霍頓房屋 (DHI) 2004 Q2 法說會逐字稿

.

Please stand by.

The Q2 2004 D.R.

Horton earnings conference call will begin momentarily .

Ladies and gentlemen, this is the operator.

Today's conference is scheduled to begin momentarily.

Until that time, your lines will again be placed on music hold.

Thank you for your patience .

Good morning, my name is Amanda and I will be your conference facilitator.

At this time I would like to welcome every one to the D.R.

Horton second quarter earnings conference call.

All lines have been placed on mute to prevent 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 key pad.

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

I would now like to turn the conference over to Mr. Tomnitz, President and CEO of D.R.

Horton America's Builder.

Please go ahead sir.

Thank you very much.

Joining me this morning is Sam Fuller, our Senior Executive Vice President of Finance, Stacey Dwyer our Executive Vice President and Treasurer and Bill Wheat, our Executive Vice President and CFO.

Before we get started, Stacey.

Some comments made during this call may constitute forward-looking statements as defined by the Private Securites 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 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 and performance is contained in D.R.

Horton's annual report on form 10K and most recent quarter report 10-Q which are filed with the Securities and Exchange Commission.

Don.

Thank you Stacey.

The second quarter of fiscal year 2004 was another record quarter for D.R.

Horton, America's Builder.

As we continue to grow the bottom line faster than the top line.

We are proud to announce the following highlights.

Consolidated net income increased 48% to a record $188.6 million.

Homebuilding, pretax income, increased 56% to $288.5 million.

Home sales increased 37% to $3.3 billion on 13,480 homes sold.

Sales contract backlogs, our future revenue, increased 32% to a company record of $4.6 billion or 18,137 homes.

Consolidated revenue increased 22% to $2.3 billion.

Homes closed increased 25% to 9,823 homes.

Homebuilding debt to total capitalization net of cash improved 800 basis points to 43.3% from 51.3% a year ago.

At March 31, 2004 we had approximately $1.1 billion in dry powder.

All of our operating regions reported increases in homes closed, net sales orders and sales contract backlog in both homes as well as dollars.

All of these accomplishments contributed to a 40% increase in second quarter diluted earnings per share to $.80 per share from $.57 cents per share in the same quarter in fiscal year 2003.

Sam.

Thank you, Don.

As we noted, our second quarter sales increased 37% to a quarterly record $3.3 billion on 13,480 homes sold from $2.4 billion on 10,548 homes sold in the year ago quarter.

Net sales orders for the first six-months of fiscal 2004 increased 30% to $5.4 billion on 21,714 homes sold compared to $4.1 billion on 17,800 homes sold in the year ago period.

Our strong sales contributed to our all-time record backlog of 18,137 homes with a sales value totaling 4.6 billion, a 32% increase over last year.

This is the largest reported domestic backlog in the history of the homebuilding industry.

Our backlog gives us excellent earnings visibility for the remainder of fiscal 2004.

If you look at homes closed plus our backlog we have already sold or closed 85 to 87% of our 43,000 to 44,000 projected closings for fiscal year 2004.

We are now beginning to focus on selling homes to build our backlog for fiscal year 2005.

Stacey.

D. R. Horton America's Builder, is the largest builder in California, Colorado, Arizona and Texas and Florida rounds out our top five home building sites.

In the March quarter we had strong sales dollar performances in the following markets.

In California our sales increased 30% with a 77% increase in Sacramento and a 53% increase in the Los Angeles area.

In Colorado our sales were up 28%.

In Arizona, up 31%, with a 29% increase in Phoenix.

Our Texas sales increased increased 18% with a 45% increase in Houston, a 15% increase in Dallas/Ft.

Worth and a 14% increase in San Antonio.

Florida sales increased 87% with a 164% increase in our central Florida division, which includes Orlando and Tampa and a 119% increase in our south Florida division which includes Naples, Ft. Myers and the Miami West Palm Beach area.

A few markets that I would like to mention include Las Vegas where we had sales increases of 185%, the Washington D.C. area increased 135%.

If you will recall, we are focusing more and increasing our commitment and trying to penetrate the market deeper in this area.

Chicago, up 57%.

Atlanta, up 47% and Charlotte, up 24%.

Sam.

Our second quarter homebuilding revenues increased 23% to $2.3 billion from $1.9 billion in the year ago quarter.

Home sales revenues increased 27% to $2.3 billion on 9,823 homes closed.

This increase was driven primarily by a 25% increase in homes closed.

Homebuilding revenue for the six-months ended March 31, 2004 increased 25% to $4.5 billion on 19,065 homes closed compared to $3.6 billion on 15,402 homes closed for the same period of fiscal 2003.

Home sales gross margin in the second quarter increased 210 basis points to 22.3% from 20.2% in the year ago quarter.

For the six-months ended March 31, 2004, our home sales gross margin improved 230 basis points to 22.4% from 20.1% in the year ago period.

