霍頓房屋 (DHI) 2003 Q3 法說會逐字稿

Good morning my name is Leticia and I will be your conference facilitator today.

At this time I would like to welcome everyone to the D. R. Horton Inc.

Third 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 that time, simply press "" then the number "1" on your telephone keypad; if you would like to withdraw your question press the "" key.

Thank you.

Mr. Tomnitz you may begin your conference.

Thank you.

Joining me this morning is Sam Fuller, Executive Vice President and Chief Financial Officer;

Stacey Dwyer, Executive Vice President of Investor Relations; and Bill Wheat , Senior Vice president and Controller.

Stacey.

[Before we get started there will be a forward looking] comments segments.

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

Although D.R.

Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.

All forward-looking statements are based upon information available to D.R.

Horton on the date of this 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 the most recent Form 10-Q, both of which were filed with the Securities and Exchange Commission.

Thank you Stacey.

This was another very strong quarter for D.R.

Horton, and we are proud to announce the following highlights.

Net income increased 47% to a $155.6m.

Sales backlog or future revenue increased 37% to a record $4.0b.

Net sales orders increased 29% to $2.6b, 10,811 homes.

Consolidated revenue increased 22% to $2.2b.

Homes delivered increased 14% to 9005 homes.

Home building debt-to-total capitalization net of cash improved 1000 basis points from 45.9% on 55.9%.

Financial services pre-tax income increased 69% to $24m.

All of these accomplishments contributed to diluted earnings per share of 99 cents a share, a 48% increase.

Our third quarter sales increased 29% to a quarterly record of $2.6b and 10811 homes sold, up than $2b and 9,065 homes sold in the year ago quarters.

Net sales orders for the first 9 months of fiscal 2003 increased 38% to $6.8b or 28,611 homes.

Strong sales contributed to our all time record backlog, 16,901 homes with the sales value totaling $4b, a 37% increase over last year.

Our backlog of 16,901 homes is the largest domestic backlog in the industry, with both of them delivering this backlog, while continuing a strong sales performance to ensure another record year in fiscal 2004.

Stacey.

Asset concentration corresponds with our top 500 in state.

The percentage of our assets in these states are as follows;

California was 25%, Texas was 17%, Colorado was 12%, Arizona was 10%, and Florida was 5%.

Our total sales orders increases for the third quarter in those respected states are California up 38%, Texas up 20%.

We saw increases in sales in all of our markets in Texas with the most substantial increases in Dallas and San Antonio.

In Colorado our sales orders were down 2%; we are slightly down in Colorado in third quarter, but we are still double-digits on year-to-date basis.

Colorado continues to be a strong market for us and we will generate more pre-tax income there this year than we did last year.

In Arizona, our sales were up 23% and in Florida, our sales were up 49%.

In addition, we have several markets where we saw increases greater than 50%.

Those markets include Las Vegas, South Florida, Seattle, Greensboro, Greenville, Salt Lake City, Houston, Orlando, Los Angeles, and Sacramento..

Thank you Stacey.

Our third quarter home building revenues increased 22% to $2.2b from $1.8b in the year ago quarter.

The home sales revenues increasing 21% on 9,005 homes close.

Our average closing price for the quarter was up 5% to $234,200 as a result of our continued pricing power and product mix changes.

Home building revenue for the 9 months ended June 30, 2003 increase 28% to 5.7b on 24,407 homes close compared to $4.5b on 20,207 homes closed for the same period of fiscal 2002.

Our gross margin on homes sales revenues in the third quarter increased 140 basis points to 20.5% from 19.1% a year ago.

Our gross margin on home sales revenues has consistently improved throughout the year from 20% in the December quarter, 20.2% in the March quarter, and 20.5% in the current quarter.

Homebuilding SG&A expense for the quarter was 9.6% of revenues a 30 basis point improvement over the year ago quarter.

For the 9 month synergy in June 30th 2003 homebuilding SG&A was 10% of revenues which is consistent with the prior year.

Our company goal is to continue to maintain our annual SG&A expenses as a percentage of homebuilding revenue at 10% or less.

Other expense for the current quarter and for the 9 months ended June 30, is primarily related to the change in the fair market value loan interest rates swap.

Our financial services division had another record quarter.

Financial services revenue for the quarter increased 58% to $45.6m from $28.9m the prior year.

And for the 9 months ended June 30th, increased 59% to $123.6m.

The revenue increase is driven by an increase in loan volume from the Homebuilding's record closing and an increase in our cash relates to third quarter in divisions where we have [mortgage offices] to 75% from 70% in fiscal year 2003.

Financial services pretax income for the third quarter grew 69% to $24m from $14.2m and for the 9 months ended June 30, increased 79% to $65.1m compared to $36.5m in the year-ago period.

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

For the quarter, our consolidated net income increased 47% to $155.6m, $105.9m last year.

For the 9 months, ended June 30, 2003 net income also increased 47% to $395.2m, from $268.3m last year.

Our diluted earning per share for the quarter of 99 cents again exceeded the consensus estimate.

The 99 cents per diluted share represents a 48% increase from 67 cents for diluted share last year.

For the 9 months ended June 30, 2003 diluted earnings per share increased 35% to $2.62 per share from the $1.94 a year ago.

Sam.

Thank you Bill.

Our homebuilding leverage ratio net of unrestricted cash improved 1000 basis points to 45.9% from 55.9% a year ago.

The majority of the improvement -- 586 basis points in our net home loan debt capitalization is the result of strong earnings and controlled inventory growth.

In addition, in June we completed the redemption of our Zero Coupon Convertible Notes, which increased our common stock outstanding by 10m shares and moved approximately $219m to shareholders equity.

We are revising our net home building debt to total capitalization project for fiscal 2003 from less than 49% to less than 45% by year end, Bill.

Thank you Sam.

