霍頓房屋 (DHI) 2003 Q4 法說會逐字稿

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  • Operator

  • Good morning.

  • My name is Tonya and I will be your conference facilitator today.

  • At this time, I would like to welcome everyone to the D.R.

  • Horton America's builder fiscal year 2003 earnings release conference call.

  • All lines have been placed on mute to prevent any background noise.

  • After the speakers' remarks, there will be a question-and-answer period.

  • If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad.

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

  • I would now like to turn the call over to Mr. Don Tomnitz, CEO and president of D.R.

  • Horton, America's builder.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Thank you.

  • With me I have Sam Fuller, our Senior Executive Vice President, Bill Wheat, Executive Vice President, and CFO and Stacey Dwyer, Executive Vice President and Treasurer.

  • Before he get started, Stacey?

  • Stacey Dwyer - Executive Vice President and Treasurer

  • 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 statement,based on reasonable assumption there's no assurance actual outcomes may want be materially different.

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

  • Horton on the date of this call.

  • 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.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Thank you, Stacey.

  • D.R.

  • Horton, America's Builder, just completed its 26th consecutive year of growth and increased profitability.

  • On a trailing 12 months basis, D.R.

  • Horton is again the largest builder in America as we sold and closed more homes in America than any other builder.

  • It was another record year for us, and we're proud to announce the following highlights: For the first time in our history we generated over $1 billion in consolidated pre-tax income, an increase of 56%.

  • Record net income increased 55% to $626 million.

  • Diluted earnings per share increased 43%, to $4.10.

  • Stockholders' equity increased 34% to $3 billion.

  • Consolidated revenue increased 30% to $8.7 billion.

  • Homes closed increased 21% to 35,934 homes.

  • Net sales orders increased 33% to $9.2 billion, or 38,725 homes.

  • Sales backlogged, our future revenue, increased 29% to a year-end record $3.7 billion.

  • There are three financial metrics we are especially proud of.

  • One, home building debt to to the capitalization net of cash improved 1,130 basis points to 40%.

  • This is the first year in the company history that we generated positive free flow from operations.

  • Our free cash flow was more than $400 million.

  • Thirdly at September 30, 2003 we had a record $1.3 billion in dry powder.

  • Highlights from fourth quarter include income increasing 69% to $231 million, diluted earnings per share increased 59% to $1.46, net sales orders increased 21% to $2.4 billion on 10,114 homes sold, consolidated revenue increased 32% to $2.9 billion, homes closed increased 11% to 11,527 homes.

  • Net sales for the quarter increased 21% to $2.4 billion on 10,114 homes.

  • Net sales orders for the year increased 33% to $9.2 billion or 38,725 homes.

  • Furthermore and most importantly, our same-store sales dollars increased 23% in fiscal 2003, continuing to reflect exceptional growth in our core divisions.

  • Our strong sales contributed to our record year-end backlog, 15,488 homes with a sales value totaling $3.7 billion, a 29% increase over last year.

  • We are clearly focussed on delivering this backlog while continuing our strong sales performance to ensure another record year in fiscal 2004.

  • Stacey?

  • Stacey Dwyer - Executive Vice President and Treasurer

  • Our top five home building states are California, Arizona, Florida, Texas and Colorado.

  • Our fiscal year 2003 sales dollar increases in those states are in California, 48%; in Arizona, 29%; in Florida, 45%; in Texas, 18%; and in Colorado, 19%.

  • We'd also like to mention a few markets where we saw exceptional sales performances, this is in sales dollars.

  • Orlando 78%, Chicago up 50%, Sacramento up 49%, San Antonio up 46%, Dallas up 32%, San Francisco also up 32%, Houston increased 27%, and Phoenix increased 21%.

  • Finally there are a few markets that we've mentioned before as weak markets.

  • However, the sales results in the fourth quarter were very encouraging.

  • In Salt Lake City, our sales dollars increased 39%, in Charlotte 27%, in Greenville 17%, in Raleigh 14%.

  • We are currently in the process of entering Laredo and McAllen Texas, Bend, Oregon, Savannah, Georgia, Baltimore, Maryland, and Tampa, Florida.

  • For the last four years we have focussed on penetrating existing markets.

  • This demonstrates the ability of a large builder like Horton to profitably aggregate market share.

  • We're very proud of the market penetration and through August 2003, some of our leading market share percentages are: Austin, 29%, San Antonio 25%, Ventura 24%, San Diego 20%, Hawaii 14%, Albuquerque, Myrtle Beach and Denver all had 13% market share, Hilton Head, Phoenix and Jacksonville all at 12%, DFW 10%, Las Vegas and orange County at 9%.

  • Sam?

  • Samuel Fuller - Senior Executive Vice President and Director

  • Thank you, Stacey.

  • Our fourth quarter total home building revenues increased 32% to $2.8 billion.

  • From $2.1 billion in the year ago quarter.

  • With homes closed increasing 21% to 11,527 homes, and average closing price increasing 9% to $241,300.

  • For fiscal year 2003, total home building revenues increased 29% to $8.6 billion from $6.6 billion in fiscal 2002.

  • This reflects a 21% increase in homes delivered to 35,934 homes, and the 6% increase in our average closing price.

  • The average closing price increases for both the fourth quarter and the fiscal year were due to our continued pricing power as well as changes in both product and geographic mix in home deliveries.

  • Our operating gross margin on home sales revenues in the fourth quarter of fiscal 2003 improved 180 basis points over last year.

  • To 21.2%.

  • Before the purchase accounting adjustments related to the SHULER acquisition last year's fourth quarter gross margin was 20%, therefore, on a fully comparable basis the current quarter gross margin improvement from a year ago is 120 basis points.

  • For fiscal 2003, our operating gross margin on home sales revenues improved to 20.6% from 19.1% in the prior year.

  • Before last year's purchase accounting adjustments, the gross margin was 20% yielding a 60 basis-point improvement in the current year on a fully comparable basis.

  • Our goal is to continue to improve our gross margins by at least 10 basis points per year through continued strong pricing flexibility, a continued focus on operating efficiencies, and through our efforts to control our costs as we partner with our suppliers and subcontractors on a national, regional and local basis.

  • This year, we saved a record $2,600 per home through our national purchasing program compared to our savings of $2,200 per home in the prior year.

  • Our goal is to increase our savings per home 10% annually.

  • Home-building selling and general administrative expenses for the current quarter 8.6% of home building revenues compared to 9 1/2% in the fourth quarter of last year.

  • For the year, home building SG&A expenses as a percentage of home building revenues improved to 9.6% from 9.8% in fiscal 2002.