Our gross margin improvement has been has been driven by continued pricing power in many of our markets, as well as our continuing focus on controlling our construction costs.

Homebuilding SG&A expense for the quarter was 9.7% of revenues, compared to 10% a year ago, for the six-months ended March 31, 2004 our homebuilding SG&A was 9.8% of revenues, compared to 10.2% a year ago.

We continued to leverage the fixed component of our SG&A costs with the increased revenues associated with our deeper pen of our homebuilding markets.

Bill.

Financial services revenue for the March quarter increased 6% to $42 million from 39.8 million in the year ago quarter.

For the six-months ended March 31, financial services revenue also increased 6% to $83 million from 78 million in the year ago period.

Financial services pretax income for the March quarter was $18.1 million compared 21 million in the year ago quarter and for the six-month period was $36.8 million compared to 41.1 million last year. 93% of our mortgage company revenue is captive reflecting our continued commitment to focus on the home builders business.

In the past 12 months we have improved our capture rate company wide to approximately 70% from 67% this time last year.

The mortgage company's financial results in the second quarter, include the impact of our startup costs in California, product mix and overcapacity in the mortgage industry.

For the quarter, our net income increased 48% to $188.6 million from $127 million last year.

The 48% increase in net income compares to a 22% increase in total revenues continuing our tradition of growing the bottom line faster than the top line.

Our diluted earnings per share for the quarter increased 40% to $.80 per diluted share from $.57 per diluted share in the year ago quarter.

For the six-months ended March 31, 2004, net income increased 56% to $374.2 million from $239.7 million last year.

Diluted earnings per share for the six-month period increased 46% to $1.58 per diluted share from $1.08 a year ago.

We control approximately 200,000 lots at March 31, 2004, of which 48% are owned and 52% are optioned.

The number of owned lots is down as a percent of total controlled lots from 50% a year ago, reflecting our continued efforts to maintain a conservative owned lot position.

On March 25, we restructured and amended our homebuilding revolving credit facility, increasing its capacity from $805 million to $1 billion and extending its maturity from January 2006 to March 2008 and also pricing it more favorably to the company.

The facility also includes an accordion feature which would allow us to increase the facility to $1.25 billion.

Our home building leverage ratio net of unrestricted cash improved 800 basis points to 43.3% from 51.3% a year ago.

Our goal for fiscal year 2004 is to continue to maintain our year-end homebuilding debt to cap at approximately 40%.

At March 31, 2004, we had approximately $1.1 billion in dry power with approximately $109 million in cash and $863 million available on our homebuilding revolver.

Sam.

This quarter, we received what we believed to be long overdue recognition of our strong performance and balance sheet from the rating agencies.

Fiche upgreated us to investment grade, triple B minus.

S&P 500 up graded us to BB+ on our senior unsecured debt and Moody's yesterday raised our outlook on their BA 1 rating on debt to positive from stable.

The company raising its guidence for the year to approximately to $3.45 to $3.55 per share based upon approximately 237 million diluted shares.

The fiscal year earnings guidance represents a 26 to 30% increase over the $2.73 reported in fiscal year 2003.

This increase guidance is based on 43 to 44,000 homes closed and 10.2 to $10.4 billion in consolidated revenues.

Now I give you guidance on what to expect from D.R.

Horton, America's builder, the largest builder in America.

In fiscal year 2004 we will complete our 27th consecutive record year, continuing to increase our revenues and profits and growing the bottom line faster than the top line.

We will exceed $10.2 billion in revenue in fiscal year '04.

We will continue our growth in fiscal years '05 and '06.

Specifically, we plan on fiscal year '05 to close 52,000 homes and generate $12 billion in consolidated revenue.

All organic growth In fiscal year '06 our goal is to close 63,000 homes and generate $14 billion in consolidated revenue, again, all organic growth.

These numbers all represent approximately a 20% year over year growth.

In the years thereafter, our commitment is to grow the top line 10 to 15% annually and grow our EPS 15 to 20% annually.

This growth will be characterized by our continuing control of our SG&A and our continuing to be the lowest cost operator in the industry, continuing to expand our gross margins, continue to focus on internal growth in fiscal year '04, continue as we always have to evaluate acquisition opportunities on a going forward basis.

Maintaining our debt to cap net of cash in fiscal years '04, '05, '06, in the 40% range.

In conclusion, with our first half closings and our record backlog of $4.6 billion, D. R. Horton has sold and closed 85 to 87% of our fiscal 2004 projections, projected closings.

Therefore fiscal year 2004 is in the bag, and D.R.

Horton America's Builder, the largest builder in America, is now focusing fiscal years 2005 and 2006.

This concludes our presentation, we'll entertain questions.

At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number 1 on your telephone key pad.

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

Your first question is from Greg Geiber with AG Edwards.

Good morning, gentlemen, Stacey.