We have adopted FASB interpretation number 46, commonly known as 10/46, which significantly alters the method for evaluating whether certain entities should be consolidated on our balance sheet. 10/46 supplies to entities that are beginning to be variable interest entities for VIEs and some results in the consolidation of certain entities in which we have no ownership interest, but with which we have executed lot option contract., if we are being to the primary beneficiary of VIE.

Certain implementation requirements of 10/46, we have evaluated all of VIEs created after January 31st, 2003.

Based on the results of our 10/46 evaluation to-date due to executed lot option contracts, we have consolidated a limited number of variable interest entities in which D.R.

Horton has no ownership, which has added to our balance sheet $41.7m in land inventory owned by these entities and $47.1 of minority interest ownership in these entities as of June 30th, 2003.

D.R.

Horton's obligation is related to these lot option contracts for guarantee by performance letter to credit holding $17.3m.

We will complete our evaluation of the remaining VIEs by the end of our fiscal year, September 30th 2003, at which time we will disclose the complete effects of the implementation of 10/46.

Based on the results of our evaluations thus far, we believe that 10/46 will not materially affect our balance sheet or leverage ratios, and will not have -- and will have no impact on our income statement or statement of cash flows.

Our current random acquisition is approximately 165,000 lots owned and controlled, 50% of which are owned and 50% are auctioned.

Assuming the 15% growth rate in Homes closed, this is approximately a 3.3 year supply line.

Sam.

Thank you Bill.

The company has approximately $33.5m remaining on our stock repurchase authorization.

And we plan to continue buying back stock and will approach our board when necessary to increase the authorization based on our expected cash flows and our current balance sheet structure.

We do not buyback stock this quarter because we wanted to avoid the appearance of attempting to influence our stock price during the put-and-pull period for the convertible debt issue.

We took advantage of the favorable rate environment in the debt markets this quarter.

We call the 10%, $148.5m senior notes due 2006 and redeem them in May with proceeds of the $200m issue of 6 and 7, 8s ten year senior notes we issued in April.

In June, we issued $100m of 5 and 7, 8s ten year senior notes and we used the proceeds to redeem the 9% senior notes which were due in 2008.

The 9% notes have been called and will be redeemed in July over the remaining terms of the revealed notes, the net present value of our interest cost savings is approximately $21.5m.

At June 30th, we had approximately 959m in dry powder with approximately 264m in cash and 695m available under our revolving line of credit.

Stacey.

A reference in our press release, the company expects earnings for fiscal year 2003 to be in the range of $3.85-3.90 per diluted share on approximately -- on 153m shares.

This will be a 34-36% increase over our fiscal year 2002 earnings per share of $2.87.

The earnings estimated is based on fiscal year 2003 closing of more than 35,000 homes and consolidated revenues of more than $8b.

For fiscal year 2004, we are issuing preliminary guidance in the range of $4.25-4.30 per diluted share.

This guidance is based on approximately 40,000 homes closed, consolidated revenues of approximately $9.5b, slightly increased gross profit margins, and SG&A remaining under 10%.

On historical earnings pattern, it's been to earn approximately 40-45% of our annual earnings per share in first half of the year with the first quarter slightly stronger than the second quarter.

Although we plan to continue our share repurchase programs, the fiscal year 2004 guidance does not include any share repurchase.

Now we'll give you further guidance on what to expect.

We will complete our 26th consecutive record year in fiscal year '03, continuing to increase revenues and profits and growing the bottom line faster than the top line.

We will exceed $8b in revenue in fiscal year '03.

We target $9.5b in fiscal year '04, this assumes no acquisition.

We will continue our growth in fiscal year '03, '04, and '05.

Specifically our goal in these years is to grow our consolidated revenues 10-15% annually and grow our EPS 15-20% annually.

Again these percentage increases assume no acquisitions.

This growth will be characterized by continuing to control our SG&A and be the low cost operator in the industry, continuing to expand our gross margins, continuing to focus on internal growth in fiscal year '04, while continuing to evaluate acquisition opportunities on a going-forward basis, continuing our stock repurchase program while decreasing net homebuilding debt-to-capitalization.

At fiscal year-end '01, we were at 54%; fiscal year '02, 51.3%; and our goals for fiscal year in 03 as Sam said is be less than 45%.

And we will generate free cash flow in fiscal year '03 and as important is […] greater than $1b of growth drive part of it in fiscal year in '03.

This includes D. R. Horton third quarter conference call.

We will now entertain any questions.

At this time I would like to remind everyone, in order to ask a question please press "" then the number "1" on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from Margaret Whelan of UBS.

Good morning folks.

Good morning Margaret.

Great quarter.

Thank you.

When we look at the alternatives provided for '04, can you give us an idea of the margins that you would be expecting -- I know your gross margins for the quarter just reported was, I think probably the highest in your history and just give us an idea of where we are expected to go from here?

Well as we started this fiscal year Margaret, we indicated that we indicated that we believe that we could increase our gross margins by 10 basis points, and you are right we've increased to 30 basis points so far.

Our guidance for next year is to increase our gross margin by an additional 10 basis points.

Okay and that's sustainability by year end or just consistently?

I always like to use the year end number.

Okay.

But I -- if we try to increase it on quarter-by-quarter basis, […] with just the fiscal year inventory.

And keeping SG&A around 9.5%?

Less than 10%.

Less than 10, Okay.

And then I guess when you announced earlier in the year that you are going to slow your M&A activity, quite of the reason was that your stock wasn't as strong as currently as it is right now, it's just like you've taken some core side of the business, you are doing good job on the margin side, should we expect to see you get more acquisitive going forward?

Not necessarily.

I believe the best thing in the lowest risk profile that D. R. Horton can assume right now is to continue to increase our market penetration in our existing markets and put additional assets with our proven divisional presence; that's our business model.

And also I believe at this point in time, that most acquisitions that we could possibly do are variable price.

