霍頓房屋 (DHI) 2003 Q2 法說會逐字稿

Good morning. My name is La Trishia (ph). I'll be your conference facilitator today. I'd like to welcome everyone to the D.R. Horton second 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 session. If you would 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.

Thank you. And thank you for joining our conference call this morning. With me is Sam Fuller our EVP and CFO, Stacey Dwyer (ph) our EVP of Investor Relations, and Bill Weeks (ph) our SVP and Controller. Before we get started, Stacey.

Some comments made on this conference 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. PRAUL all forward-looking statements are based upon information available to D.R. Horton on the date of this conference call. D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K and most recent quarterly reports on form 10-Q, which are filed with the Securities and Exchange Commission. Don.

Donald Tomnitz thank you. The second quarter of fiscal 2003 was another record quarter for D.R. Horton, the largest builder in America. As always growing the bottom line faster than the top line. We're proud to announce the following highlights. Consolidated net income increased 44 percent to 127.8 million dollars. Home building, pretax income increased 41 percent to 185.2 million dollars.

Total sales increased 33 percent to 2.4 billion dollars, (inaudible) homes sold which contributed to our record sales backlog up 32 percent and an all time company record of 3.5 billion dollars (inaudible)

Consolidated revenue increased 19 percent to 1.5 billion dollars. Homes closed increased 19 percent to 7,888 homes.

Home building debt to capitalization net of cash improved 450 basis points to 51.3 percent from 55.8 percent a year ago and at March 31st we have approximately 800 million dollars in dry powder.

Donald Tomnitz financial services, consolidated pretax income increased 95 percent for 21 million. The company repurchased approximately 1.7 million shares in March 2003. All of these accomplishments contributed to an increase in second quarter diluted earnings per share of 34 percent to 86 cents from 64 cents in the same quarter in fiscal year 2002. Sam.

Thank you, Don. Our second quarter sales increased 33 percent to quarterly record 2.4 billion dollars on 10,548 homes sold. From 1.8 billion dollars on 8,617 homes sold in the year ago quarter. Furthermore, our same store sales dollars increased 19 percent in the second quarter, reflecting continued exceptional growth in our core divisions.

Net sales orders for the first six months of fiscal 2003 increased 45 percent to 4.1 billion dollars, on 17,800 homes sold. For the six months ended March 31st, 2003, same store sales dollars increased 20 percent.

Our strong sales contributed to our all time record backlog, fifteen thousand ninety five homes with a sales value totaling 3.5 billion dollars, a 32 percent increase over last year. This is the largest reported backlog in the history of the home building industry.

Our backlog gives us excellent earnings visibility for the remainder of fiscal '03. If you look at the homes we've closed plus our backlog, we have sold or closed 87 percent of our 35,000 projected closings for the fiscal year. And we have only 13 percent of those projected deliveries remaining to sell. We're now beginning to focus on selling homes to build our backlog for fiscal 2004. Stacey.

Just in case you missed it, Sam did say we've sold or closed 87 percent of our 35,000 projected closings for fiscal year 2003. On the sales front, we are the leading builder in California, Colorado, Arizona and Texas and Florida rounds out our top five home building states.

We had strong sales performances in the following markets: In California, our sales dollars increased 46 percent. In the Los Angeles area, they were up 66 percent. and San Diego sales dollars increased 56 percent. In Colorado, where a major market is Denver our sales were up 31 percent. And Arizona, again with Phoenix as our major market, sales dollars were up 24 percent. Texas saw a 15 percent increase in sales dollars, with dollars up 16 percent and San Antonio up 43 percent. Ask in Florida sales dollars increased 43 percent with Orlando posting a 91 percent increase and south Florida posted a triple digit increase of 106 percent.

And finally a couple of markets that we'd like to mention where a couple of our competitors have seen weakness, in Las Vegas we were up 41 percent. In Atlanta we were up 24 percent.

Thanks, Stacey. Our second quarter home building revenues increased 19 percent to 1.9 billion dollars, from 1.6 billion in the year-ago quarter. Home sales revenues increased 16 percent to 1.8 billion dollars on 7,888 homes closed.

This increase was driven by 19 percent increase in homes closed, offset by 2.5 percent decrease in our average closing price. Our land sales were unusually high this quarter. As we focus on improving our balance sheet, we are challenging the land positions in each of our markets and in each of our subdivisions. We have been extremely successful in our land and entitlement process throughout the country where we have more than a three-year supply we continue to evaluate our lot positions. While the timing of land sales remains difficult to forecast, we do not anticipate that this level of land sales will be repeated in the third or fourth quarters.

Home building revenue for the six months ended March 31st, 2003 increased 32 percent to 3.6 billion dollars on 15,402 homes closed, compared to 2.7 billion dollars on 12,330 homes closed for the same period of fiscal 2002. We mentioned in our conference call last quarter that we expected our margins to be greater than 20 percent this fiscal year. The 20 basis point improvement to 20.2 percent in the March quarter, compared to home sales margin of 20 percent in the December quarter, is consistent with our expected margin improvement.

This also represents a 50 basis point improvement over the year ago quarter home sales margin before purchase accounting adjustments. The year ago total home building margin of 18 percent reflected approximately 33.6 million dollars of purchase accounting adjustments related to the SHULER (ph) acquisition of which 26.5 misdemeanor dollars million dollars affected home margin. The adjustments in the year ago quarter related directly to land sales.