Good morning, Greg.

Good morning.

I wonder if you could talk about your orders numbers and what percentage of them have come from promotional activity and how the promotional activity that you run in some markets compares with what you have been doing previously, so level up, down or somewhat unchanged?

As I have said for a number of years, 24/7, 365, somewhere in D.R.

Horton land, we are offering homebuyers some incentives to buyer homes.

We have a centralized I.T. system that projects and then calculates our gross profit margin as we sell each home on a daily basis.

Our incentives this year are less than what they were last year.

We are operating higher incentives in certain markets.

Obviously Austin was one of those markets that you red about recently.

But generally speaking, where we are offering incentives, our margins are flat to up.

Okay.

I guess this is a somewhat related question on your inventories.

Of finished homes.

Has the aging on that changed any this year, or the latest quarter, what it has been?

That's an interesting question, Greg.

Our aging has changed and it's significantly better year over year.

The number of homes that we have in spec inventory is still run in high 20s to low 30s which is ahead of what they were this time last year, actually lower I should say, not ahead.

And the one number we base this on is number of homes that have been completed for more than a year that are labeled specs, and those are usually models that have fallen into the spec category and this year we have 78 homes that have been completed for more than a year.

On a inventory of how many homes that are currently under construction, approximately 22, 23,000 homes.

Okay.

The other thing I always encourage people to remember about our specs, 90% of our specs are sold before they are completed and we continue that trend in this company.

And the other thing too is we spec differently from other builders, as soon as we pull a permit are, we count it as a spec so there's not necessarily any kind of ground work involved to start movement or foundation.

Okay.

And if I might ask one last question.

Is there any way you could give some sort of very rough quantitative split between the increase and gross margins that would have come from pricing power versus better cost controls?

My answer is, about 50%, Greg, is still from pricing power and the other 50% is improving our cost to goods purchased.

Okay.

Thank you very much.

Yes, sir.

Your next question is from Ken Jones with Wasserman and associates.

Good morning.

Good morning.

Good morning, Mr. Jones.

Well I am glad you are finely starting tie your projections to what you say, in your first comment, your first line, you say we continue to grow the bottom line faster than the top line, which is obviously true.

If you recall, when you started, that of the year, you had a 315 estimate, tentative, slower than the top line, and I asked you specifically about it.

Now you are up in the 35 to 40% range of increases.

Why were you being so conservative when you had a pretty good idea on your revenues, in fact you just bumped them up slightly from the front end, but were so low on the earnings?

Quite frankly our division presidents have done such an outstanding job in the first first six-months of the year they provided us greater clarity for our earnings on the rest of the year.

And that's why we have been able to take them up as we have.

Yes, but I think you would HANG any one of that didn't increase the bottom line.

But, you've given us the, the...the revenue numbers are roughly you know high teens or so forth.

Does that imply it is pretty good to expect for the next two-years, a 20% plus EPS growth?

That's goal is to deliver that 15 to 20% on the EPS?

Not the 15, the 20% plus.

I didn't say 15 to 20.

I know you didn't.

I was trying to make sure you understood.

I understand, but there's one thing I can't control and that is Stacey Dwyer's conservative nature.

Oh, blame it on Stacey.

I think your discussion is more with her than with me.

Thank you so much.

You're welcome

Your next question is from Margaret Whelan with UBS?

Good morning, guys.

Good morning, Margaret.

Welcome -- well done, great outlook.

I have a couple of questions.

I guess the first one is Stacey, you ran through the growth rates you are seeing in the individual markets quickly but it definitely seems to be better than we're seeing in general from the industry does it feel like you guys are gaining marketshare in all your markets?

I would say that is definitely one of our goals, when we look at our market share which Shannon and I do on a quarterly basis, we are generally seeing market share improvment in the majority of our markets.

Can you give us an idea of who you are taking it from?

Well, I would love to answer that question .

And it's on a market by market basis, but Margaret, one of the things that our division presidents focused on a daily basis is profitably aggregating the market share both from the smaller and medium sized builder, which as you know represent about 80% of the U.S. housing industry.

Uh-huh.

I believe our cost structure is so far superior to that 80% that we will continue to profitably aggregate that portion of the market.

But I'll also tell you in certain markets, and I give the great examples of San Antonio.

Six-years ago in San Antonio one of the top five builders had 40% of that market, we had somewhere down in the 12 or 14% range.

We finished last calendar year with about 24% of that market and the builder who had 40% of the market, top 5 builder builder now has 21%.

So I can tell you when our people get up everyday, they're focusing on aggregating marketshare both from 80% as well as the 20%.

Is that...are you getting share because you're adding more value in your product or is it a pricing strategy?

Well I know you're not going to like this answer because it's not something that people can put into their business model.

But I continue to say this.