Okay then just finally the land sales number for the quarter was a little stronger then we expected, what should -- what have you -- what's the decision I can close if I guess involved in the timing of the land and the regions; and what should I expect for the next 12 months?

Well first of all, we have been very successful versus several of our other competitors in terms of successfully entitling our land in various markets on a more timely basis, and those results out of times, when we do have excessive land and lost positions entitled, that is in excess of our goal for 3-4 years.

So therefore we are going to take the opportunistic time to sell those to add a profit which we will do.

I believe our land and lot sales for next year will pretty much attract somewhere where they are this year, I think -- that we will do about a 100m and probably next year we do somewhere between 50-75m.

Okay, great.

Thanks very much.

Thank you.

Your next question comes from Ivy Zelman of Credit Suisse First Boston.

Good morning everyone.

It's actually Denis McGill on behalf of Ivy.

Good morning [Denis]?

How are you?

Very good.

Yourself?

I'm doing well.

First, I'd just like to get an idea of whether there were any impacts from weather in the Mid Atlantic and Mid West as far as closings, though it looks like you are a little bit below your historical pattern?

No.

You'll never hear us give you the weather report.

Our closings were slightly lower there I guess, but not a functional weather report, just the timing completing our houses.

Would you see that maybe in the fourth quarter that pick up to closer the historical standards or should we assume that the lower rate would continue going forward?

I still believe that it will come closer to the historical patterns.

Okay, very good.

Let me get the retirement of the debt straight.

Are the 2008, Bill, on your book as well as the issuance at the end of the June?

Yes, they are Denis.

The timing of that -- we have to give 30-day notice to the bond holders and we close the re-financing -- the $100m deal as you'll recall in June.

So its on our books as well as the notes we've planned -- we have called and plan to retire in July.

Okay.

And how much is out on the revolver?

Zero.

Zero.

So we should see the debt assuming no further issuances, automatically around by 100 because of that call?

Exactly.

Okay.

And cash is similarly overstated by $100m for the same reason.

Right.

Is - are there no extraordinary charges related to retirement of both debt and one the back in May.

We are [--] in terms of [--] if you look at our interest expense line Denis, you'll note that it's higher than it was in the quarter earlier.

And the reason for that was the unamortized discount associated with the trends when we called and redeemed those.

Okay.

But that's included in interest rate expense and homebuilding for the quarter.

Is that essentially the entire 1.7?

Yeah.

For the most of it, yes.

Okay.

Looking at -- what would be the expense from the retirement in July?

Actually that -- again we had to pay a 4.5% premium to call the nines due in '08.

So that will increase the cost of that.

But as I indicated to you earlier, we -- when you borrow at 5 and 7-8s and retire at 9% debt, that's going to be outstanding for five more years.

It's a no-brainer.

Right.

Base of 4.5m premium.

Okay.

Did all that run through the interest expense in the fourth quarter then?

Yes.

Okay.

Going forward with your break-out of inventory minority interest will we see the FIN 46 adjustment separate or are you intending to include it actually in the press release.

As of the end of this quarter, we have included that in our inventory number and not [--] and don't plan to break it out separately because we don't think it's material enough to do so.

Okay.

Alright.

Thank you very much as well.

Thank you.

Your next question comes from Jo Sroka of Merrill Lynch.

Hi.

Good morning everyone.

Good morning, Jo.

Hey Don, consistent with your comment about growing the bottomline faster than growing the top line, alright, if I take your comments on home deliveries and revenue for 2004 versus 2003; it's like 14% on the deliveries and 18% on the revenue, but then if I take the mid point of the two guidance ranges, you gave on EPS, it's only 10%.

I am trying to figure out where -- you are either being conservative or aggressive?

We are being -- spacing for the worst.

I know what I let Stacey answer this question.

What Don is saying we're being conservative, and we think we are because we plan to be -- have some share buyback and I definitely don't want to put a number out 15 months in advance for the fiscal year-end we've been aggressive, but one of the things that we're doing was in earnings per share next year compared to this year it can be a bit in 10m shares associated with the convertible will be outstanding for the entire year or just half a year.

Certainly part of the difference.

Okay.

Now that's a fair comment.

Thanks.

Thank you.

Your next question comes from Michael Rehaut of J.P. Morgan.

Hi good morning.

Good morning.

I have a follow up from the Sin 46; is it possible to try and give any color in terms of what the underlying land value is of the options that you have in aggregate and roughly what percent of those options are entered into its non-refundable deposit?

Might be underlying value of our option contracts is somewhere in the range of the $2b.

At this point I do not have a number as far as our percentage of how many of those currently have non-refundable deposit at this point.

We are in the midst of completing our implementation and have not yet reviewed all of the contracts yet, but we will by the end of our fiscal year and at this point I really don’t have a good estimate on that.

As a general we will go, Mike.

Yup.

we are very conservative on running a lot of contracts and we put, I will just say we put up very, very little [non] return of the money while you'll be surprised if that changes much from those current analysis.

Okay and thank you.

And in terms of just the ASP gain for the quarter, was that mostly mix shift, there was their [poor] pricing in there and maybe if you could also talk about some of the regions in California and Colorado and Texas in terms of the current pricing strength going on right now?

Stacey will handle the first part of that question.

In terms of the increase in average sales prices, it’s the combination, there is some mixture, but we are still [do see crossing a tunnel] in lot of our markets and that's one thing that you are seeing help in Texas improving our gross profit margins.

We're just been -- but in California we are going back to Southern California today, we were there last week where we had significant pricings power in Southern California, in particular Orange county and San Diego and we have in the [Northern Part] local area.

Okay.

We continue to have strong pricing power in the Sacramento area, Las Vegas, the Phoenix market with pricing power in our Texas market as you can see our sales were up there.

We have very strong pricing power in the Florida as well as what we call the Coastal Caroline.