Home building SG&A expense for the quarter was 10 percent of revenues, compared to nine and a half percent a year ago. For the six months ended March 31st, 2003, our home building SG&A was 10.2 percent compared to 9.9 percent a year ago. Last year's historical low SG&A percent was primarily due to the number of homes SCHULER close in the five week period after the acquisition compared to the overhead incurred in that period. In fiscal 2003 our goal is the same as it has always been, to maintain our SG&A as a percentage of home building revenue at less than 10 percent. One of the ways we do that is operate on a very efficient basis and we will consistently generate over one million dollars in revenue per employee. Bill.

Our financial services division had another record quarter. Financial services revenue for the March quarter increased 67 percent to 39.7 million dollars from 23.9 million in the year ago quarter and for the six months ended March 31st increased 60 percent to 78 million dollars from 48.8 million in the year ago period. Financial services pretax income for the March quarter increased 95 percent, to 21 million dollars from 10.8 million in the year ago quarter, and for the six-month period increased 85 percent to 41.1 million dollars from 22.3 million last year. In the past 12 months we have improved our capture rate company wide to approximately 67 percent from 50 percent this time last year.

And we have increased our capture rate in markets where we have mortgage offices to 72 percent from 61 percent last year. This reflects the continued commitment of our mortgage operation to primarily support our home buyers. As our home building operation grows our financial services operation grows with it.

We have opened new mortgage offices in Portland and Seattle, as well as several new branches in southern California. Looking forward to 2004, we see a lot of opportunity in California. As the mortgage branches that we are opening in California mature, we expect to see continued earnings expansion in financial services. For the quarter, our consolidated net income increased 44 percent to 127.8 million dollars from 88.9 million last year. The 44 percent increase in net income compares to a 19 percent increase in total revenues, continuing our long standing tradition of growing the bottom line faster than the top line.

This also represents an all time company record of 16,000200 dollars in net income per home closed. Our diluted earnings per share for the quarter increased 34 percent to 86 cents per share from 64 cents per share in the year ago quarter. For the six months ended March 31st, net income increased 48 percent to 239.7 million dollars, from 162.4 million last year. Diluted earnings per share for the six-month period increased 29 percent to 1.62 per share from $1.26 a year ago. Our income tax rate increased from 37 and a half percent to 38 percent this quarter, primarily due to our increased market presence in California and the relatively high state income tax rates there. There are three items we'd like to highlight from our balance sheet.

Our land and lock position, our net home building leverage and the March quarters share repurchase activity. We control approximately 163 thousand lots at March 31st, 2003. Of which 50 percent are owned and 50 percent are optioned. The number of owned lots is flat with December 31st, and it's down as a percent of total controlled lots from 53 percent at December 31st, reflecting our efforts to reduce our own lot positions in markets where we have more than a three-year supply.

Our home building leverage ratio of net of in restricted case improved basis points. 51 percent from 55.Eight percent a year ago. Our goal for fiscal 2003 is to continue this improvement with the year-end home building debt to cap target of less than 49 percent. At March 31st, 2003, we had approximately 800 million dollars in dry powder, with approximately 160 million in cash and 633 million available on our home building revolver. The company repurchased approximately 1.7 million shares of its common stock in the month of March, 2003.

The company has approximately 33.5 million dollars remaining on its stock repurchase authorization. When that authorization has been exhausted, we plan to approach our board when necessary to increase the authorization based on our expected cash flows and current balance sheet structure. Stacey.

The company is raising its guidance for the year to approximately $3.60 to $3.65 per share, based on approximately 152.4 million diluted shares. The fiscal year earnings guidance represents a 25 to 27 percent increase over the $2.87 reported in fiscal year 2002.

The balance of our fiscal year earnings will be realized approximately 45 percent in our third quarter and 55 percent in our fourth quarter. This increased guidance is based on 35,000 homes closed and more than eight million dollars in consolidated revenues and assumes that our average sales price remains in its current range. As we mentioned earlier, we expect to maintain our SG&A at less than 10 percent, and we expect our home building growth profit margin for the year to exceed 20 percent.

This guidance does assume that the convertible debt will be in the money for the remainder of the year and that we will add back approximately $2 million of tax affected interest expense to our reported net income for the earnings per share numerator. We realize this is a conservative approach to our EPS guidance but our stock is currently trading close to the levels where the shares related to the convertible debt issue will be included in our share count. Don.

Donald Tomnitz now, to give you guidance on what to expect. D.R. Horton will complete this 26th consecutive record year in fiscal year '03, continuing to increase our revenues and profits and growing the bottom line faster than the top line.

As Stacey mentioned, we will exceed eight billion dollars in revenue in fiscal year 2003. We'll continue our growth in fiscal years 2004, 25, we specifically plan to grow consolidated revenues 10 to 15 percent annually while growing EPS 15 to 20 percent annually. This growth will be characterized by continuing to control our SG&A and continuing to be the lows cost operator in the industry.

All the while expanding our growth margins. Further focusing on internal growth in fiscal year '03 but continuing to evaluate acquisition opportunities on a going forward basis. We will continue our stock repurchase program while decreasing home building leverage. As Stacey mentioned our goal for fiscal year '03 is a debt to cap, net of restricted cash of 49 percent or less. We will generate free cash flow in fiscal year '03 and possess greater than one billion dollars in dry powder at physical year-end '03.

In conclusion, our company and industry record backlog of 3.5 billion dollars, combined with our Q1 and Q2 closings, reflects that we have sold or closed 87 percent of our fiscal '03 projected closings. Therefore, fiscal year 2003 is in the bag and we're now focusing on fiscal 2004. Finally, our people are extraordinarily proud that D.R. Horton climbed 97 slots from No. 368 to No. 271 on the Fortune 500 list. But most importantly, D.R. Horton was a 11th amongst the Fortune 500 on annual EPS growth over the last 10 years. And an incredible accomplishment for this company. At this time we'll entertain any questions you may have.