And if you look at our track record over the last 26 years, 26.5 years there's only one reason why we're doing that and that is because we have the best people in the industry, they are properly incented, incentivized; and I like to say and I've said this for a number of years, this company has come from nothing, number 27 in 1992.

And we have a culture in our company which is very, very deep that we get up every day and we are trying to figure out how to profitably aggregate the entire industry.

Okay.

So you can't quantify anything.

Do you think your brand is gaining momentum?

Without a doubt, as I look across the country, and I've had a number of investors as well as media people call me.

And since we've rebranded our company, we've got a lot better name identification and a lot better branding throughout the United States.

Clearly I think that's helping us.

Because we used to have people who lived in Atlanta who owned a Torrey home and they were moving to San Diego and they were looking at a Continental home or West Pacific home and they really had no idea that all those homes were D.R. Horton.

As you know, one of my goals in this company is to make certain that 100% of our customers are completely satisfied on the warranty side.

We believe when someone moves from Atlanta they ought to be looking for a D.R.

Horton home in San Diego because we've taken care of them.

Okay.

The second question that I have is, when I was out meeting with some of your regional presidents in the last quarter they were all talking about campouts.

Are you still seeing that in demand?

Oh, campouts?

Yes.

Well we are, I can tell you that as a matter of fact, on our last conference call, we left New Jersey out and we got a call from the New Jersey division president saying hey, we've got the same thing going on up there.

We do have that in a number of states.

We don't have it in all states unfortunately.

But what we do have any number of our states still continues to be strong pricing power.

And I think that's one of the reasons why our margins are continuing to improve.

It's basically as you know better than I, the demographics in the industry are great but the supply is constrained and I believe that we are in the right market, 70-some odd percent of the permits are being taken from the south and in the southwest and the west and that's really our focus.

Okay.

Just one last question.

You mentioned that in terms of the gross margin improvement, it's evenly split between selling price and your cost controls.

Can you give me some specific examples of cost controls because you are definitely finding head winds with timber prices now?

Yes.

I will tell you that -- although it may be difficult for people to realize, we tell investors we fight pricing head winds every day in this company.

Subcontractors are trying to go up on us.

Suppliers and manufacturers are trying to go up on us.

We are fighting lumber prices today.

But I will tell you, the 23 years that I have been in this business, there's one thing that's absolutely true.

Every spring the lumber companies begin to raise prices in anticipation of builders selling more homes.

Uh-huh.

I will say to this.

We are still going to improve our gross margins as I mentioned at the beginning of this year at least 10 basis points for the next three to four-years.

Well, give me some concrete examples of how you're going to do it.

Well, clearly I can tell you as an example, Whirlpool who is a very important supplier to us on the supplier side basically had garnered Atlanta and Las Vegas which one of their competitors had, we've increased their volume, they've decreased our prices to us because we have been able to deliver to them them another 1500 units in Atlanta and in Las Vegas probably another 2,000 units.

And those units are coming from another manufacturer of appliance and clearly those 3,000 plus units fall to Whirlpool's bottom line, straight to their bottom line so they're more willing to aggressively price us their washers and dryers and refrigerators simply because it's more profitable business to them.

So do you see more opportunity on the procurement side or in the building process?

I think both, but I can tell you on the procurement side, clearly, as we go from 43 to 44,000 units this year, to 52,000 next year, to 63,000 units and ultimately 100,000 units, I can tell you that we will be able to procure our supplies and appliances and those sorts of things, more cost-effectively.

But I always ask the rhetorical question.

Do you think we're buying our refrigerators, washers and dryers as low a cost as Home Depot, Loew's and Best Buy?

I know the answers to that question in general but not specifically, I can say to you that if Home Depot is not selling more washers or dryers than we, they have big problems.

So I feel like that we still as we increase our volume can drive our cost down to the level of Home Depot and Loew's and Best Buy.

Okay.

That's it for me.

Thank you guys.

Thank you.

Thanks.

Your next question is from Bill Nobler with [inaudible]

Congratulations on a great quarter, great six-months and a great outlook.

Thank you, Bill.

A couple of questions.

If I am correct, am I correct, you didn't buy any shares back in six-months and what are your thoughts going forward in reducing the number of shares outstanding?

You are correct.

We bought no stock back in the first two quarters of this fiscal year.

Clearly what we evaluate on a daily basis, monthly basis and quarterly basis given our cash position, is our alternative to buy back our stock relative to invest in additional inventories.

I will tell you, for the first six-months of this year, clearly, we believe that we have much better yields on investment in our inventory than we were in our stock buyback but we will continue to evaluate that in the two quarters that are left in '04.

Okay, and the second question is, it's now becoming increasingly clear, in the financial markets, that rates are headed up.

This is certainly not a new question to you, but now that we are closer to those days, and it's actually occurring, how were you looking forward to adjusting in a higher rate environment?

Well, D.R.

Horton welcomes an increase in rates.

We have currently the highest gross margins of the industry, the lowest SG&A in the industry.