I would submit, though Michael that 5.4% increase in average selling price doesn't represent much of a bubble.

Right, okay.

Thank you very much.

Thank you.

Our next question comes from Stephen Kim of Smith Barney.

Thanks very much guys, a strong quarter.

A couple of questions, one, Don I thought I heard you say something in response to, I think it was Margaret's question about land sales did you say a 100m this year going down to 50-75 next year;

I just wasn't sure what those numbers were referring to, was that revenue or profit?

I will let Bill clarify that.

Yes the land sale revenue was close to the $200m this year.

Yes that's what I was thinking.

Than historically [these were] until the last three years they were all three were right at the $100m.

Right, okay.

So that's achievement.

So you are expecting to be in 50-75 versus roughly $200 this year?

It was closer to the 100 [inaudible].

Okay so close to a 100.

Okay, we assume then that the profit from those land sales would be therefore somewhere in the range of 15m or 20m or something like that?

It should be consistent.

Generally, we had some [promises] shown in the past because each land deal is very different as they see much more fluctuation in our gross profit on land sales.

Sure.

So that would also account for may be, you know when Joe was asking about the difference in the bottom line versus the top and that could also help I mean little bit -- you've been more of a conservative with your land sale assumption?

Yes, be more conservative -- a bit conservative [of them] all

And you find that same thinking out of the financial services earnings in your guidance, what kind of assumption are you making for profits next year from finance and other income?

I state financially -- financial services are.

Yes, I kept their margin actually a little bit reduced from what they were on year-to-date -- spend more money for the […]fiscal year 2002 just for my internal purposes and you can join the you can draw your own conclusion like make your own assumptions---.

Right

We did cut that just a tab.

Right, but we should grow the top line with the transactions, right.

Yes.

Okay, there was any chance you can have your growth in caps rate?

We've been seeing growth year-to-date in our capture rate and has increased our presence in California after we closed our joint venture with Wells Fargo out there.

Then I think we can continue to increase our capture rate.

Okay.

All right great.

And then I guess I was largely -- I think we also had a question about your tax rate.

It looks like, you know, just in terms of where you are going to end up for the year, we think in 38 for this year and next?

I think that's accurate Steve, part of the reason, as you know, is that we have to pay California State income taxes and we have a much larger portion of our total business in that State post the Schuler acquisition and that caused our effective tax rate to be a little higher.

Okay and actually I did have one other question.

Don, if I remember correctly it was in the last quarterly conference call where you made a statement that I think took some people little bit by surprise which was that you expected June quarter orders to be up double digit and given the tremendous comparison you had in the year ago period, that was something that people were rather surprised if you would have the […] ground to say that.

While you have a tough comparison again in September, and I know that tough comparison is really nothing new for you guys.

But do you feel given what you see today comfortable in making some sort of prognostication about your order growth?

I would look at Stacey and I ask Steve […], but I would be disappointed without any input from Stacey if we were not able to grow our sales in the fourth quarter double digit year over year.

Stacy any--

I am going to stay out of this one.

Okay all right, well thanks for--

I'll pick it up, I can clearly that that our goal for our regional division presence and we expect them to hit that goal.

Well it's a consistent goal; we always want to grow; you know, is being to tell our divisions getting [anywhere between 10 and 20%.

So we have a consisting goal of double-digit sales increases consistent with our overall business plan.

Okay thanks.

You are welcome.

Our next question comes from Brain Hog of Fleet Securities.

[…].

I am sorry can you speak--

We can't hear you.

Can you hear me now?

Yes.

Actually Fred Taylor , You did a good job with the guidance and the one thing you mentioned that was at least a little new to me was new guidance on your, I guess, debt-to-capital ratio of 45%.

And my question sort of relates to as you sort of look at that, look at the stock repurchase plan you certainly -- looks like you are going to have cash flow to kind of both improve your ratio as well as buy end stock.

Is there a definitve plan yet to become investment grade especially at the senior note level?

Well actually we believe we are already investment grade, but we just haven’t made a noise as such.

We have worked hard at convincing the rating agencies that we are.

In time I think that will come about.

The answer is yes.

You want to be at least at a senior level investment grade.

That's a corporate finance goal.

So let's be clear.

We would like to be -- we clearly have a goal of getting our debt-to-cap down into the low 40s.

Great.

Keeping it there.

But we probably are not going to decrease our debt-to-cap down into the 30s because--

Right.

We believe that our shareholders would be better off if we took those proceeds and repurchased stock, right Sam?

Yes.

I believe that we were in the 30s.

We would be doing our shareholders a disservice through the inadequate use of leverage.

I think I agree with you.

Yes, and so I think [where]you are coming out I think a number of people in your industry especially the larger ones are coming up the same is the low BBB seems to be the best sweet spot I guess?

We believe so.

For both low cost debt as well as being enough levered to get the return on equity?

Exactly.

Okay thank you very much.

Your next question comes from Timothy Jones of Basillman Associates

Good Morning.

Good morning Tim.

Nice try on the 18% growth on the topline and 10% on the bottomline.

It doesn't calculate at all even with 15m less of land sales and 10m more of shares outstanding.

I mean--

That's we can.

Did Don Hort would have an absolute [conviction] if that happens?

Well he probably would, and we are doing the best we can with what we have.

I mean but wouldn't […]mean, you are being extremely, extremely conservative given that what you've have said before it really does not calculate [anywhere near]10% growth.

We are being conservative.

That's it.

Okay.

Secondly, do you have the --- I had them in your financial services, it is the operating income for financial services the 24m versus 14, that is basically the gain on sale of mortgages, is there anything else in that number?

Let me clarify the gain on sales mortgage is a very small number in that and in that the largest group is the -- the two largest groups are the origination fees and when we originate the loans.

But is any origination fee at the end of the revenue number?

.

Yes, the origination fee is in the revenue number.