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

Your first question comes from the line of Margaret Whelan (ph) from UBS Warburg.

Good morning, folks

Good morning, Margaret

Congratulations on the quarter. Would you talk about the price declines this is a mixed issue. Seems like it was (inaudible) for the closing.

It is primarily a mixed issue. If it were sales price to pressures, you would have seen a decline in the margin. Since you saw an increase in the margin, it is truly driven by a product mix.

Is that something that you were gearing towards?

Really over the last year and a half one of our focuses in one of our markets is to penetrate the market further and to do that we have moved slightly down the price scale. We were focused on delivering homes to the first time and the first time movement buyers.

And the second thing is under the return on capital can you comment on how you can get that to improve? Maybe it would be inventory turns and then tying into the land sale and I understand the comment that if you have supply or more than three years of supply in some regions you're going to be selling land but how about the time and what region (inaudible).

First of all, Margaret, return on invested capital is an important item to us and we are focusing on that. Can you see when we were up visiting with you recently we explained we gave our division presidents an additional bonus point to achieve a 1.6 inventory turn. We've also increased our return on inventory. Percentage level (inaudible) Percent to 20 percent. As well as we are decreasing our own lot inventory and placing more of our land and lot positions in the hands of third party developers. We think those factors combined will increase our ROIC (ph).

In addition to the focus on our balance sheet and one of the things we did just this last week is replaced higher price debt with lower cost debt, reduce our overall cost to capital and help improve that return.

And the other major thing, Margaret, is this fiscal 2003 does not have the 60 million dollar purchase accounting overhang from SCHULER.

How much was it for the quarter, actually?

The first quarter?

Yes.

33 million. That was last year. I'm sorry.

For this past, the quarter just reported.

No, none.

There was none. Great. What region were you selling the land in, please?

Primarily in our California region, represented the vast majority of our land sales.

Okay. Thanks very much, guys.

Thank you. Your next question comes from the line of Steven Kim (ph) with Smith Barney.

Thanks. Congratulations guys. Another very strong quarter.

Thank you, Steve.

I can get used to this. I guess we've already been doing that, though.

We're never used to it because I can guarantee every day we get up, as I say, shower and shave and they put their make up on, we're constantly striving for the next level.

Good. First of all I want to sort of applaud on you the return on capital you guys have already been generating. It's been pretty impressive. But I was wondering if you could give us some clarity on the breakout of inventory in terms of the various components. I don't know if you have that yet in terms -- the way you typically get it in your Qs, do you have that?

Yes, the finished homes and construction progress is 2.4 billion.

Do you have the decimals on that?

I'm sorry?

Do you have the decimals on that?

The thousands? Two billion 407.6. Our lots developed and underdevelopment is two billion 321.8. And our land held for development is 6.8 million.

Perfect. And then with respect to your average price, earlier I think you had given a guidance statement that the full year '03 price average closing price would be basically flat with last year. I think you gave that maybe two quarters ago. And I'm just trying to get an update on that. Obviously at this point it kind of looks like you're going to be up year over year with your backlog price, beginning backlog price for the third quarter up about 10 percent year-over-year and thus far this year your average price has been higher than last year. So given your comment earlier about mix shift seems like your average closing price will be up year over year, right?

What we're running on the average closing price year-to-date is 223,000 compared to 222 last year.

Okay.

And one thing about the backlog is that price in our backlog generally tends to average higher than our average closing price. So I'm not sure that's your best indicator of where our closing price will be.

On the other hand, you oftentimes tend to have your highest average closing price in your fourth quarter. Any reason why that wouldn't happen again this year?

Not any that we can think of.

That would kind of skew things upward, I would think. Well, basically that was it for me. Thanks very much and congratulations.

Thank you, Steve .

Thank you. Your next question comes from the line of Joseph Sroka (ph) with Merrill Lynch .

Good morning, everyone.

Good morning, Joe.

What do you need the dry powder for or what's the priority for the dry powder if it seems like you want to reign in leverage and I understand the stock repurchase has a priority?

Well, I would say to you I've always been a cash type person and to the extent that we really are going to be generating more cash than we have in the past since we've controlled our inventory growth, and as a function of not being able and largely to pay off a AI lot of our debt because it's not -

Yes, we can't really call very significant amounts of our debt, Joe, as you know. We have 100 million dollar issue that's due. Eight that's callable -- but the premium is steep on that.

I understand when you comment on dry powder you're saying cash balance but revolver, what would make you spend the revolver, other than working capital?

I'd say the biggest issue we have on our dry powder our goal of dry powder at the end of the fiscal year is the reviewing any alternatives that may come before us. Clearly we've said in '03 we planned on doing no major acquisitions. And so far we have not. But clearly it is our stock price recovers and if we think there are accretive deals like we've done in the past up there we'd like to be in the position to be able to do one.

Another thing, Joe, is that at the end of each reporting period that's the bottom or the absolute minimum for our outstanding revolver balance. We use that revolver as you indicated for working capital purposes at mid month, you know. So typically our revenues come in toward the end of the month, which is the point at which we actually pay it down. So the number you see at the end of the month is generally the low point of the entire reporting period.

Joseph Sroka That's fair. And then for Stacey, I didn't catch the number you gave for the denominator on that 360 to 365 EPS.

About two million tax effected.

I'm sorry, the share count denominator.

152.4 million shares.

152.4?