  • We are proud to be the low-cost operator in the industry, and we will continue to focus on controlling our costs by maintaining SG&A expenses at less than 10% of home building revenues.

  • Other expense for the current quarter is $6 million and for the fiscal year, $9 million.

  • The expenses primarily related to the minority interest in the income from consolidated joint ventures offset by increases in the fair market valve our interest rate swaps.

  • We would like to point out that all of our joint ventures were acquired by acquisitions and all are consolidated in our financial statements.

  • In order to compare operating margins between D.R.

  • Horton and other home builders with unconsolidated joint ventures, you should consider the impact of the alternate means of accounting for other income.

  • If our joint ventures were not consolidated we would report our share of joint venture income and any management fees as other income with no corresponding revenue.

  • This would result in an improvement in our reported home building operating margin, even though reported income would be the same.

  • Bill?

  • Bill Wheat - Chief Financial Officer, Executive Vice President, and Director

  • Thank you, Sam.

  • Our financial services segment had another strong quarter.

  • Financial services revenue for the quarter increased 46% to $52.3 million from 35.9 million in the prior year, and for the year-ended September 30, financial services revenue increased 55% to $176 million.

  • The revenue increase is driven primarily by an increase in loan volume from the home builders' volume as well as an increase in our capture rate in divisions where we have mortgage offices to 73%.

  • Up from 72% in fiscal year 2002.

  • This takes our company-wide capture rate to 66%, up from 57% in fiscal year 2002.

  • Financial services pre-tax income for the fourth quarter grew 42% to $28.3 million from $19.9 million in the year ago quarter.

  • For the year-ended September 30, financial services pre-tax income increased 66% to $93.4 million compared to $56.4 million in the prior year.

  • We expect to see continued growth in financial services revenue and profitability as the home-building operation grows and as we increase our capture rate.

  • Our financial services segment is primarily intended as a service to our homebuyers. 85% of our mortgage business is captive and less than 10% is refi.

  • One thing we are not done is to increase staffing to chase refi business.

  • For the quarter, consolidated income increased 69% to $230.7 million from $136.4 million in the year ago quarter.

  • Our diluted earnings per share of $1.46 for the quarter represents a 59% increase from the .92 reported last year.

  • In fiscal year 2003, net income increased 55% to $626 million from $404.7 million in the prior year.

  • With diluted earnings per share increasing 33% to $4.10 from $2.87 a year ago.

  • On the balance sheet, we would like to highlight our stockholders' equity, our lot and land position, our home building long term, cash position and share buyback program.

  • Stockholders' equity grew 34% to $3 billion.

  • This is an incredible accomplishment for the company when you compare it to 1978 when D. R. built his first house in Fort Worth, Texas with only $3,000.

  • Even with the significant growth we earned a 24% return on average stockholders' equity this year.

  • Our lot and land position is at approximately 179,000 lots. 49% owned, and 51% optioned.

  • Assuming a 15% growth rate in homes closed, this is approximately a 3.2-year supply land compared to a 3.5-year supply a year ago.

  • This reflects our commitment to focus on inventory turns and to bring land supply closer to three years.

  • You will note that we have added a new line to our balance sheet, consolidated land inventories not owned.

  • This represents the inventory impact of our consolidation of a limited number of variable interest entities in which DHI has no ownership.

  • Pursuant to our adoption of FASB interpretation Number 46 or 1046.

  • We have recorded a total of $105 million in land inventory owned by these entities, and $105 million of minority interest ownership in these entities on our September 30, 2003 balance sheet.

  • Even though the FAS be issued a limited deferral of the effective date of 1046 we have fully adopted the provisions of 1046 as of September 30, 2003.

  • The minimal impact of 1046 to our balance sheet is reflective of our conservative approach to land acquisitions in which typically only a small amount of our earnest money is at risk.

  • Sam?

  • Samuel Fuller - Senior Executive Vice President and Director

  • Thank you, Bill.

  • This year we improved our home-building leverage ratio net of unrestricted cash by 1,130 basis points to 40% from 51.3% a year ago.

  • This year, we had a convertible debt issue that converted into stock which represented approximately 37% of that 1,130 basis-point improvement.

  • But the remaining 63% improvement was achieved with continued strong earnings flowing through to the equity line, and by controlling our inventory growth.

  • We would like to point out that all of our joint ventures are consolidated, and that we have no offbalance sheet financing.

  • When you look at DHI's home-building leverage ratio what you see is what you get because all of our debt is on our balance sheet.

  • Our goal for the future is to maintain our year-ending home building debt to cap in the low 40% range, to do this, we will continue to focus on disciplined internal growth in the upcoming years, although we will continue to evaluate acquisition opportunities as they arise.

  • Stacey?

  • Stacey Dwyer - Executive Vice President and Treasurer

  • We indicated to you at the beginning of the fiscal year that one of our goals was to improve our debt to cap to the low 40s.

  • As Sam mentioned, we achieved that goal.

  • Another major financial goal in fiscal year 2003 was to generate free cash flow.

  • And just by way of clarification when we say free cash flow we're talking about cash from operations, on the GAAP cash flow statement.

  • We generated over $400 million of free cash flow in fiscal year 2003.

  • D.R.

  • Horton's financial goals in the years ahead will be to maintain a low debt to cap and always generate free cash flow.

  • While we're on the subject of the balance sheet, leverage and cash flow, we'd like to mention that we visited with Standard & Poor's, Moody's and Fitch so all three of the rating agencies while in New York last week.

  • We certainly feel that our history of uninterrupted earnings, accretive acquisitions and consistent internal growth merited an upgrade even a year ago.

  • However, in fiscal year '03 we have focussed on internal growth, we've improved our leverage and generated free cash flow.

  • As we continue to focus on this business strategy, we are also focussed on convincing the rating agency analyst that we are an investment-grade company.

  • We also mentioned to you at the beginning of fiscal year 2003 that we intended to end the year with greater than $1 billion in dry powder.

  • We start fiscal year 2004 in a strong position with $709 million available on our revolving credit facility and $583 million in cash for a total of $1.3 billion in dry powder.

  • We prepurchased approximately $59 million of our common stock in fiscal year 2003.

  • We have approximately $175.6 million remaining on our stock repurchase authorization and we plan to repurchase between 2% and 5% of our beginning outstanding common stock in each of the next few years.

  • Since we generate more free cash flow in the third and fourth quarters, the majority of each year's repurchase activity will be in those quarters.

  • The following earnings guidance does not assume any share repurchase activity.

  • For the quarter ended December 31, 2003, we are issuing guidance of .90 to .95 per share.