They are down in this $24m number of this operating income for financial services.

Let's say gain on sales of mortgages, isn't it?

No that is a very small portion of that to this numbers in the revenue lines which then slow down in the pre […] terms are the origination fee and then the fee that we received when we sell the loans for the service release premium, only the two single biggest factors in our financial services.

I understand that, but I don't understand how you can have $45m on the [top] which would be that number should be -- the revenue number should be where the origination fees are?

When we start with the revenue earnings, you are saying what's in the $25m number?

I am asking what's in the $24m number versus the $14.2m operating income from financial services.

When compared to last year, we had a lot more origination.

Yes I understand a bit, it is mainly the gain --

It's primarily the biggest piece of the financial services is the origination and service release premium.

Okay.

The revenue line.

And then all other revenues still are in that[tooo]?

Right.

And then […]SG&A and that's what closed down the $24m.

That's consistent within our last year since we were doing much more volume this year.

Okay, I'll give you -- I understand that, but I guessed the numbered that you -- did that happen to be very similar to the number that you breakout in the 10-Q, it has a different number, it has that number broken out I admit?

And there is some detail given in the Q.

I think the detail [team] in the Q says origination, I am sorry, sale of servicing rights and gain on sales is the signal caption

Yeah, then it's relatively the same numbers that's what that is.

That's what I am saying.

But you don’t breakdown gain on sale of mortgages from the sale services rights?

Since it is a much larger number than the gain on the sales.

Okay and lastly, how many homes did you finance both years and do you have the dollar value of that by any chance?

I know, you easily give out -- you gave out the number of homes, but I don't know if you have the dollar value.

Let me find the piece of paper I have got that on.

I am sorry Tim .

Okay alright thank you.

Our next question comes from Carl Reichardt of Wachovia Securities.

Good morning guys.

Our questions of we have been there but, Don just to go back to that backlog conversion question from earlier you are expecting the return to kind of the historic backlog conversion level in Q4.

Can you explain again to me why it was down this quarter relative to history?

Say your question again please.

I am sorry Don I am just -- as I look at, it you converted about 59% of your backlog to deliveries this quarter just in the units, and that's down relative to your past history.

I think Margaret asked this question kind of earlier, and I am just trying to understand why it was down relative to history as you said it's going to kind of return back to normalcy in the fourth quarter?

Right.

I think it's the function of more houses being sold and more houses under construction.

I don't -- clearly don't have a delivery time -- delivery problem, but the issue has to deal with just construction times.

Let's clarify little too because if I look at our 330 [conversion rate] last year we did run very high compared to our historical [we ran] 63% on net.

But the year before that, we were running at 54%.

So we are not that far of the historical sales at all.

There is a lot of variability in that number call from quarter-to-quarter.

Sure I understand that.

And then of course the backlog itself is high to begin with going into the quarter.

So I am just trying to get a sense that there is something related to the mix in markets like California and the mid Atlantic where you have increased your next set.

It's just taken longer to build their, relative to what I was to expecting, that's all.

I think its -- clearly our California mix has increased and it also states that form a backlog perspective, we are starting more homes than we have ever started and as a result of it we are also building more homes where we're short off.

We do not have a production home, but it’s just taking a little bit longer time.

In some municipalities where we're dealing with permit issues and inspection issues, just to complete the process.

Yeah.

No, I didn't think it was the construction part, and I am just trying to understand.

In terms of last quarter then in previous quarters you talked about the Carolina as being kind of soft.

Did you see some improvement in those markets over the last say couple of three months?

Absolutely.

I was surprised, as a matter of fact Stacey mentioned that.

We saw over 50% sales increases both in Greenoro and Greensville, South Carolina.

Charlotte also had double digit increases.Bill Wheat: I will tell you though that the volley and throws are still weaker than the we would like, but we're seeing good increase and we are seeing good increases in Greenboro and Greensville.

So really we didn’t have any weak markets just last quarter.

I know that's good.

Okay and last question is can you just talk again a little about your goal for material cost savings on a kind of per house basis?

What you've seen so far this year?

And what your goal is for next year?

Haven't thought about next year yet, but our goal for this year is say at least $2400 per unit.

That cannot be in excess of $50m.

And our goal for next year is to increase that consistently what we've done in the past in previous -- in calendar year -- fiscal year '02.

We say $2200 per unit.

And this year we anticipate doing more than $2400 per unit, and I guess just to extend that out and we'll really be out to somewhere north to $2600-2700 per unit next year.

Okay.

Are there any particular materials that you feel you can be more aggressive line, will that be Lumber drywall or payment, what have you?

Lumber continues to be an opportunity for us.

We are pretty aggressive on most of the […] units and paint.

We're aggressive on paint, [window , carpet, plumbing and a lot of other categories, right now, but Lumber still continues to be an opportunity for us.

Stacey, you are pretty aggressive on everything except guidance.

Right.

Everyone and less on numbers, alright.

I understand.

Okay.

Thanks a lot guys.

I appreciate it.

Thank you Joe.

Thank you.

Your next question comes from Steve Fockens of Lehman Brothers.

Hi good morning guys.

Hey, Stacey one quick clarification in the beginning where you gave out the sales dollars by California, Texas, Colorado.

Is that on orders or on closings?

That's on sales orders.

That's on sales orders.

Yes.

Okay.

Great and then sort of longer term -- the 15% plus EPS over the next several years, what does that imply in terms of orders and closings versus pricing?

That's a good question.

Really what we are looking at internally is the revenue growth of 10-15%.

That's the target for our division president.

And so if I do that we will make shift to a higher price or when we're selling more homes at a lower average cost price, that is up to do in you local divisions.

Would you expect that more of that would probably come from units versus price?

Yes.

They're given and we try to form the entry level and the first time the buyers -- that would be my expectation.

But we are still focusing as we came out of Southern California last week in couple of our projects.