Yes.

Thank you very much.

Thank you. Your next question comes from the line of Carlos Ribeiro (ph) with Credit Suisse First Boston.

Good morning, gentlemen and Stacey.

Good morning, Carlos. .

Congratulations on a good quarter. Most of my questions have been answered. Clean up items. Stacey refresh my memory the in the money stock price is 23 dollars for the convert?

Actually, the in the money stock price is around --

21.40 today, Carlos. The actual conversion premium as you know is 10 percent. So it would be around 23.50 or 23.40.

Got it. Okay. Cancellation rates, any change there?

Actually, yes. As you know, our historical ranges have been between 17 and 19 percent other than for about the first two quarters post -- 911 but they're trending down this quarter and they're down to the lower end of that 17 to 19 percent range. So I'm very pleased with that.

Very good. Lastly on your interest expense and your cap interest, obviously you guys are not reporting any interest expense this quarter and your amortized interest and cost of sales was up about 20 million year-over-year, can you give us insight in terms of what happened there?

Essentially we are capitalizing 100 percent of our interest incurred because our debt as compared to our active inventory is basically driving that. As we improve our inventory turn, some of the capitalized interest that's been our inventory in the past is flowing through at a greater rate than you may have seen in the past in our cost of sales.

It's still consistently a two, two and a half percent of our revenue, Carlos. It really hasn't changed that much over the past few years..

And you mentioned a goal of 1.6 times inventory turns. When are you targeting that goal to be achieved?

We just established that as a bullet point. As we always laugh around here we pay our division presidents to do something and they do it. I really anticipate that it will not happen this year. But I do believe in '04 and 2005 we'll hit that 1.6 turn Carlos.

Do you think it will be more in 2004 than 2005.

I'd like to see it in 2004. We're not promising but that's our goal.

If most of the divisions hit it we'll raise the bar.

Very well. Thanks, guys.

Your next question comes from the line of Armando Lopez (ph) with Morgan Stanley.

Just a couple of quick questions, one I was wondering if you could comment on what you're seeing in the incentives, maybe in some of the specific regions that you mentioned?

Well, as I've always said at least for the last year, D.R. Horton land we offer incentives 24/7365. The only thing you can look at is clearly as our grosses continue to increase our markets where we are having strong pricing pour and to clarify a little bit better for you, the last, at the end of Q1 we had five weaker markets and really we have no weak markets based post Q2 our slower markets are simply Charlotte and Raleigh but a couple of our weaker markets Greensboro Greenville and Salt Lake City have had really good Q2s so in general, based upon our sales rate ask and our weaker markets getting stronger, our incentives out there which we don't track other than through our gross profit margins I believe are less than what they've been in the past.

Okay. Great. And then second I was wondering if you could comment maybe on some of the current traffic trends you're seeing.

Again unfortunately we don't track traffic at the corporate office. What we do track on a daily basis is our sales and our sales are still for April looking strong.

Okay. Thank you.

Thank you. Your next question comes from the line of Tony Campbell with KNOT partners.

Good morning and congratulations. How much money did you spend in buying back the million seven or give me the average price that you paid.

The number is in the balance sheet, Tony. It's 29 and a half million.

Tony Campbell with KNOT partners Okay. Very appropriate and opportune purchase, I might add.

We think so.

Tony Campbell with KNOT partners. What do you think the biggest challenge you face now going forward?

I've always said our biggest challenge on a going forward basis is continuing to grow our team of personnel like we have. Clearly we're in all the markets that this company needs to be in. We're focusing on penetrating our markets deeper, achieving larger scale in our markets, achieving larger economies of scale in our markets and continuing to bring along our people. I really don't lose sleep at night anymore, Tony. I think we've got a wonderful organization. Wonderful organization of people with we're geographically diversified. And I firmly believe that this company. Will continue to be profitably aggregate market share on a going forward basis irrespective of single family starts in this country.

Tony Campbell Wonder if you could also, because I've forgotten this, just remind me, what would your debt to cap be for some strange reason you are able to call your converts?

It would decrease the debt to cap by 4 basis points so goal is to be 49 percent or less if we're able to call our converts or they were converted that would improve our debt to cap by 400 basis points.

Thank you very much and good luck.

Thank you. Your next question comes from the line of Bill Nodler (ph) with Atlanta (inaudible).

Good morning. You just mentioned that one of your goals is to continue to penetrate your markets deeper. And you also in the conference call talked about beginning to focus on next fiscal year. Those two things, I wonder if you could add some color on.

Based upon the fact that we already sold and/or closed 87 percent of our 35,000 units that we projected to deliver for '03, means that we only have 13 percent or a little over 5,000 units to sell to meet our target for fiscal year '03. We should sell those 5,000 plus units within the next -- in the first six weeks of the third quarter. So therefore we're now focusing on building our backlog for fiscal year '04.

In terms of penetrating our markets deeper, one of the beautiful things about our industry, at least for this company, is that it's a very fragmented industry and the top ten home builders control only 20 percent of the U.S. housing market. The top 20 home builders only control 30 percent of the U.S. housing market. But the other 70 percent are small medium-sized builders who are very inefficient and most importantly are being excluded from the primarily from the major raw material in our construction process and that's land and lock.

So we feel we can continue to aggregate market share by controlling land, buying land more cost effectively as well as buying our cost of goods purchased more effectively. Buying our labor more effectively and offering a better product than 70 percent if not 80 percent of the rest of the U.S. housing market at a better price.

Would you say -- I guess the general consensus and with very good reason would suggest that interest rates are going to move up, the rate of short-term money is low as perhaps it can get. How do you see a couple hundred basis points affecting your outlook, if we see it?