  • This assumes our backlog conversion rate stays in our historic range of 55 to 65 -- or excuse me 55 to 60% of September 30 backlog.

  • We are using a share count of approximately 158 million shares.

  • The company is raising its fiscal year 2004 guidance to be in the range of $4.50 to $4.60.

  • Our goal for the entire fiscal year 2004 is to achieve approximately $9.5 to $9.7 billion in revenue on approximately 41,000 to 42,000 homes closed.

  • We expect to earn between 40 and 45% of our net income in the first half of the year, and approximately 55 to 60% in the second half.

  • This assumes that we maintain our SG&A at the current level, and that we improve our gross profit margin by 10 basis points over fiscal year 2003.

  • Our earnings per share estimate for fiscal year 2004 is based on approximately 158 million shares which does not assume any share repurchases since the amount and timing of those repurchases will depend on free cash flow and market conditions.

  • A comment on land sales.

  • Land sales in fiscal year 2003 were unusually strong.

  • Historically the land sales have been approximately $100 million annually, and we believe this level is more realistic to expect in fiscal year 2004.

  • Don?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Thank you, Stacey.

  • We spent a considerable amount of time last year formulating a 10-year plan for D.R.

  • Horton, America's Builder.

  • This plan has the following characteristics: Growing revenue 10 to 15% annually; growing EPS 15 to 20% annually; increasing our inventory more in line with our projected revenue growth; maintaining our debt to cap, the same as Stacey said in the low 40; annually generating free cash flow, repurchasing from 2% to 5% of our common stock annually; and improving our gross margins by 10 basis points annually.

  • Also improving our inventory turns, annually; continuing a tradition of profitably aggregating market share in each division while growing the bottom line faster than the top line.

  • Growing our existing markets with the focus of being the number 1 or number 2 builder in each of our markets and to ultimately achieve a 10% or more market share in each of our markets; continuing to grow financial services by increasing our capture rate and expanding to new markets; continuing to partner with our suppliers, vendors and subcontractors to mutually capitalize on economies of scale as we grow together; continuing to create value for our stockholders since our IPO in 1992 we have outearned our cost of capital year-over-year; finally, in 2013 our plan is to close over 100,000 homes and forever etching the national brand, D.R.

  • Horton America's Builder in every consumer's mind.

  • This concludes our conference call, we'll now entertain questions .

  • Operator

  • At this time, if you would like to ask a question, please press star then the number 1 on your telephone keypad.

  • We'll pause for a moment to compile the Q&A roster .

  • Please hold for your first question.

  • Your first question comes from the line of Margaret Whelan with UBS Warburg.

  • William Lamb - Analyst

  • Good morning, this is actually William Lamb for Margaret.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Hello, Will.

  • William Lamb - Analyst

  • Hi.

  • Congratulations on the quarter.

  • We noticed, though, that you had strong pricing in the southeast and the west region, up about 13% and 11% respectively.

  • I was wondering if you can comment on that.

  • A and also about ASP expectations in '04?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Obviously, in the west, which includes those markets that are in California and in Las Vegas, and Hawaii, especially in California, we've had very nice pricing power as the supply is constrained in that market.

  • I know the national average is somewhere around 3.5 months of unsold new homes and it's a lot lower in California.

  • Also in Hawaii, we have one of the longest waiting lists of prequalified buyers anywhere on our company.

  • And frankly we asked Mike Jones the division president to slow sales and to garner higher pricing power, which is very possible there.

  • And obviously in Las Vegas, it's been a very strong market for us and a lot of pricing power there.

  • The southeast, clearly in Florida, we're extraordinarily proud Florida.

  • Photo past three-plus years each one of our three divisions in Florida have exceeded a 30% return on inventory.

  • And they have good pricing power there and we have expect that to continue.

  • Stacey Dwyer - Executive Vice President and Treasurer

  • One thing we should probably point out in terms of expectations for next year, in Southern California in particular we are going to expect a decrease in our average sales price strictly from mix.

  • We don't anticipate any pricing pressure but we have entitled a lot of land that will be for attached or smaller single-family product than we've had in the past.

  • So when I'm running numbers internally, Will, I left our average sales price flat.

  • William Lamb - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Your next question comes from the line of William Nobler with Atlanta [inaudible]

  • William Nobler - Analyst

  • Thank you.

  • Congratulations on a great year year.

  • Your dry powder, it's getting embarrassingly large, as is your cash.

  • Do you see the company continuing to utilize start-up methods rather than acquisitions to use some of your excess cash?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Actually, we are focusing and all the numbers we're sharing with you today by the way and our 10-year plan in particular, assumes no acquisitions and that's all internal growth.

  • Clearly, we are continuing to look at acquisitions.

  • And we will, if we find acquisitions we will use some of that dry powder.

  • The bottom line is, right now we are in as many markets as we need to be and we're just focusing on generating and penetrating our markets deeper.

  • William Nobler - Analyst

  • And a second question.

  • You suggested that the bulk of your buybacks would be in the second half.

  • The 2% to 5% per year.

  • And why wouldn't you, since you have cash, and plenty of borrowing power, why wouldn't you use market conditions to, you know, force the buybacks rather than statistically try to buy it in the second half?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Well, clearly what we are focusing on not borrowing any more money than we absolutely have to and we prefer to match our cash flows with our inventory growth.

  • So, therefore, we find most of our cash flow comes in the third and fourth quarters so you're going to find in the first two, we're trying to keep our borrowing as low as we possibly can.

  • William Nobler - Analyst

  • And last question.

  • In your forecast, of units up 14% to 17%, and your sales forecast of nine to 12 you're clearly assuming a big change in mix, and maybe even prices.

  • Why would that be?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • As Stacey mentioned, especially in California, we've worked on entitling more affordable units, more affordable houses and our average sales price will be decreasing there.

  • I think the second part of it is that we are conservative in our projections for next fiscal year.

  • I think one of the things you have to realize is that -- I'm sorry not saying it's going to happen this year -- but last year we took our guidance up 20% throughout the fiscal year '03, as our earnings picture became clearer and clearer into the second, third and fourth quarters.

  • So clearly, I think that we want to make sure that whatever number we tell you, we're going to hit.

  • William Nobler - Analyst

  • Thanks very much.

  • Keep up the great work.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Thank you.

  • Operator

  • Your next question comes from the line of David Jarrett, private investor.

  • David Jarrett - Analyst

  • Great quarter, guys.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Thank you, David.

  • David Jarrett - Analyst

  • Sam, I had a little question, depreciation, amortization in the fourth fiscal quarter declined from 14.2 to 11.8 million, even though it went up considerably for the year.