We are still focusing on increasing our prices every -- so many releases and given our projects and earnings accounting with basically every 10 units we are going up thousands of dollars and basically we have been on the project since about last October-November, and we have increased the sales price up 10% over that time period zone.

We are using every opportunity we can to achieve the pricing power largely related directly to the fact that we don’t want to sell any more homes in a given month than we can affectively build.

We do not want to let the home buyer have the upside in the price.

We are trying to keep the upside on the price to ourselves.

And relative to California, I mean, if you look at the states that would seem on paper to be kind of a disaster whether it is, you know, budgets, take your pick.

Is California just really a prime example of supply versus demand?

It really is.

We don’t get involved in the politics in California, Steve.

Thank goodness.

And I am sorry, one last quick question.

If the -- depending on what happens with ultimately what you have to put on the balance sheet from FIN 46, what size would that have to be for you to consider breaking that out as a separate line item?

Well you just -- whatever it is, you just lump it in the inventory?

I think we will make that determination when we get there.

And we know what that total is but my guess is anything more than a few percentage points of our total inventory would probably warrant a separate classification.

Great thank you very much.

Thank you.

Your next questions come from Jim Wilson of JMP Securities.

Thanks good morning.

I guess my main question is left is just as I am calculating your average price and backlog at the end of the quarter was 238 and obviously that reflects what you've been selling this year.

As Don you look to forward and I guess not even -- and so I think what you're budgeting but think of your thoughts on the mix of where are you bringing out communities and all that across the country, would you tend to think that the average price might trend up down or sideways from where you are in today's current backlog?

We believe that the price will trend downward and largely because of our new sub-divisions that we are bringing on in Southern California in particular and we are focusing a lot more on sort of cash than a lot of entry level product there, and our average sales price in our California region was definitely down '04 over '03.

And -- because that represents about 25% of our inventory, I believe our average sales price [will work it way downwards.

Just simply because of that?

Yes, just simply because of that.

Or certainly remain stable with this year but I don’t expect them to go up different but because of where we are going in California.

Jim, as you know too, average sales price in backlog is always higher than average sale -- closing price or average sales price because the higher price homes tend to stay in backlog longer than price wins.

Sure.

And any other market you see any material direction where you are changing product besides California or is it just California?

First of all it's company wise our division presence clearly are focusing on increasing their market penetrations in each one of the markets because we focus on being number one and number two in the markets or how they are going to get there, and when they get there how do they get to be double-digit market penetrators.

And the easiest part of that market for them to penetrate is that more affordable buyer.

So we constantly across the country are always trying to focus on how do we increase the affordability of our homes and focus on that first and second number.

Okay.

Very good, thanks.

Your next question comes from Barbara Allen of Natexis Bleichroeder.

Good morning.

I wonder if you all could give me an indication of your community count this quarter and a year ago; and also the relative weakness in orders -- unit orders in the mid-Atlantic and mid-west versus your very strong other three markets -- is that due to lack of products or something else?

In the mid-Atlantic in particular the coastal Carolina has had an incredible year last year and they had a great year this year this year, this was an incredible year they had last year.

In Chicago what you see there is a little bit of a shift from a lower price point to a higher price point.

The sales dollars were up, and sale of units were down slightly and that's in line with their -- [plan] for the year, they'll deliver more PPI for us and so show those increased dollars on the revenue line.

And community count?

Community count is not something that they will give out.

How much are you growing -- I mean how can we measure what you are doing in terms of internal productivity?

Without giving the specific number of sub-divisions, we are operating in about 20% more sub-divisions this year than we were last year.

Okay.

So the difference between the first two markets and the very strong other three markets is not due to adding more relatively more communities in the three strong markets; or are you putting more emphasis in those?

You know that’s why we don’t want to talk about sub-divisions in particular, because if you have a fifty watt sub-division, then that sub-division cannot count as the same as an 800 watt sub-division.

Yeah I know but you probably got what, 400 sub-divisions country wide -- now these things should balance out?

We've a lot more subdivisions.

Okay so do you make my point?

You're getting there Barbara, keep trying.

You know when you guys were a little company that was I think a valid argument and we could discuss it but it seems less valid now given your size?

[With] the work we're getting them sideways here.

I always have a problem with people and subdivision counts because I always look upon subdivision counts, increasing our number of subdivisions as a very positive thing.

In other words we're going to have more stores available to sell homes, but at the same time because of our low overhead structure we can help earn and especially for the 50 units subdivisions whereas for the other builders the overhead is so high they can't do that.

As a result we do have some peripheral subdivision that is smaller, and we don’t have a model location of the peripheral subdivisions.

We basically have a model location in one and we got three or four peripheral subdivisions that we're planning under the subdivision that we're selling into but not out of.

Yes.

But you would have had the same thing last year.

I mean we'd be -- still be comparing apples-to-apples because you have always been doing it that way.

What's the question again?

The number of communities that are selling into these that you have this year versus last year, because I think that it will well accrue to your benefit to show how much growth per community you are getting.

I think it's, you know, it will be a very positive number.

So, let us get the number on that and Stacey will call you back.

Thanks very much.

And incidentally over the last two quarters, you're --you have recommended for the small growth in inventories relative to the huge growth in your backlog.

What are you doing there, Sam?

We are working harder.

That’s' great control.

Yeah, believe me.

I have become a balance sheet boy and we're all of a sudden focusing on catching our inventory growth of our division's presence -- individual presence and focusing how they are going to turn the inventories more frequently.

Yeah, well it seems to really be working.

Congratulations and thank you.

Thank you.

Your next question comes from Ivy Zelman of Credit Suisse First Boston.

Just one quick follow up and you kind of touched on this, Stacey, in the Midwest with the strong pricing there and units still down.

Is that a mix that you expect to continue going forward?

I don't believe so.