No significant impact on our outlook whatsoever. I don't believe interest rates drive our business. I never have believed they drive our business this company has sold homes in an 18 percent mortgage environment 21 percent prime rate. We continue to grow the company.

I think core competence alternative investments for home buyers and the fact that home buyers, especially the people to who we're appealing and those are the people primarily the people living in apartments still seek the American dream of being in a single family detached home. So I don't believe interest rates we could absorb another 200, 300 basis points increase in interest rates and not significantly impact our plans for the next three years..

Bill Nodler Great. Thanks very much.

Thank you your next question comes from the line of Steven Fockens (ph) with Lehman Brothers.

Good morning. Stacey could I ask for one quick clarification. On the regional comments you made about the very strong numbers, were those on orders or on closings?

Those were on orders.

So along those lines, given that the closings and the west this quarter were flattish and trailed a very impressive order performance, can you sort of comment a little bit on that? And sort of along those lines is there anything behind selling the land in California or were you just, you were more than long enough there in land that you can still meet your needs in what I think is a pretty tight environment going forward?

Let me answer the second part of that question first in our land sales in California which represented about 90 percent of our land sales for the quarter, clearly we were long on land there. One of the things that this company has done a better job of, I believe than virtually any other company, is obtaining our land entitlements. We have the opportunity to sell land that we're long on at a profit. We're going to do it.

And on the closings in the west, one thing that's important to point out from last year is that SCHULER Western Pacific were on three 30 year-end bonus plans ended in March. When we closed with them in the middle of February they had a lot of closings to tee up March. Our fiscal year end is in September. The focus for the March quarter has shifted a little bit.

That was more a time issue then.

Absolutely.

Okay. Thank you very much.

Thank you. Your next question comes from the line of Jerry Clower (ph) with Cumberland Associates (ph).

Congratulations it's refreshing to talk to a company where they don't use the excuse of war over capacity. And I think that's probably going to be the case. But one question before I get into the main one. What experience have you had in light of the war, has there been any impact at all in terms of people looking at homes, I doubt it, right?

No we have not seen any impact on our sales at all, Jerry. Clearly, and we don't keep up with our traffic counts as I said. We don't think that's relevant. But we've been busy with division presidents. Obviously a lot of people have been watching CNN in the first week of the war. Things are back to normal. Our sales didn't suffer at all.

Jerry Clower Very good. The other question relates to the guidance that you've given over time, the 10 to 15 percent revenue growth and the 15 to 20 percent EPS growth. I assume you're talking about also without acquisitions as it relates to that number and what is the assumption with regard to share repurchases? With regard to those guidance numbers.

First of all let me talk about the revenue growth clearly is without acquisitions.

Okay.

EPS growth, bottom line I think you're probably back into the number. We're going to get a 10 to 15 percent revenue growth and to the extent that we need to drive that 15 to 20 percent EPS growth, then that would probably be the differential in terms of our share repurchase.

Another thing we're expecting in increased earnings per share growth is continuing operating efficiencies you're seeing our margin increased this year we'll sold the SG&A flat. We expect to be able to continue improving our core operations as well as just buying back stock.

Very good. Thank you very much.

Before you hang up one other point I'd like to make. Horton has never let us give anybody a weather report.

Or a war report for that matter.

ANALYST: Thank you.

Thank you. Your next question comes from the line of Carl Waggart (ph) with Bank of America Securities.

I always think I put star 1 first. A couple questions that didn't get answered. All right so three COMBREERS (ph) is the bogie on land regionally where are you light land in terms of that three year bogie.

Less than three years?

First of all let me tell you that our land and lot inventory in terms of the second quarter was 3.5 years. But the beautiful thing, and that's up from 3.3 years from the previous quarter, but the beautiful thing about that relationship is that as you saw our own potential went from 53 percent to 50 percent and our option position went from 47 percent to 50 percent. So to the extent we're increasing in our land and lock position but we're increasing it in third party developers it's a low great risk scenario for us. We're not short land anywhere right now, Carl. In terms of our major markets, we have either got land under development, land under contract or land under option that will more than fill our three year inventory of land and locks in each one of our major markets.

You're not [inaudible] Where you would like to be two and a half regionally speaking.

No, sir.

The California, it was mostly California land up sold SCHULER western Pacific related?

One of them was and one of them wasn't. Basically it was two major transactions. One of them was in San Francisco one was in the San Diego market that really drove our land sales. One was a SCHULER transaction one happened to be a Horton transaction and both of them were tracts of land where we titled it and we had more than we needed and we consolidated at a good profit.

Two other quick things. One was just to change degrees back to acquisitions for a second. What do you see coming over the TRANSOM (ph) in terms of potential deals that cross your desk on and can you give sort of your sense as to why the private companies are interested in D.R. Horton purchasing them? Is it a top tick, is it an issue related to their inability to get their cost to capital down to buy land? What's your sense as to the core reasons that you're seeing given all the folks that chat with you?

Primarily the reason that people want to join the Horton organization is because we're a decentralized company. We respect and buy companies that have profitability. We respect their abilities to continue to drive profits. We're looking for people who want to stay managing their divisions. And we give them the respect and the responsibility and the authority to continue on with their normal business but we've taken a lot of risk element and a lot of the management hassles away from them. In terms of looking at companies, and Stacey is shaping our M and A activity, the companies that we have looked at basically are smaller or medium sized companies where we're looking at simply supplementing the lot position of one of our proven existing division presidents we haven't consummated any of those transactions this year that's largely a function of the fact they're too pricey.