  • What was that -- what caused that?

  • Samuel Fuller - Senior Executive Vice President and Director

  • You kind of caught me unprepared for that one, David.

  • I assume you're talking about the numbers that are on the.

  • David Jarrett - Analyst

  • In the press release, right.

  • Samuel Fuller - Senior Executive Vice President and Director

  • Yes.

  • I'd have to look it up and get back to you.

  • David Jarrett - Analyst

  • Okay, fine.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • We'll get that for you, David.

  • David Jarrett - Analyst

  • Thank you.

  • Operator

  • Your next question comes from the line of Steve Fockens with Lehman Brothers.

  • Steven Fockens - Analyst

  • Hi, good morning, guys.

  • One quick question or a couple actually.

  • The financial services margin for the year in '03 of around 53% and up nicely over '02, what kind of run rate do you assume in '04 and beyond?

  • And how impacted is that by the level of rates?

  • Stacey Dwyer - Executive Vice President and Treasurer

  • This is Stacey, Steve.

  • I've assumed that that margin actually comes down to the 45 to 50% range over the next year.

  • Of course that's what we assumed last year.

  • We don't think that there's that much of an impact from interest rate in our financial services.

  • We try to hedge our interest rates, our goal is to break even on the interest income and interest expense.

  • And since we're not out looking for the REFI business and most of it is captive we think we have less exposure to the interest rates.

  • Steven Fockens - Analyst

  • So is the decrease year-over-year, then, just -- is it fair that this year you probably captured some positive carry gains on the loans from the time you issued them to the time you sold them and you won't repeat that next year?

  • Stacey Dwyer - Executive Vice President and Treasurer

  • Well, actually, it's the break -- there's a spread between our warehouse line interest rate and the rate that we earn on the mortgages we would still continue to see a positive carry in that time period.

  • Steven Fockens - Analyst

  • Okay.

  • Then is there anything in particular that's bringing that margin down or that's just being conservative for next year?

  • Stacey Dwyer - Executive Vice President and Treasurer

  • That's pretty much being conservative.

  • Steven Fockens - Analyst

  • Okay.

  • And then secondly, what kind of magnitude of mixed change in '04 are you assuming in the west, down 3%, 5%, something like that?

  • Stacey Dwyer - Executive Vice President and Treasurer

  • That's a pretty good range.

  • Steven Fockens - Analyst

  • Okay.

  • And then I guess lastly, and I think Don already answered this, but the 10 to 12 earnings percent or I'm sorry, EPS growth for next year versus the longer term 15 to 20% goal is again being conservative?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • We're trying to give you real numbers that we see at this point.

  • Obviously, again, we don't want to miss the number.

  • At the same time, we don't want to tell you that we're being so conservative we're going to take us up higher than we've given you guidance for.

  • I think it's a difficult question to answer.

  • Clearly we're committing to the street the 10 to 15 and 15 to 20% revenue and EPS increase respectively.

  • But as we like to do, we like to make certain that we see the rest of the fiscal year more clearly as the year approaches.

  • Steven Fockens - Analyst

  • Fair enough.

  • Thanks guys.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Yes.

  • Operator

  • Your next question comes from the line of Serina Schiller with JMP Securities.

  • Serina Schiller - Analyst

  • Hello and good morning.

  • I was curious, you might have already disclosed this but do you have any indication of what to expect as far as SG&A in 2004 as a percentage of total revenue?

  • Stacey Dwyer - Executive Vice President and Treasurer

  • Our goal for 2004 is to keep SG&A in line with where it was in 2003, the 9.6% again.

  • Serina Schiller - Analyst

  • Looking at orders growth in the fourth quarter, are you expecting a lot of community count rollout in the western divisions and also in the Mid-Atlantic?

  • Or where will community count growth likely be located?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Clearly our community growth is going to be focussed on the states which are performing the best for us across the country.

  • Clearly in California there's going to be a large community growth, as well as in Las Vegas, as well as Arizona, Texas and Florida, which are our five primary states.

  • So those are a focus of ours, as well as clearly we've put a bigger emphasis on Maryland and Virginia and New Jersey.

  • But I don't think there will be community counts increasing there this year as much as it will be in '05.

  • Serina Schiller - Analyst

  • Okay, thank you.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Uhm-hmm.

  • Operator

  • Your next question comes from the line of Michael Rehaut with JP Morgan.

  • Michael Rehaut - Analyst

  • Congratulations on the quarter.

  • A question, I guess, questions on '04 guidance were answered but in terms of the cash flow for next year, you mentioned share repurchase of 2% to 5%.

  • Are there any thoughts on the dividend where it is now, obviously, Lenar raised it a couple months ago to about 1%, 1.1% yield.

  • Any thoughts on that?

  • And I guess on a broader perspective, if you can sort of prioritize, you know, what your your, you know, what your uses are for that cash in order of priority?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Clearly, they probably needed to raise their dividend relative to where they were.

  • As you know, in 1997 we started our dividend and we've consistently increased our dividend and we tell investors on a going-forward basis that we're going to increase our dividend in the years ahead percentage-wise pretty much as we have done on a historical basis.

  • From a cash perspective, clearly we have opportunities to invest in additional inventories.

  • And that's -- we're growing our inventories as we said, we're increasing our inventories but at a decreasing rate, but the cash will be used to replenish inventories in various parts of the country.

  • And our goal is to keep our borrowings under our revolver as low as possible.

  • Michael Rehaut - Analyst

  • Okay.

  • So in absence of acquisitions we could expect the net debt to cap to continue to fall?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • No.

  • Because as Sam said, our goal, Michael, our debt to cap somewhere in the low 40s, and to the extent that our free cash flow provides us the opportunity to buy back 2% to 5% of our to come each year and to the extent our cash flows are greater than what we're projecting we'll take up the slack and perhaps uses more to buy back additional stock.

  • Michael Rehaut - Analyst

  • Thank you.

  • Operator

  • Your next question comes from the line of Chelsey Ingenito with Merrill Lynch.

  • Chelsey Ingenito - Analyst

  • Hi good morning.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Good morning.

  • Chelsey Ingenito - Analyst

  • My first question is regarding the home-building G&A.

  • You had a larger sales base so obviously you were able to bring that cost down.

  • But were there other specific improvements maybe in that G&A line that occurred?

  • Bill Wheat - Chief Financial Officer, Executive Vice President, and Director

  • That's certainly something that we focus on constantly in this company, it's part of our culture, is keep our G&A costs as low as possible.

  • We continually are focussed on those costs.