I think that's kind of a temporary thing and they will work on bringing their [average sale] back down a little bit.

Okay. was that mostly Chicago?

That was Chicago.

And one of the things that has happened in Chicago, when we -- past three of four years, they have focused largely -- really since 1998 when we purchased [Cambridge homes] about 40% of those businesses was more active adults.

And there is work that we feel a lot of those projects have difficulties replacing them, and choose not replace them.

And so, a smaller percentage of their businesses was active adult.

So basically that by definition has been a more affordable product to them.

And then you should keep in mind to that the Midwest region contains only two markets for us now, Minneapolis and St. Paul.

Okay.

Heavily weighted towards Chicago or more -- majority is Chicago, correct?

Yeah.

Event though it only contains two markets -- two very good markets for us.

That’s correct.

Alright, thank you very much guys.

Thank you.

Your on to next question comes from V.M Nobbler (ph.) Acrumental Soft Law .

Thank you.

Congratulations on a very good quarter and a very good year.

The question I have is in your forecast of EPS 15-20% for 2004, I would have to believe that part of your goal is to offset the 10m more shares that you have which will dilute EPS if you don't do it?

You mean by -- through the share buyback?

By share buybacks.

We have indicated our intent to continue that program.

In the guidance, I was [--] with the included number in there since -- first of all we only have $33m less on an operative basis that will need any board authorization to have a significant impact.

And since we gotten exactly what our opportunities going to be, we don’t want to take a guess in putting that in the guidance.

How many -- what did you spend on buybacks in the first half when you were a buyer?

$29.6m in the -- that was all in second quarter, and we did none as we indicated in third quarter because of the tendency of the -- both the put and call of our convertible debt issue.

Since that was equity linked, we didn’t want to be seen as we influenced the stock price during the tenancy of those offers.

So, actually it might be aggressive to assume that you would spend as much as $300m or so depending on the price to offset that dilution from 10m more shares, or would it not be too aggressive to assume it?

Again that will depend on our cash flows -- our free cash flows and our balance sheet positions at the time.

As well as our board authorization.

In turn you said you were going to generate free cash flow in ’03

Yes.

Could you give us number what that amount might be?

It will be positive.

Okay.

Would you expect to generate more free cash in ’04 than ’03?

Yes.

Yes.

Could it be over $100m?

I don't think we forecast that.

Well we actually have [but that] for internal purposes.

And clearly that the real kicker in that as you know is our inventory growth rate.

If we can improve our inventory returns, which we've committed to as a corporate policy, then our growth in revenue should exceed the pace at which we grow our inventory.

And if that’s the case, the free cash flow should be positive from operating activities.

Right.

And I guess when you state that you hope to have your debt-to-capital down to less than 45% that sort of suggests a very tight control of inventory, continued tight control?

Precisely.

That’s probably an understatement.

That’s an understatement.

Right.

So, my next question, you know, there has been a big concern in financial markets that higher interest rates means home builders will start to have either lower home prices or inability to adjust, how do you see Horton adjusting to what was, you know, a pretty clear the possibly of higher interest rates over the next 12-months?

Well, first of all I will [inaudible] we've had 103 quarters of adjusting to all types of economic scenarios including interest rates.

I would also clearly tell you that its our belief that when interest rates decline we benefit by adding more affordable buyers at the same time when interest rate increase and we don't believe the increase in a vacuum i.e., there are to be good job growth, good income growth, good consumer confidence, and we are adding events with those kinds of -- with that type of good economy move our buyers to approval or replacing some of the affordable buyers that we lost.

So, bottom line is the home builders [will win] especially deal [Horton] in a down interest rate environment or an up interest rate environment.

The answer to your other question as to how do we adopt.

The great thing about our businesses is that we can turn our inventories somewhere around one and half to two times a year, which means that we can adopt our products offerings what are mortgage payment is that our buyers can afford.

How we do that?

Sometime we built smaller home, sometime we develop smaller lots, sometime we take some of the amenities out of the houses as to the bottom line is, we are adapting to the market place very quickly.

Nice.

And I was little surprised when you said that you expect a lower prices in California because I thought I heard that you are increasing your pricing 10-11% in Southern California.

We have been last year.

We believe we will set our pricing power next year.

But we have our division presidents have aligned themselves for fiscal year '04 over the course of the past couple of years on a much more affordable price point.

And that’s why we believe that our average sale price in California year-over-year '04 or '03 for us will decline.

Thanks very much, keep up the good work.

Thanks Bill.

Your next question comes from Larry Raymond of Credit Suisse First Boston.

Question has been answered, thanks.

Thank you

Thanks Larry.

Your next question comes from Sergis Woodberry of Irradiant Assets

Good morning, one question on historical results where the gross margins in the year ago quarter still muted by the sheer acquisition due to purchase accounting adjustments, and if so by how much?

They were indeed and I think the improvement we indicated at a 110 probably half of that was due to the […] purchase accounting.

Okay, thank you, because I missed whole portion of the call and then also excluding the interest in cost of goods sold, it looks like that increased the amortized interest amortized through cost of goods sold -- look like it increased as a percentage of sales even though the your capital structure's becoming more or less leveraged.

We really haven't enjoyed the benefits of that yet, the refinancing activity we did, we indicated, we'll cut our interest cost going forward, but we still have some 10.5% senior paper out there as you know.

This environment is not to accrual to do.

Okay terrific great quarter thank you very much.

Thank you.

Your next question comes from Alex Barren of Franklin Templeton (ph.).

Good morning and congratulations.

Thank you Alex.

Simple questions, one was whether you have the breakdown of your inventory between work-in-progress and land.

Yes with our work-in-progress at $2.7b and land under development at $2.3b.

Okay, thank you.

And I was hoping if you could just discuss some of the better views, I guess that you are focusing on to lower your SG&A below 10%?

Well.

First of all again we –

That's a cultural thing with us, as you probably knew about it.