We have the best material and subcontractor prices, we are the most geographically diversified builder.

We haved great pricing power.

We have the largest backlog in the history of the industry.

Ask basically what we are looking forward to doing is this increase in rates should permit us to continue to profitably consolidate the industry.

And along those lines, would you expect some of the smaller builders to have more and more difficulties and is this an opportunity for you to add, at perhaps more reasonable prices, management and or land backlogs?

Your question was breaking up some.

I don't know if we've got a bad connection.

Well.

My question is, as the interest rates go up, is this going to create more difficulties for smaller builders, and can you take advantage of those?

Yes, I think as interest rates go up clearly it will be more difficult for builders to compete both in terms on purchasing power as well as pricing power but most importantly, as rates go up, they, we are controlling the most important raw material in the homebuilding process, and that is the entitlement of the land and lots and as rates go up, clearly, I think that the trend is going to be for land sellers as it has been over the last four or five-years to sell their land, contract to sell their land, to the larger more profitable builders who can absorb that increase in rates.

Actually, that's a pretty good observation because most of our rate, fixed rate debt is -- whereas the smaller builders are going to be building that current market rate.

Great.

Thanks a lot.

Keep up the great work.

Thank you.

Thank you.

Your next question is from Michael Rehaut with JP Morgan.

Hi, good morning.

Good morning.

Just a couple of questions.

First, on the margins, you said that its roughly driven half by pricing and half by efficiencies.

But, you know, noticing that your closing ASP has year over year ASP growth has decelerated in the last couple of quarters and I was just surprised to hear you say that, you know, still you are getting about half of your margin expansion from pricing, so I was wondering if you could address that and then I have another question.

Well, I think the reason our margins are accelerating so much in the last couple of quarters is because I truly believe that we're hitting critical mass in terms of our national purchasing, we, I look at national purchasing really as three modules, we've implemented the first module which is just ramping up all of our purchasing across the country in the national contracts.

The second module is dealing with regional purchasing where we are using roof tiles in certain parts of the country and we're just we're ramping up that, those contracts on a regional basis, and the third module is is we're trying to do the same thing that the automobile industry is doing.

We are trying to drive a significant portion of our purchasing to one supplier, such that they can become more efficient and they can continue to provide us lower costs.

Also into this, working through on the land side.

We've become much better in title willing land.

We're contracting to buy larger pieces of land.

We're not necessarily buying all of those at the same time, but we're contracting to buy them, taking options on the land and basically entitle willing the land.

So I look at all of those things and also Stacey mentioned our cost of capital.

Those things are truly becoming to reach critical mass for a builder who will do 43 to 44,000 and 52 to 63,000 units.

I think it will get better in the years to come.

Right, but even with that said I would think perhaps that the efficiencies are taking more than 50% given the slower, you know, the deceleration and growth and ASP, but, I mean, is it mix shift perhaps, to a lower priced product, you know, planning it all here?

Actually, we did mention at the first of the year that we expected our average price in California to drop this year simply because of mix.

Uh-huh.

So there's definitely a mix component to the basically relatively flat closing price that you are seeing from us.

Okay.

And on that question also, you know, we had seen, we have ASP in the most recent quarter for orders of 7%.

Would you expect then to have the closing ASP rise in the next couple of quarters?

Well, one thing we usually see is that our funding, average sales price or log, backlog because the higher priced home sales stay in baglog longer.

So I'm not sure that we're anticipating a significant closing average sales price increase.

But I will tell you on a going forward basis in '05 and '06.

You will see D.R.

Horton's adjusted average sales price on a market by market basis to hit the highest affordability index that we possibly can.

California is a great example, when the affordability index is in the mid 20s, that's a beautiful position for all the builders.

When the affordable index works its way down from the low 20s and the 20%.

You find companies like ourselves repositioning our product, redesigning our product, getting higher density, pulling amenities out of it, but the bottom line is that on a market by market basis we're trying to hit the sweet spot on the affordability index.

Okay.

Lastly on inventories, you know, the turns are, on an annual basis, roughly stable, about 1.4 times.

Do you have any plans to improve that over the next couple of years, and I guess this really hits more to the longer term improvements on the build cycle.

Do you have goals like some of the other builders I have articulated in terms of reducing cycle time?

To answer your question, yes, and it was two-years ago, that we are in the second year of a plan where we begin compensating, incentivizing our profit center managers to increase their inventory turns.

Our increase this year is 1.4 our goal in '05 is 1.5 and our goal in '06 is 1.6.

We've found one thing about our profit managers, whatever we choose to incentivize them for, typically they'll do.

So we anticipate being able to increase our turns at the level I just indicated.

On an option, land, the owned portion of our land has coming down from about 53%, really 12 to 15 months ago to the 48% we're talking about on this call.

Right.

And also in terms of cycle time, can you just give us an idea where that is right now and where you hope it goes?

