn't look like there is any risk to the returns on capital at the very least.

Therefore I guess what I am hearing you say is if you were to actually generate EPS growth of -- I hate to say it, but a mere 15%, you would p;probably[UNINTELLIGIBLE] free up a significant amount of cash.

That would, yes.

Thanks very much.

Your next question is from Steven Fockens of Lehman Brothers.

Hi guys.

One quick follow-up.

We've continued to hear from a few builders that Texas remains relatively weak and if I read from you right, you guys are still doing relatively well in Texas.

Is it fair to interpret that in market, especially maybe Austin where the big builders I think are relatively large that you are taking share from other bigger builders?

Yes, in answer to your question we're up in Texas.

We keep hearing other builders talk about Texas being a weak market.

It's not a weak market..

As we've heard people talk about Colorado and Nevada being weak markets.

They are not weak markets for us.

The bottom line is yes we are taking market share away from not only the smaller builders, but also the larger builders.

Particularly in Austin.

Is there anything in particular that you guys can point to that you're doing that allows you to take share from the other guys, Is it particular price points, land positions or is it do you think the whole way you're running your business in those markets?

I would say all three of those,but most importantly if you meet the division presidents in the markets.

Those individuals and the teams that they have formed and the management style of those division presidents who have basically a philosophy of take no prisoners Whether they are big builders or small builders.

They are on and have done in the past agragating market share at an increasingly profitable rate and you just have to meet them to believe them.

It's a people issue.

Those operator and the operators of most of our markets have that kind of attitude.

Great.

Thank you very much.

Your next question is from Ivy Zelman of credit Suisse first Boston.

Good afternoon, Gentlemen.

Dennis McGill on behalf of Ivy with a couple follow-ups.

I apologize if you guys have touched on this already, but in the past few quarters you had to book a loss in relation to your swap agreements.

Can give us what that change would have been this quarter.

Actually we had a gain.

We got a little bit of it back this quarter, Dennis, to the tune of a half million dollars.

A half million.

Can you touch on why the lower interest expense this quarter?

The interest expense that's actually on a separate line on the income statement is a reflection basically of how much of our interest incurred is capitalized.

That's determined based on the amount of our total inventory that is active.

For this quarter. more of our interest was able to be capitalized based on that calculation.

Very good.

Just to make sure that I understand this correctly, the [UNINTELLIGIBLE] 23 dollars that you mentioned, that's the accreted price that the convert will need or stock will need to trade at?

It's the average of the last 20 trading days of the fiscal quarter.

If that price exceeds 110% of the accreted value at the end of the quarter, then we have to use the converted method.

And the created value at the end of the first quarter was --.

Approximately $21.

Very good.

Thank you very much.

At this time there are no further questions..

Mr. Tomnitz, are there any closing remarks?

No there aren't.

Thank you for attending the DR Horton 1st quarter conference call and thank you for handling it so efficiently.

This concludes today's DR Horton conference call.

You may disconnect.