  • Certainly, in the fourth quarter we did have a tremendous revenue number and so that did leverage the fixed aspects of our SG&A costs tremendously in the fourth quarter.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • I think other thing clearly that's happening is that post our merger with Shuler a number of their divisions especially in California, one of my good buddies in San Francisco, Ed, is focusing on driving down SG&A.

  • Because there are other divisions in California where operating at less SG&A.

  • I think we're clearly focussed in all of our divisions but particularly Shuler's division of driving down SG&A.

  • Achieving those kind of goals.

  • We refer to it as a Hortonization process.

  • Chelsey Ingenito - Analyst

  • Okay.

  • And then I guess regarding there was a woman who came on earlier and she asked about next year's expectations for G&A.

  • You're still, though, conservatively measuring it flat as opposed to getting better cost improvement?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Yes.

  • And I guess it's one of the things that, is a pet peeve of mine.

  • We have the lowest in the industry and to the extent we can improve upon that we will but we don't want to tell you it's going to be a tremendous improvement in connection year like it was this year.

  • Chelsey Ingenito - Analyst

  • Okay.

  • And you specifically mentioned a couple of markets that you were planning to enter, Laredo, Bend, Oregon, Savannah.

  • Can you give me an idea of how much capital you have to allocate into those markets to get it running in the early stage?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Yes, I can tell you what we start a new market, we basically say we need $20 to $30 million of inventory to give that market a chance to have a good start.

  • Typically what we put into a market like that.

  • And one of the things you're talking about in SG&A, though, tracking back is that one of the things Horton has been doing for the last three years, we really started this in the coastal Carolinas, under Brian Gardner, initially, we are operating in Myrtle Beach, Hilton Head, Charleston and now satisfy in a but or back office is being operated out of one division.

  • We're really leveraging up our back office by expanding into the new markets.

  • The same thing that's going to happen in Bend, Oregon, we'll operate it out of Portland, in McAllen, and the Laredo market, we are going to operate that out of San Antonio.

  • There are opportunities for increased improvement into SG&A as we go out into the markets.

  • Samuel Fuller - Senior Executive Vice President and Director

  • The other point on the 20 to $30 million that won't be incurred all at once.

  • It will be expended other grow over a period of six to eight months.

  • Chelsey Ingenito - Analyst

  • You expect it to be the six to eight months in this upcoming-year, 2004?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Yes.

  • Chelsey Ingenito - Analyst

  • For spec. homes for the quarter, what did you end up with?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Spec. homes are the lowest they've been in the history of the company.

  • They're slightly less than 30% of inventory.

  • The one thing that you should know about our spec. homes is that 90% of our spec. homes are sold before they're completed.

  • And we keep about two to three spec. homes per subdivision so that we can sell homes vis-a-vis realtors, which is one of the reasons SG&A is so low, we did very little advertising but we bond with the realtors across the country, and we like to be able to have someone to sell a home to, especially a relocation buyer.

  • Someone moving from Atlanta to San Diego, trying to put their family in a home so their kid can get in school within a short period of time.

  • The other thing to real estate, we start counting it as a spec. from the time we turn a permit.

  • The vast majority of our specs are under construction.

  • And also, I'd point out that [inaudible] our inventory on a monthly basis and at the end of the fiscal year, we had less than 100 homes that had been completed and unsold for a period of greater than one year.

  • And that included all of our model homes that we roll in the inventory, which by definition are always a year old or greater, so we do not have an inventory problem, we do not have a spec. inventory problem.

  • Very clean and fresh.

  • Chelsey Ingenito - Analyst

  • Okay.

  • You must have like one model home per community, so how many model homes do you have out there?

  • Samuel Fuller - Senior Executive Vice President and Director

  • Good question.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Actually, Stacey, can address in terms of where we see our communities percentage-wise this year over last year increasing.

  • Chelsey Ingenito - Analyst

  • Okay.

  • Stacey Dwyer - Executive Vice President and Treasurer

  • This year over last year we're up about 7%.

  • Chelsey Ingenito - Analyst

  • And that's a growth rate that you think is sustainable?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Absolutely.

  • Chelsey Ingenito - Analyst

  • Great.

  • Okay.

  • Well thank you very much.

  • Strong results.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Thank you, Chelsea.

  • Operator

  • Your next question comes from the line of Jeremy Pinchot with Monness Crespi Hardt.

  • Jeremy Pinchot - Analyst

  • Hi guys, great job once again.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Thank you.

  • Jeremy Pinchot - Analyst

  • Most of my questions have been answered but I want to know, do you have any comments on how things are going for the Atlanta market and what do you think your market share is there?

  • Now and sort of goals for the future?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Interesting you should ask, as part of our 10-year plan we broke it down into three, three-year plans.

  • We gave each one of our divisions a target for unit closing by fiscal year-end '06.

  • Currently we have about a 2.3% market share in Atlanta, I think that places us number two.

  • Number one has 2.2%-2.6% market share.

  • We closed somewhere around, I believe, 1300 homes in the Atlanta market this year.

  • And our goal for fiscal year in '03 is to be -- fiscal year-end year-end '06 is to be greater than 3,000 units.

  • Atlanta is a market where we have as a goal to penetrate much deeper over the next three years.

  • Jeremy Pinchot - Analyst

  • That's great.

  • Thanks a bunch.

  • Appreciate it.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Yes, sir.

  • Operator

  • Your next question comes from the line of Timothy Jones with Wasserstein Parella.

  • Tim Jones - Analyst

  • You there?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • We're right here, Tim.

  • Tim Jones - Analyst

  • How are you?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Great, how about yourself?

  • Tim Jones - Analyst

  • Oh, I'm fine.

  • Okay.

  • Back on the projections, just a couple of questions.

  • First of all, the 9.7 high billion, does that include or exclude land sales?

  • Stacey Dwyer - Executive Vice President and Treasurer

  • That would include both land sales and revenues.

  • Tim Jones - Analyst

  • Okay.

  • So you're basically saying that your sales are going to go up 14% next year and your -- if you use the high end of your estimate of 460, it's nine and change.

  • You've said that your gross margins will be improving, I mean, the only thing I can see that is a negative is your land profits going from down about 20 million from about 35 to 15, offset by a 10 million rise in your gross profit.

  • So if you take that off that .06, and if you just go 14% on your number, it comes off to 176 minus six, it's more like 470 for a number, assuming no change in what you've said.

  • What am I doing wrong?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Well, obviously I don't have your spreadsheet in front of me.