Our cycle time has not really changed appreciably.

It is very significantly market to market, but we haven't seen an appreciable change in cycle time.

Yeah on average Mike, we're probably running about four to six-months for a cycle time.

That's going to be longer in Chicago and Minnesota where you are digging a basement.

Okay.

Thanks a lot.

Thank you.

Your next question is from Stephen Kim with Smith Barney.

I tell you what.

If we could put you on hold for just a moment we will transfer to a different line because we have a lot of static on this line for some reason.

So may I I put you on hold, Steve?

Sure.

They changed the music it used to be country.

Are you asking or am I asking?

I think um, well why don't you start off and I have a couple of followups.

I am going to transfer the call now now.

Hello?

Yes.

Okay.

I think we are ready to try it again.

Gentlemen, it is Jed BARON for Steve Kim.

Hi, Jed.

Hi, how are you?

Just a couple if I could here, first of all very strong gross margin again here, you've been up above 22% here for the last couple of quarters.

That would sort of imply here that for the year, you're probably going to do better than that 10 basis point annual improvement you've been targeting.

Along those lines, could you sort of talk about the trajectory for margins that you are expecting in the following couple of quarters here?

Well, I would -- yes, no one wants to answer your question.

I would say to you, that we, we would not expect a greater improvement in the last two quarters than what we have on the first two quarters, although it is likely that we would experience that.

But I just, with our gross margins running where they are.

I think these are very respectable gross margins and very respectable increases.

Sure.

Could we do better?

Yes.

Am I going to tell you we're going to do better?

No.

Okay.

So when you are talking about the improvement there, not being greater than in the second half.

Are you talking about a greater year over year basis improvement not being greater but are we talking about sequentially?

Sequentially.

Okay.

And just one other if I could, you were talking a little bit I think on the previous question, on your closing prices and in pricing backlog.

What was the guidance here for closing prices for the whole year?

The numbers I was using was basically flat in the $230,000 range.

Okay, right.

So that the increase we are seeing here in the backlog price you are saying is primarily due to mix but we shouldn't expect that to be included in closing prices this year?

Right.

Those homes do take longer to build.

Great.

I think that's it, thanks very much

Okay, can I jump in actually, it's Steve down here.

Hi, Steve.

Hey, I just heard somebody say that your cycle time hasn't increased appreciably.

And unless you are looking for your cycle time to increase appreciably going forward, wouldn't that sort of suggest, that you should uh.. all of that, I think it's like close to $10,000 increase in your average backlog price.

Shouldn't we start to see some of that through your average closing price?

I think.

I...I...this is an open forum and we agree and disagree with one another.

I would disagree slightly with Stacey and say that you are going to be seeing some of that in third and fourth quarters but not significantly.

Great.

Yes, I kind of agree with that as well.

The second question I had...Jed, were you finished by the way?

Yes go ahead.

Okay, it's sort of a bigger picture question and that is that I absolutely agree with you that, you know, this business comes down to people and you guys have said many times you think you have the best people in the business.

And I think by implication is that if the industry would see harder times than we see here, which is not hard to envision in the next few years at some point, that you have the wear-with-all and the capability to be able at the local level to make the right decisions, the right strategic move to be able to minimize that impact particularly relative to your competitors.

That having been said.

D.R.

Horton has grown pretty significantly over the last 10 years, when you know, as I have watched you guys.

The people who are part of you today weren't really part of you before when we had hard times.

So I guess what I am trying to figure out is, do you believe that and can you point to some examples where the people, part of your organization today who maybe were part of the organizations in the past, that did not fare as well as Horton did during the tough times, that maybe now because they're part of your organization will be able to make better decisions and therefore minimize the impact of any down turn?

Well, yes, I can answer that question two ways.

One, if you look at my six regional presidents, they've been with me for an extended period of time with the exception of Jim Schuler, who I have the greatest respect for and is...is equivalent the best regional president that we've got out there.

As well as Randy Birdwell.

And so I would look at those six who basically are the people, who, as you know, we say "Hortonize" our new people who come into the company.

And I think we've done an excellent job as we've integrated fully all of our acquisitions over the years and we really have "Hortonized" these individuals.

The individual I love to throw under the bus is my good buddy Ed Gallegher who runs one of our San Francisco bay area divisions.

A couple of years ago when we merged with Schuler, he was absolutely convinced he could not lower his SG&A.

Today he's got his SG&A right in line with our division president bonus plan.

And as I move forward and we get into more difficult times, I think the companies like Horton, who have the track record of having worked its way profitably through every economic cycle, every war scenario and every interest rate scenario in the past 26 years has brought its people, all of them, to the level where we can continue to do that on a going forward basis.

One thing I've learned on acquisitions, is if they are not on the deal and they're not able to be "Hortonized", they're no longer with us very quickly after the merger.