As we know, we bonus our division presence on the maturity of SG&A of 10% or less.

With the confidence of this, Alex, we're looking at every consumable thing, trying to tie up these rates at a more attractive rates today than what they were.

We negotiated with some of our leases.

It is just that the culture and we are just focusing on every little bit of it.

Usual prices to [further] to enhance our returns and increase our SG&A.

So we find in our company on a historic basis as we pay someone to do something and they are definitely going to do it and they are definitely controlling their SG&A.

And it seems like you have just a part of the press release, challenge everything that goes down the door really more so because they have 18% inside the leadership.

When we make a whole hotel reservation, all of us [ constantly badger] that about -- is that the [best rate] you can give us.

This is a cultural thing I am serious.

But I mean would you expect the raise under 10% to be almost every quarter or its just focused more on one separate quarter?

We look upon it on a fiscal year basis.

We -- our goal is that fiscal year-end have the SG&A at 10% or less.

Mike, if you look back with the seasonality and that in the first two quarters the SG&A is higher simply because most of our revenues and most of our earnings were delivered in third and fourth quarters which got down SG&A.

Okay.

And could I ask you one more, what do you expect to be the effect of views in either for production as far as your backlog conversion rate?

Well obviously you saw some even full production when we were in Southern California last week.

I don’t know that I like that terminology, but nevertheless that is what they've named.

During the process, we will have our regional presence meeting tomorrow in San Diego and we are going to have that same division and the same construction manager leading us -- explaining that process and how they have accomplished so much in southern California market to other regional presence.

We're rolling that out.

And as usual, we are not going to tell anybody how to build -- we are basically going to encourage and give them ideas.

Thank you.

Yes.

Your next question comes from Steve Fockens of Lehman Brothers.

I -- Stacey, one quick follow-up.

Did you say in terms of '04 that the EPS in the first quarter would be higher than the second quarter?

It generally is.

Not yet caught up in the quarters, but I mean last -- in this year you were 75 in the first quarter and 86 in the second and about even in the year ago.

Am I missing something there?

The land sales

Okay.

In both of those years were higher than normal.

Okay.

Great thank you very much.

Thank you.

Your next question comes from Mike Kinder of Citigroup.

Yes.

Most have been answered.

Just a couple of follow-ups.

One was on the […] purchase accounting.

You gave the direction, those can be down, what's the order of magnitude in terms of the absolute number?

For the last year, you’re asking what the cost of sales line.

What went through cost of sales in the most recent quarter?

We had no purchase accounting in this quarter or in this fiscal year.

Okay great.

And on the Atlanta side you talked about you are little bit over three years at current run rate.

Do you expect that to go up or down in terms of number of year supply?

We got to maintain it at about 3.5 year, Mike.

We're at 3.3 right now.

I wouldn't be surprised to see that increase some, but a couple of few quarter in the go and I think we indicated, I know we indicated that we are trying to drive our lending and pull it down to three years, and we are being effective at it.

And if we can do that enough, it obviously improves their terms.

We presently are seeing Atlanta Division will be taking it from about 3.5 to 3.3, but we have also changed the mix.

Our R&D losses are now 50% compared to about 53% for close of the year for that by itself helping to its decline.

Okay great.

And on the -- earlier Nicole and you talked about interest savings of 21m a year -- with nobody throughout.

Is that interest?

That wasn't -- that was total over the present value of the total savings and interest cost.

The remaining life of the [inaudible] we have either retired or are retiring will amount to that.

Okay great.

Just wanted to clarify.

Total savings are closer -- yielding gross interest cost or closer to about 11m a year.

Okay.

And that's 11m on an interest-incurred basis?

I am sorry.

They are not that much.

They are $7.7m a year.

Okay.

So, interest incurred should be down $7.7m a year, given the--?

Well, not over the entire term.

The one issue matures in 2006, the other matures in 2008.

So, there is a disparity in the term.

Right, but for the coming year that’s rough order magnitude?

Right.

Okay, great, thank you.

Our next question comes from Bill Gilchrist of CC Growth Investment.

Hi, good morning.

Good morning.

I just want to see if you could clarify on the unit sales growth in the future that may be, you said, 10% or 20%; is that correct or is that order growth?

Naturally, what we are projecting -- what we are talking about is we have finally got our revenues growing 10-15%.

Okay.

And our EPS growing 15-20%.

Do you have any forecast on how many closings you are going to have into the future?

We have given that in today's share of over 35,000 and then for fiscal year '04 we are targeting about 40,000.

Okay.

Great, thank you.

Thank you.

Our next comes from Timothy Jones of Basillman Associates .

Yes, couple of questions.

First, you have talked about you are going to be expanding internally next year with new acquisition which is fine.

Can you give us some specific markets where you really would be expanding quite aggressively, I mean obviously your backlogs in the West are pretty substantially but do you have any I guess couple of markets just to point out specifically where you are going to be aggressive?

Well, clearly in Florida, then really last year and we are continuing this year for the first time in the history of the company [to achieve] greater than 30% return on inventories.

We are definitely growing in Florida.

We are definitely growing to Atlanta and also Carolina, we are seeing the growth.

We are looking for additional -- we are looking for additional lot acquisitions in the Chicago end area because of our market presence there and we're continuing to grow Texas and we recently realigned with our regional operating regions, in Atlantic regions we are focusing in [very strongly]over the next three years showing our market presence in Maryland and Virginia.

Do you have the land in Maryland and Virginia to do that?

Now that we are a regional [person]is moving up there, [I bet] that he finds a lot more land [looking up that there are] the folks who are looking down there.

Okay, thank you.

Thank you.

Hello, they're cheesing out.

Well they don’t have a line.

And it's all up.

At this time there are no further questions.

Are there any calls or remarks?

Yes.

We appreciate you joining our third quarter conference call, thank you.

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