Okay. And the good old days of division managers leading larger companies to start their own firms in this industry is inaudible.

I don't think B of A is making those loans.

Hey, now, wait. But I do have one other question I just remembered I wanted to ask. On STR*ENT growth year-over-year, just based on what you're telling me, I think it's five million or so. That is basically or much of it is going to be focused on just stuff being built to backlog; is that right?

You look at that, Carl, too, the percentage growth in inventory is significantly less than the percentage of growth in revenue. I think it's around nine percent compared to double digit increase in revenue. And, yeah, it's mostly focused on building out our backlog.

Thanks, guys.

Your next question comes from the line of Greg Nejmeh (ph) from Deutsche Bank.

One question point of clarification on the share count implicit in the 360, 365 guidance I think you mentioned 152.4 and that's predicated on the shares trading at Sam I think you said 2340 or 2350; is that correct?

Yes.

Do the shares have to trade there for some interval of time? Usually there's a ten day moving average or closing price related to the shares over some interval of time. If in fact it becomes effective. Is that the case here?

The rule is that they have to average at or above that for the final 20 trading days of the quarter. If they do then we're obligated to use the converted method and add that to the share count.

ANALYST: So at or above 2350 let's call it for the, on a closing price basis for the 20 days, 20 trading days at the end of June?

That's correct.

If the conversion did not take place, what would the -- I don't want to be a pessimist here on the stock price I'm asking for clarification, what's the 360 to 365 become?

For the year that would probably add another 10 to 12 cents. For this quarter it was a five cent differential.

So are you saying it's 10 to cents 12 cents incrementally above the five cents or inclusive of the five cents.

It would be an DISHLT 10 to 12 cents for the year on the 360, 365 guidance.

Implicit in that 360 to 365 guidance is the 86 cents you reported in the opening quarter.

That's correct.

Don, you mentioned part of the demand that you've seen has come from people in apartments and where the after tax cost of home ownership is obviously more compelling. Apartment rent in select markets have begun to rollover and come down fairly substantially as vacancy rates have wrist SEN can you comment on the markets where you think you've benefited the most in that trend. Are you seeing any evidence that as apartment rents weaken in those markets that the traffic flows or order patterns are softening a bit.

Not really I think the best example is one Stacey gives on the first time home buyer with the apartment owners who are offering incentives and so forth. And that is the fact that -

If you look at most of the incentives they all come on the back end so there's no immediate benefit to the renter. But the other real advantage we have is that there are tax advantages to own PG a home. You're building equity in a home and you don't ever build equity in an apartment. For that reason we don't really view apartments as direct competition for our homes.

To answer your question directly we've not seen any softening in any of our markets as apartment owners offer increased (inaudible).

From the standpoint of comparisons, many of the builders had quite strong results June '02 to June '01, if you look at your comparisons as we move forward, did your sales per community or in whatever manner you want to characterize it, did they accelerate appreciably in the June '02 quarter relative to the March '02 quarter and how would you characterize the formidable nature of your comps as we move forward?

First of all let me address as we look up some stats here T but let me look at the formal accounts we got over KOMD (ph) March was a record sales for us and March '03 we exceeded that record and set a new record. I thought we had the toughest comps to overcome in this March 31st quarter. We're looking at some sales numbers here and we may need to get back up to. But as Sam looks at the numbers here for the June quarter -

Our June quarter a year ago was 9,065. And as you know we've already reported, we beat that. We set -- that was our former all time record for a quarter. It beat the quarter just past.

To answer -

To answer your question doesn't look like our June quarter order sales is a tougher comp than what the March was. And our sales are going well in April. Frankly I think Greg we've weathered through very, very well with our sales increases, the if you have if toughest part was the last with the economy and the war, EEFB (ph) though we've got high comps to overcome quarter after quarter they were not the size they were on 3- 31 and I feel comfortable we'll continue to have positive sales comps quarter over quarter.

So from what you have observed on, this quarter just completed represented the most formidable quarterly order comp that you'll face over the balance of the year?

Yes, sir.

Thank you very much.

Next question comes from the line of Dennis McGill with Credit Suisse First Boston.

It's Ivy Zelman. Good morning, everybody. Just to actually, Greg, the question I want to elaborate on that one and understand it better then I'll get into my question. But I'm looking at, correct me if I'm wrong, Sam, in March of '02 your orders were 8,618 units and they were up 28 percent from the prior year ago period for the March quarter.

That's correct.

And your orders in June of '02 were 9,065 surpassing March's level for the quarter ended March of '02 and they were up 51 percent year-over-year. I think Greg was trying to get at when your orders are up 50 percent year-over-year, it looks pretty tough to try to beat that number. And you're saying that 9,000065 you can surpass that but would you anticipate that that 9,065 you'll surpass it significantly or do you think it's going to be in the single digit type of growth.

We feel comfortable Ivy we can achieve double digit growth over that comp.

I would say the June quarter was the full quarter of inclusion SCHULER in our operations and the year-ago quarter of course had absolutely zero of SCHULER in it.

Right.

So the 51 percent increase in the June quarter last year was largely a function of the acquisition.

All right. Now my question relates to margins. You know for the quarter, your margins excluding the purchase accounting adjustment made in the prior quarter a year ago, your gross margins based on our calculations, and please correct me if I'm wrong, were roughly flat, and therefore I'm wondering if there's an opportunity for you to improve gross margins, assuming the mix issues may have been why you didn't see an improvement or whether it was anything that you can point to. But what should we expect going forward again excluding purchase accounting adjustments that were made in your fiscal '02 period.