  • Tim Jones - Analyst

  • I'm doing this in my head.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Well, I don't think you're doing anything wrong other than the fact that there may be -- we can circle back with you and go over the specific points, but the bottom line is, I would say to you, Tim, as Stacey said we're talking about guidance versus --

  • Tim Jones - Analyst

  • Actually, good idea, the other thing is your ending the year with 37% of backlog sold as opposed to 35 last year?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Right.

  • We feel like we're entering fiscal year '04 stronger than we did '03.

  • Tim Jones - Analyst

  • All right.

  • I'll let you off the hook.

  • Samuel Fuller - Senior Executive Vice President and Director

  • Thank you.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • By the way, I would like to point out to you, you know, Horton established a goal for us three years ago.

  • Tim Jones - Analyst

  • I know the Horton's goal is not 9.6% next year, on a one to a 100, I'm 99.9% sure of that.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Just to point out just for a second, he said $8 billion revenue goal for us in '03 a number of years ago and 10 billion in '04, obviously we hit 8.7 billion versus the 8 billion target for '03, and we're telling you we're going to be somewhere between 9.5 and 9.7 in '04.

  • When we set the $10 billion goal several years ago, we said the only way was with a billion dollars acquisition.

  • But now we're going to get there internally which I think speaks well of the fact that we're growing this thing organically.

  • Tim Jones - Analyst

  • I think it's a much better way to do it and I like that 40% debt to cap.

  • Stay right there.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • We're going to be right there, sir.

  • Tim Jones - Analyst

  • Okay.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Thank you.

  • Operator

  • Your next question comes from the line of Kent Green with Boston American Asset Management.

  • Kent Green - Analyst

  • Great quarter, fellows.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Thank you.

  • Kent Green - Analyst

  • Question pertains to current condition.

  • There seems to be a lot of speculation about rising default rates or not having qualified on mortgage because of pricing, you know, and other things out there consumer spending strong.

  • Are you seeing any evidence of that?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • No, and as a matter of fact, Stacey might share with you on our mortgage company, how we're seeing the credits quality of people with CH mortgage company improving.

  • Stacey Dwyer - Executive Vice President and Treasurer

  • Yeah, we've got a couple of numbers here.

  • Our FICO scores for the quarter were 710, higher than our average range of 695 to 705.

  • We're seeing very solid quality come through in our mortgage company.

  • One thing I found interesting was our loan-to-value for the year we ended up at 85%, down from 87% last year.

  • For the fourth quarter, a little lower, 83%.

  • So people are putting more money down compared to last year and we're seeing high FICO scores.

  • We're comfortable with what we're seeing in the mortgage company.

  • Kent Green - Analyst

  • Sort of a follow-up question, has any other markets in the country, are you, you know, say, changing your mix to more affordable housing due to the rapid rising pricing?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Well, I can say California is the biggest one, but frankly, let me tell you, about 40% to 45% of our business is that first-time buyer.

  • And 40% to 40.5% is the second-time homebuyer.

  • Our division presidents across the country are trying to fight their way down the price curve.

  • What we're trying to do is pull people out of apartments put them in their first home and as they're in there, sell them their second home.

  • So we're always trying to figure out how we can keep our price points as affordable as possible across the country.

  • But California, to answer your question, is the biggest impact.

  • Kent Green - Analyst

  • Thank you.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Yes, sir.

  • Operator

  • Your next question comes from the line of Ivy Sellman with Credit Suisse First Boston.

  • Dennis McMillen - Analyst

  • Dennis McMillen on behalf of Ivy.

  • You mentioned debt to cap of 40%, are you speaking on a net basis.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Yes.

  • Dennis McMillen - Analyst

  • Can you give us an update on inventory turns?

  • I know you talked about a long-term goal of maybe in the 1.6 range, is that your thought process?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • We finished fiscal year '03 with about a 1.4 turn, our three-year plan shows to us take that to 1.5 in '05 and slightly under 1.6 in '06.

  • Right now we're working on a three-year plan to try to increase it from 1.4 to 1.6.

  • Dennis McMillen - Analyst

  • Lastly sort of following up on the last question, any change in cancellation rates during the quarter?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • No, as a matter of fact, ever since Sam started tracking them --

  • Samuel Fuller - Senior Executive Vice President and Director

  • In 1991.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Have ranged between 17 and 19% with the exception of post-9/11 with when they went up for about two quarters into the low to mid 20% cancellation rate.

  • We're right down in that 17% to 19% sweet spot.

  • Dennis McMillen - Analyst

  • Thanks, I appreciate it.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Yes, sir.

  • Operator

  • Your next question comes from the line of David Knot with Knot Partners.

  • Tony Campbell - Analyst

  • Good morning, it's Tony Campbell.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • It's good to hear from you this morning.

  • Tony Campbell - Analyst

  • I love your charts by the way, especially the ones, the comparable ones to other companies.

  • By the way, I apologize for this, but I missed your ASPs average selling price was?

  • Samuel Fuller - Senior Executive Vice President and Director

  • For the year, 231,900, for the quarter, 241,300.

  • Tony Campbell - Analyst

  • And for '04, your guidance was to down, right?

  • In ASPs.

  • Stacey Dwyer - Executive Vice President and Treasurer

  • Flat to slightly down simply because of the anticipated mix change in Southern California.

  • Tony Campbell - Analyst

  • And then I'm wondering if you could just sort of give us a more edification, I mean, are you determined to spend 2% to 5% of this -- or buy back 2% to 5% of the outstanding stock no matter where it is, depending on free cash flow?

  • I mean, is that etched in stone here?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Actually, we still think our stock is undervalued, even at today's prices, but we think that two to 5% is actually computed now on beginning shares outstanding.

  • But we will certainly take into account the dollar effect of that as we go forward.

  • If the stock price goes to 100 within a year, I would doubt that we're going to buy 5% of our beginning outstanding shares back.

  • Tony Campbell - Analyst

  • But presumably if you stay in the same kind of multiple range as you are, I guess -- let me rephrase the question.

  • Assuming that we're in the sort of eight or nine or 10 multiple range that we are today, am I hearing this right, that you will have a consistent repurchase program?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Let us be absolutely clear about this because this is one of our -- one of the assets of our 10-year plan, we plan to be a constant buyer of our stock each and every year for the next 10 years.

  • Tony Campbell - Analyst

  • Great.

  • I'm pleased to hear that and keep up the good work.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • All right.

  • Thank you.

  • Operator

  • Your next question comes from the line of Stephen Kim with Smith Barney.

  • Jed Barron - Analyst

  • Hi, it's Jed Barron for Steve Kim.

  • Congratulations on strong numbers this quarter.

  • A couple of questions if I could.