So going forward, our people that have not been part of the company in the last 26 years definately have the same attitude as all the people who have been here.

In addition, Steve, we're giving the tools that we have as a large company.

That we're giving them competitive pricing, access to capital.

A lot of office support that they don't ave to support in their local divisions so their tools are going to be different working with D.R.

Horton as well.

Great.

I appreciate that.

Yeah, I'll tell you, I think that your...the reduced SG&A, you know, the overhead at D.R.

Horton is a real hallmark.

I'm hearing that commercial property is cheaper than it once was, any plans to move the corporate headquarters to a place with a better view?

Well, obviously we're growing.

We may need a new corporate office but I can assure you that when we do get one it won't be anything like our competitors'.

All right.

Thank you very much, guys.

Your next question is from Ivy Zelman with Credit Suisse First Boston.

Good morning, Dennis McGowan on behalf of Ivy.

Sure.

You guys touched on alot of the markets earlier, some fairly large markets that have seen pretty extraordinary increases in orders.

And realizing that most of those are above the company total for the quarter, can you give us the flip side of that, maybe markets where you are seeing a little bit less than company average growth?

Yes.

Yes, well I can tell you that we had one weak profit center out of 53 in the company, that is in Raleigh.

They've never -- they've had terrible job losses over the last three years, especially with technology bust in the research triangle.

So that continues to be a weak market for us, although profitable.

Salt Lake City continues to be, just a slow market for us.

Charlotte is improving.

We...that used to be one of our weaker markets.

Other than that, and I would tell you one market that we did not mention, and that's Austin, and even though Texas was up 18%, Austin was pretty flat for us this year or this last quarter.

Can you give us a sense of the 53 profit centers that you mentioned, how many were up less than 10% versus your total company of, I think, 40?

Off the top of my head, no, but we will be glad to call you back on it.

Okay, no problem.

The second question, just touching on the raw material issue that you brought up earlier in the call, realizing that really across the board most material prices even outside of lumber are up.

Is it, is it your stance that even in '05, a lot of those pressures can be offset through synergies and really without even pricing you are still able to expand at a 10 to 20 basis points on the growth side?

Yes, and I think what I've clearly committed to is a 10 basis point improvement in gross margins in each of the next three years, to answer your question directly, yes.

And just on the financing side, can you give us an update on your cancellation rates for the quarter and the breakout ARMs and fixed rate mortgages?

On our cancellation rate we are in our historical range of 17 to 19% and near the low end of that range.

Adjustable rate mortgages for the quarter were 34% and I'm sorry, what was the third part of your question?

I guess what would that be versus last year?

Last year we were running about 20%.

Is that having any impact on the profitability as well with the financial services?

That is, that is part of the product mix, and margins on ARMs are not as high as on fixed rate mortgages so there is -- there is some impact on our product mix.

Okay.

Last thing, on the share repurchase issue, I think at the beginning of the year, you were committed to repurchasing somewhere in the neighborhood of 2% annually, and it sounds like depending on what your opportunities are on the inventory side, that may be on the high side of what actually gets done this year?

Excuse me, you are breaking up.

Will you say that one more time?

I'm sorry, um, uou mentioned at the beginning of the year, I believe, that part of your ongoing corporate plan was to repurchase somewhere in the area of 2% a year.

Earlier in the call you mentioned that that's going to really be weighed more against the inventory decision, but since we haven't really repurchased any thus far this year are we likely to come under that 2% range?

Yes, that's entirely possible.

Okay.

You know and tracking back to one of your earlier questions on which of our profit centers had had a greater than or less than 10%, we can get you those numbers.

But you know the beautiful thing about our company is that we are geographically diversified so well that even though we may have a market that is less than 10% increase in sales this quarter, it'll change quarter to quarter based upon where the demand is.

So, I always look upon D.R.

Horton, even though I'm very proud about 37% increase not withstanding the fact that we may have had Austin as flat, but the bottom line is California or Alanta or someplace like where it's strong --so as you look, think as the investors look at the builders to invest in, certainly one of our strengths is that geographic diversity.

Sure, I would agree with that.

I appreciate it.

Thank you, guys.

Yes.

Your next question from David Jarret a private investor.

Hi, again, it's a terrific quarter.

Question, I notice there is a big jump in ARMs this quarter.

I just wonder how that might affect future revenues should interest rates go up and people are more forced to go into fixed income or fixed interest rate mortgages?

The fixed rate mortgages are actually more profitable for the mortgage companies, so if people were moving to fixed rates that would be an improvement in our margin on the financial services side.

Am I answering your question?

No.

I was concerned that since a lot of people were buying homes at lower interest rates, what would happen if, indeed the market rates go up and their rates go up?

Well, I can tell you one thing that we clearly believe.

If the rates go up, David, that's going to be the best thing that can happen to D.R.