Ivy, as we said. We were really not flat on a home sales, because not all of that 33 million in purchase accounting affected our home sales margins. Seven million of it affected land and lock sales margin in the third quarter. So we believe and are pretty comfortable with the fact that we have in fact improved quarter over quarter on our home sales margins. And that's consistent with our guidance that we gave last quarter. And what we expect for the balance of the year.

Okay. So in aggregate what type of margin improvement was it? Because we had it included it all assuming the purchase accounting on the gross margin with home sales, all of it there. So what would it be if you just used a proportion of purchase accounting adjustments on the home sales piece?

It's a 50 basis point improvement over last year on the home sales line to 22.2 percent this quarter.

Great. And the improvement is mostly stemming from what?

Well, I think it's a combination of both pricing power and the number of our markets, Ivy as well as the fact that we're continuing to achieve greater economies of scale in our natural purchasing, we're driving down the cost of goods purchased. We saved [inaudible] Per unit goal is [inaudible]. Combination of both things. Clearly in California we had some strong pricing power. We were only selling a limited number of units at every release at the beginning of the month. We could sell more. But we do not want to give the buyers the upside of the price appreciation. We've got strong markets in Florida. Clearly in the coastal Caroline as we've got strong markets in Minneapolis and in Chicago. It's a function of both things right now.

Okay. And looking at the outlook with respect to ongoing improvements in your cost structure, as well as benefits from pricing, when we look out in some markets right now we have seen home price appreciation abating, can you still improve margins assuming you're not as successful across the board giving the benefits of pricing that you're getting today?

Actually, I would be very disappointed in this company, as we continue to increase our volume, Ivy, that we cannot, that -- I'd be disappointed if we can't continue to drive down our cost to goods purchased both on a national purchasing basis as well a local basis as well as the fact that on a labor basis. So I'm very comfortable that we are striving on a monthly, on a daily basis to improve both of those. I can tell you our office of national purchasing which we're sitting across from right now is one of the most active offices in the corporate office.

Another thing that happens is as the market closes for other builders and we take market share away it gives us more opportunity to work with local subcontractors and work on our land costs to maintain those margins.

If you look at the, I guess communities, one of the things that Horton doesn't talk about as much as other companies do, and I just want to maybe try to get you to talk about it a little bit any way you like is community count. I understand why, Don. You've explained it to me. But if we were to look in aggregate of the number of new jobs you're opening and you don't want to talk in absolute numbers that's fine. But if you're talking about like a double digit increase of 20 plus percent of the number of new communities opening or are you talking about 10 percent, can you just give us a sense of the magnitude of the growth that you're putting in the ground right now?

I will tell you that our sales are up over 30 percent or community count is up slightly over, right at about 15 percent.

You're doing a lot better on absorptions per community.

Yes we are. And that's the first time -- we had that number before. We thought someone might ask that question.

Ivy Zelman You were ready.

Stacey said if we answer this question this time then we're going to be answering it on a going forward basis. So I don't want to do this on a going forward basis.

But what would you do without Stacey, my goodness.

You know I wouldn't do much.

I know. Let me ask one last question. I think that one of the things that we're hearing from the private arena and maybe you can clarify your position here is that there are many markets today where land prices continue to accelerate faster than home prices. And that has a lot to do with the scares city of land I'm sure everybody read the article about Las Vegas which is pretty likely to be the case. In terms of land price appreciation and bidding on land today, do you think that there are some markets that you're actually taking a breather on, because they're getting a little pricey? I mean obviously you're smart land seller in California where you're long land but there are some markets that you may just want to take a breather on today or walk away from because deals are getting a little bit too crazy.

I'll tell you one at this point we're in a very fortunate position on Ivy is we're not short land anywhere. And to answer your question we're passing on deals from time to time. I just came out of a land -- we passed on a number of deals there recently but yet at the same time we're back trying to rework those deals. One of the benefits we have is being one of the larger land users in each one of our respective markets is the fact that I sort of look at it as the greater (inaudible) sellers are looking for a greater fool to sell the land to at a higher price. That doesn't always work. So we're passing on some deals. But I'll tell you Stacey did a beautiful analysis back to what I would I do without Stacey, even though land prices continue to ratchet up that's not an apples to apples comparison.

We did an analysis if anyone is interested I'd be happy to send it to anyone. Just looking at raw land cost doesn't give you a complete picture because there's so many other variables that go into what your actual finished lot cost is going to be in terms of if you're required to put in a road for the city that's adjacent to the property, if you're having to list stations for assuming what's the topography for the piece of land. So we look at the entire package of the subdivision or parcel of land when we're evaluating it. It's not just a land call analysis.

The other thing I would point out to you. I think on the East Coast we called them farms on the West coast we're calling them ranches. But basically this company sole proprietorship different than what we were five or six years ago. And that is we're taking a tract of land say it's 800 to 1200 lots. And the bottom line is that we're entitling that and then typically, based on our densities, then we're (inaudible) the product to fit the land cost and what the market is where we think we can sell the home. Yes we're absorbing land cost and land costs continue to go up. But I think one thing we've done very, very effectively and I think a lot of the other top home builders have done, is we've been able to absorb those land prices by achieving more density and designing different product each and every time.

I did have one more question and I'm pushing my luck, but who did you sell the land to?

I really couldn't tell you.

Come on, Don.

Donald Tomnitz Ivy.

You had the greater fool spirit. I -

Donald Tomnitz I hope they're not listening to this conference call.

Congratulations. Talk to you later.