  • First of all, any commentary on how sales have trended here through your first fiscal quarter?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Well, we started our quarter obviously at the first of October, and we do not release monthly sales as you know, because my pet peeve is a month a quarter does not make.

  • I will tell you October sales are trending pretty much in line with where they have for the past quarters.

  • We're double -- our goal is to hit double-digit sales increases each quarter year-over-year, and we're on that trend in the first month of this first quarter.

  • Jed Barron - Analyst

  • Great.

  • Next, you, I think you said a little bit about the other income line, other income expense line from your home building, and I think you said it was a combination of the interest rate swaps and JV income.

  • Any guidance in terms of how we could best model that out over the next year?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Going forward, we certainly would not expect to see as much expense resulting from minority interest in consolidated JV income because as we've stated all of our joint ventures were acquired through acquisitions.

  • So as we work through the projects, that amount will come down over time.

  • The impact of obviously the market-to-market on our swaps is going to depend on the direction of the yield curve and we're not even going to try to predict that.

  • Samuel Fuller - Senior Executive Vice President and Director

  • Obviously, as the yield curve goes up, the market-to-value of our swap goes up.

  • So, you know, to the extent that occurs, a quarterly markup will continue to improve our operating margin.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • I know we don't give any credit for this, but it's temperatured in my mind permanently, in the second quarter when we had to absorb, I think a $13 million mark-to-market on our swap, obviously the worst years of the swap are over and as Sam says, it will be consistently we'll be getting that money back over the years ahead.

  • Jed Barron - Analyst

  • Great.

  • Thanks very much.

  • Stephen Kim - Analyst

  • Actually, it's Steve Kim also, I just jumped on if I could ask a question.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Yes, how you doing.

  • Stephen Kim - Analyst

  • I'm great, strong results, I'm sure other people have mentioned that as well.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Thank you.

  • Stephen Kim - Analyst

  • I guess I had a longer term sort of question for you if you could.

  • Thus as far, it appear that is much of the competition that you've been facing or that's been relevant to you has been in the form of let's call them smaller, in many cases not public, players and all of the large builders have done an excellent job of driving market share into their arms by taking it from these smaller builders who may be less well capitalize and less sophisticated, et cetera, et cetera.

  • How long do you think this process can go on?

  • I certainly don't anticipate it ending anytime in the next few years but in your mind, how long can you continue to sort of work in concert with many of the other top-10 builders?

  • And at what point do you see that competition turning more sort of intramural, if you will, and have you given any thought as to how you might modify your strategy to continue your impressive record of growth beyond that?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • I'm clearly focussed on penetrating our existing markets deeper.

  • One of the things I'm most proud of in this company, Steve, is that I have mentioned, we are not only aggregating profitably the market share from the small and immediately-sized builders but I look at San Antonio where four or five years ago we had just barely 9% of market share in San Antonio, 10% market share, and the larger builder there had 40%.

  • This year we'll have over 25% market share in San Antonio and I believe we will be the number 1 builder in San Antonio.

  • We're aggregating market share from the small and medium-sized builders but were also aggregating market share, as we are in Austin, and other markets were more esteemed colleagues who are the larger builders.

  • Stephen Kim - Analyst

  • Got it.

  • And you anticipate that to continue for how long, before you need to modify your strategy?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • We believe we can continue to aggregate market share profitably for the next 10 years, which is going to be probably my retirement date.

  • Stephen Kim - Analyst

  • Uhm-hmm.

  • And because maybe eye might not be retired by that time.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • I might not be either, it all depends.

  • Stephen Kim - Analyst

  • Do you anticipate that you will be in substantially more markets at that time?

  • Do you anticipate that you will be doing different kinds of construction, whether it be maybe more resort properties, maybe more multifamily, maybe more multilevel, mid-rise type stuff?

  • Can you give us an idea of sort of where you anticipate, maybe by the end of that 10-year, how you might be operating differently?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Let's back up.

  • I think clearly in terms of markets as the way we're operating, one of the best plans we've developed over the years, what we're seeing in the coastal Carolinas where we basically have one division president running four smaller markets and aggregating market share there very efficiently by, as I said earlier, I think before you jumped on the call, we're in Myrtle Beach, Hilton Head, Charleston and Savannah now.

  • We are running our back office through one divisions office.

  • We've got Portland, Oregon going to Bend, Oregon, we have San Antonio going down into Laredo and McAllen.

  • We're operating them out of the main office.

  • So -- and we're going from Birmingham up to Huntsville, Alabama.

  • The bottom line, we're picking up peripheral markets where we can get 100, 200, 300 closings out of, and doing that all the back office, through the main office.

  • I think that's the game plan that D.R.

  • Horton is going to continue to implement in the years hat and will help us profitably aggregate smaller market share.

  • Smaller markets, I think you can go to San Diego, we started it as a Greenfield, we've if the 60% of the market.

  • We're building every conceivable product, we're doing triplexes, downtown condo buildings, duplexes, medium-single-family prices.

  • Our division presidents, though, are the people driving their product and price points.

  • And what they're trying to do is to choose what works best on their market, because what works in San Diego doesn't work in Minneapolis.

  • Stephen Kim - Analyst

  • So basically, you're really trying -- that's -- so you're really trying to embody the sort of the America's Builder, that kind of a profile, you know, basically for city slicker, soccer moms and red necks, basically, everybody?

  • Samuel Fuller - Senior Executive Vice President and Director

  • [ LAUGHTER ]

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • I won't mention that you called the Texans red necks.

  • Our game plan really is, and I've said this before, we want to profitably be everything we can be to as many people as we can be.

  • But again, we can set the tone at the corporate office, but it's the divisions who have to understand which one of those market niches they can most profitably penetrate.

  • And as you know, it evolves.

  • When we started in San Diego in 1994 we were not doing triplexes, downtown condos and lofts and things of that nature.

  • It's more a function, I think our subsidy centralization works very well for us by virtue of letting the division presidents choose what works for them and we control risk elements at the corporate office.

  • Thanks very much, great quarter.

  • Stephen Kim - Analyst

  • Thank you.

  • Operator

  • Your next question comes from the line of Jeff McNelly with Stonebrook.

  • Jeff McNelly - Analyst

  • My question really regards around the kind of the future views of the business, and earnings sensitivity.

  • There are very few companies in the market with your record of earnings growth that trade at nine times earnings.

  • Obviously the market is incorporating some sort of looming issue with earnings growth.

  • If the home building market stayed roughly flat over the next couple years, what sort of earnings growth can you attain in that sort of market environment?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • We will grow the EPS 15% to 20% annually.