Thank you. Your next question comes from the line of Timothy Jones with Serman (ph) and Associates.

Good morning. Don, I didn't realize that you put makeup on after you shaved.

If necessary, I'd do anything.

Two questions. First of all, I think you gave the breakdown of your inventories for this year. Could you give me the number for last year of finished product lots. I want to see what's happening with your lots, if you're holding steady.

Are you looking for the -

You broke down the inventory the three different areas for March of this year. Do you have the same number as comparable for March of last year?

March of 2002 our housing instruction with one billion nine [inaudible] Residential lots under defendant are two billion 199.3. Land held for development was (inaudible).

So that's right. Mostly, that's what I thought. The other question is on the cash flow basis, if you look, basically if your inventories run up like 500 and 30 million and you brought 30 million of land, roughly 570 of use of funds and you kept cash and debt the same, you reduce your payable, increased your payable by 170. That left about 400 million, which is down in this unearned compensation item. Can you explain what that is and how that works on a cash flow basis?

Bill.

The unearned compensation, the balance is 3.3 million in March. And what that related to is strictly related to the options that we issued to SCHULER employees in the SCHULER acquisition that replaced the existing stock options. The unearned comp represents the fair value of those options they were issued at the time and we are amortizing that to expense, to salary expense over the life of those options, as they -

It's running about $600,000 a quarter, Tim, and it has absolutely nothing to do with cash.

Yeah, there's no cash

Then if you went up, when I started 34 years ago you did it, they didn't have cash flow analysis. If your vents inventories up 500 million and everything else stayed the same, relatively stable except that your payables went up about 200 million, 200 million, 400 million there has to be another item on the balance sheet. And I'm not taking the financials because they're offsetting.

Well, we had a couple of debt deals. I'm not sure.

It doesn't show here. What I'm saying, the notes payable stay exactly the same on the balance sheet.

Last year we had to draw on our revolver.

I think the piece you're missing Tim is you need to add in the change in shareholders equity.

That's what I'm trying to get at. And what -- and that's an unearned compensation line. .

The total equity went from 2.0to 2.5 billion so that's [inaudible] Million right there.

All right. So that's basically the, you're taking in the earnings and that's basically the differential?

Yes.

Thank you.

Thank you, your next question comes from the line of Bob Dunn (ph) with SAN (ph) Investments.

Thank you. When you talk about your supply of your inventory in terms of years, what sales rate are you assuming to consume that inventory? And then also I think earlier you mentioned that calling your convertible would improve your debt to capitalization ratio but I didn't hear by how much. I missed that. And then what your goal is for debt to cap, if you could just repeat that. Thanks.

Debt to cap, the converts will were called would be 400 basis point improvement. And we are projecting debt to cap of 49 percent or less. So to the extent the converts are called that would reduce that 49 percent by about 400 basis points.

For land calculation, we assume that our closings will increase about 15 percent year-over-year..

Thank you very much.

Thank you. Your next question comes from the line of Alex Barron (ph) with Franklin Templeton (ph).

Good morning, Alex.

Hello.

A couple questions. Hoping you could give us some guidance for your expectations for closings for the year and also for margins for the rest of the year.

Our guidance for closing Alex is to close about 35,000 units. And our goal for gross margin is to have that be in excess of the 20 percent that we ran before purchase accounting last year. So we do expect to see an improvement in our margins.

How about the net margin? I'm sorry. Never mind. Okay. The other thing was can you give us some idea of where you're going with the lots option as a percentage? (Gap in audio)..

1.6 inventory turns the bottom line was they would do more lot option contracts and I thought in two to three years we'd reverse that 53 percent owned and 47 percent option. I was not anticipating that our division presidents would be as aggressive as what they had been and that's been fifty/fifty. I still believe two years out that we'll have 47 percent owned and about 53 percent option.

Okay. Sounds like you guys are going in the right direction.

Actually all we did was set the bullet point for them on their bonus plan. They're going down the road very quickly.

That seems to work.

Yes, it does.

I guess the last thing was, I was wondering whether you might be considering breaking out going forward the, the West and the Southwest regions. The reason I say that is just because I guess they've just become such a large part of your company, I think it would be nice to get some clarity of like what California is doing versus some of the others states by my numbers I guess this quarter orders were about 75 percent in those two regions. I'm wondering if you might consider perhaps giving some further details there.

Unidentified That's something that we should look at. You're right. The reason we haven't done it is because we (inaudible) back and restate obviously our regions our financial regions for the previous three years.

Five years.

Five years Sam says. I think he's just trying to save himself work. It's worth looking at. We appreciate you bringing that up.

Thanks again for the great job.

Thank you Alex. Good to hear from you.

Thank you. Your next question comes from the line of Steven Fockens (ph) with Lehman Brothers.

One follow-up in terms of the inventory turns goal of 1.6 times are there areas besides optioning more land that you specifically want to focus on to improve that number?

(inaudible) from the point you have foundation in the ground how long does it take you to build the house several of our divisions are really focusing on that piece of it. You might mention San Diego.

One of our divisions in San Diego have decreased cycle time in 15 days in the last fiscal year. The bottom line is we have found that there are a lot of creative ways from you. To improve that as long as you're willing to compensate that to get there.

I assume if you find it works in one region you try to push it out in others.

Actually we have best practices we have regional presidents share ideas we get division presidents together twice a year to share ideas. Yes, we're giving those guys ideas all the time.

Great. Thank you very much.

At this time there are no further questions. Are there any closing remarks?

No thank you for joining us on our Q2 conference call. Good-bye.

Thank you for participating in today's conference call. You may now disconnect