  • One of the things that we have a slide in our equity presentations that shows that the single-family permits over the last 10 years in this country haven't increased or decreased dramatically.

  • All of our growth scenarios over the next 10 years assume single-family permits are flat.

  • We will continue to profitably aggregate the 80% of the U.S. home building market that's outside the top 10 builders which now represent 20% of the U.S. housing market, simply because of our scale and our economies of scale.

  • So irrespective of what happens to single-family permits, saving except one thing, which I always say as a caveat, if we have a great depression like we had in the 30, all bets are off, but save and accept that, our business plan calls for us to increase our EPS 10 to 15% annually, just simply by penetrating our markets deeper and aggregating profitly the market share.

  • Jeff McNelly - Analyst

  • Thank you.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Yes.

  • Operator

  • Your next question comes from the line of Steve - I'm sorry, Michael Rehaut with JP Morgan.

  • John Barlow - Analyst

  • Hi it's John Barlow on Mike's behalf.

  • I was wondering if you could speak about the main drivers of your gross margin expansion during the quarter, and specifically if you could rank the importance of mix, pricing and efficiency gains?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Well, two things are driving gross margins, each one is pretty much an equal contributor.

  • One is pricing power.

  • One of the characteristics that's different this time than the last time is that in most of our subdivisions across the country, we have a prequalified list of buyers.

  • So that when we do have a release, as opposed to trying to find a buyer and try to get them qualified back in the early 1990s, all of a sudden today we have a qualify buyer who's on our waiting list.

  • The other half of it, of our margin improvement, really comes from our national purchasing.

  • And as we disclosed to you back in 1998 when we started national purchasing, we were saving only $350 a unit, and this year that number is $3,600.

  • What's interesting interest that is -

  • Stacey Dwyer - Executive Vice President and Treasurer

  • The way we've benchmarked the prices, John, is we benchmarked all our prices in 1998 with one of our concerns was that we started getting rebates, they'd increase the base prices.

  • So we wanted to make sure our net pricing was less than what we were currently paying.

  • We benchmarked all the prices in 1998 which are still the prices we use today to determine what we're saving.

  • They haven't been adjusted for inflation.

  • They're 1998 prices.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Our dollars own on a going-forward basis is to increase savings from national purchasing approximately 10% a year.

  • We saved $2,600 this year, our goal is to increase that by 10% in each of the next fiscal years ahead.

  • John Barlow - Analyst

  • Great, thanks.

  • If you could comment on lumber cost in 2004, you know, how do you see that impacting your margins in '04?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Well, you probably won't like my answer to this question, I answer it the same way.

  • We have a lot of variables in our cost we have cost increasing and costs decreasing.

  • Our goal and commitment is to continue to deliver an improvement of 10 basis points a year in gross margins.

  • So to the extent that OSB prices go up, I'm sure we've got something we're work on that's going down.

  • If you remember back about three years ago, there was a terrific dry wall shortage, prices went up dramatically.

  • The bottom line, our commitment to our investors is our business model is established to adjust for those increases by taking advantage of decreases in other areas.

  • John Barlow - Analyst

  • Okay.

  • Thank you.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Yes.

  • Operator

  • Your next question comes from the line of Steve Fockens with Lehman Brothers.

  • Steven Fockens - Analyst

  • Hi, just one follow-up on the, again, on the longer term or 10-year view.

  • Where do you guys think inventory turns could peak or even if they do peak, when you think about a longer term, how quickly can you build a home vis-a-vis what you do today?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Well, let's back up because part of our -- the construction cycle on a home is only one part of our inventory turn.

  • The other part of it is how judicious we are in our land purchasing and when we take the land on our books.

  • Relative to when we can start it in production.

  • I make a lot of -- as Stacey knows, I make a lot of projections, but I will tell you and she'll probably breathe easy when I say this, our inventory turns, we're telling people we're focusing 1.4, 1.5 and slightly under 1.6 for the next three fiscal years and we'll see where we can take it after.

  • Steven Fockens - Analyst

  • It's hard to predict 10 years out -- well, that's a rhetorical question.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • What we're focusing on, as we mentioned to someone on the call earlier, we've got dedicated inventory number, for each one of our divisions and regions, for each of the next three fiscal years.

  • We also have identified how many units we want them to be closing in each one of our markets.

  • From my perspective to be able to see out three years, that's about as far going as I can be.

  • Steven Fockens - Analyst

  • Better than us forecasting a quarter ahead.

  • Many thanks.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Thank you.

  • Operator

  • Your next question comes from the line of David Knot with Knot Partners.

  • Tony Campbell - Analyst

  • Hi guys, again, Tony Campbell.

  • I thought of, I would be curious to know what the differential, your company versus the building a house versus a private guys building a non-public guy, building a house, and how that differential, is it up or down year-over-year?

  • What is it and is it up and down-over over?

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Well, obviously Stacey or I shouldn't say obviously, I think you've been to one or two of our equity presentations but we do have a slide where Stacey as analyzed how much more efficient we are than 80% or 90% of our competition.

  • Specifically, we speak to the fact that we believe we have at least an 800 basis-point cost advantage over 80, 90% of the U.S. housing market.

  • That goes all the way from financing to land acquisition, to labor, to financial services.

  • Stacey Dwyer - Executive Vice President and Treasurer

  • I would say that it's increasing, Tony.

  • Because if we look at our national account savings last year of $2,200 on the average sales price of $220,000, right at a basis point.

  • This year, we saved $2,600 on the average sales price of $230,000 and so that's about 1.1.

  • And if we look at the profit per home, that our financial services division is generating, that profit is up year-over-year.

  • So again, we had estimated that at 1%, it's clearly more than 1% this year.

  • Tony Campbell - Analyst

  • I guess that sort of belies the point, your competitive advantage and why you guys should continue to do very well relative relative to the private guys per se.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • As I as a when we get up and shower and shave has been they put their makeup on, we have a competitive advantage we want to realize on a month-by-month, quarter-by-quarter and year-by-year basis.

  • I think it would be criminal for this company not to be able to continue to do that, we are in the right place at the right time with the right business model and the right economies of scale.

  • So yes, that's our game plan and we're sticking to it.

  • We're going to profitably aggregate market share and pen trite these markets deeper year after year.

  • Tony Campbell - Analyst

  • Thank you very much.

  • Donald Tomnitz - Vice Chairman, President, and Chief Executive Officer

  • Thank you, this concludes D.R.

  • Horton, America's Builder's conference call for our fiscal year-end '03.

  • Have a great year!

  • Operator

  • You may now disconnect.