Horton and the industry in general simply because of the fact that as we've mentioned before we don't believe rates will go up in a vacuum, that there'll be better job growth, the economy will be doing better and as a result there'll be good medium income growth.

I'd say we have done a lot of great things in our company but one thing we have not figured out is how to sell a home to an unemployed person so I look as rates go up, jobs are being created I think that's a wonderful thing and we'll be able to sell more homes even though rates are going up.

And I also say as we've thrown Shannon under the bus over the years, is is that the fact is, that our buyers are not really buying an interest rate, they are buying a payment.

And I was talking to a investor yesterday, and we were reflecting back as I'm sure you will recall to the President Reagan and Paul Voelker days when we went to a 21.5% rate, prime rate, and an 18% mortgage rate and I said we sold homes at an increasing rate during that period.

And that investor laughed and he said, yes, I bought a home at a 15.5% adjustable mortgage.

And I said that's really -- I think the question's being asked to the wrong people.

People keep asking the analysts what's going to happen when the interest rates go up and we ought to be asking the home buyers what's going to happen.

And what's going to happen is they're going to continue to buy homes.

May not be the same home, may not be the same , may not be with the same number of bathrooms, may not be with the same number of amenities, but they are going to buy a new home.

Okay.

Another question, is there a shift noticeably between your standard home and your customized home, and what is the significance of that?

We are still continuing to run about 50/50, specifically 50% production homes and about 50% the customization of production homes.

That has not changed materially for the last three or four years.

Very good.

Thank you.

Yes, sir.

Your next question is from Jim Wilson of JMP Securities.

Thanks.

You guys have had plenty of questions, so I'll just, I'll actually make it one.

Which is, as you look forward with your growth projections, Don, can you maybe color strategy regionally, product, at all?

I know you always drill it down to, it's handled at the local level, but markets that you see as very big opportunities for you to expand share in just given the nature of the markets and or market, tougher or product lines, parts of the market that you don't think that you served, [inaudible] etc, that you think you can, Great Lakes span or, again parts of the market you might think you have trouble with?

Not having anyone misunderstand me.

We are the largest builder in California, the largest in Arizona, largest in Colorado and Texas.

And we planning on staying that way in those markets.

One of the ways we're going to stay that way in those markets as well as penetrate our other markets clearly is by offering a wider arrange of price points and product offerings as we are across the country.

We're even doing some in-fill sites in downtown San Diego as you know, which we never were doing two or three years ago.

Also I can tell you that in Florida, our Florida people are producing outstanding return on investment in that market.

And we've said for the last couple of years we're pumping as much money as our division presidents in Florida to them.

As well as Las Vegas, which is doing incredibly well.

And I can tell you Jim Fraiser [sp] out there will be the number 1 builder in Las Vegas in the next year or two eclipsing the current number 1 builder.

So we're planning on put more money with our proven profits center managers and letting them expand their product and price offerings.

And I missed one market.

And I said at the beginning of the year we were going to be a bigger player in Maryland and Virginia And I can tell you that our two division presidents, Kingsley [sp] and McCarthy [sp] are doing a great job, and our Regional President George Seagrays [sp] moved there and we are doing a very good job of positioning ourselves for '05 and '06 in Maryland and Virginia.

And maybe the answer is simple, but anywhere you think, you know I mean it's really become a much tougher market or there's obstacles to [inaudible] in the expansion?

No.

I don't.

As a matter of fact what we are doing is and we may have mentioned this when we were at your conference, and that is that we are opening satellite markets, where bottom line is we are taking an existing profit center and just sending sales and construction people, for example, in San Antonio, we have people in Mission and Laredo, just construction and sales people.

In Birmingham, we have just sales and construction people going to Huntsville, Alabama leaving all of our back office at our existing profit center.

And we believe that we are taking the Walmart of home building these smaller and medium sized markets where we can pick up 2 or 300 closings, in Mission and Laredo where our competitors can't do it for one good reason, their overhead is too darn high and we can go there and aggregate that market share of those small and medium sized communities profitably because of our low SG&A.

Okay, great.

Makes sense Thanks.

Okay

Your next question is from Jeremy Pinchot with Monness, Crespi, & Hardt.

Hi, everybody, great job.

Yes, good morning, Jeremy.

How are you doing?

Doing great.

How about yourself?

Fine.

You know, everybody has asked you just about every question they could have but any idea of how your market share is looking like in Atlanta and the Washington D.C. area right now?

I can tell you in Atlanta we are plus or minus 30 or 40 units of being the number 1 builder there, with the builder who was there last year.

Okay.

Further apart from that last year, so I believe, we'll end up number 2 but just barely number 2, but we still won't have any more than about 3.5% of that market.

So as a result, we're continuing to try to pentrate that market deeper.

Great.

And what was your other market?

Washington D.C.

Washington D.C?

I would hate to tell you, that it's embarrassing to me, but I am not sure we're even 1% of that market.

But I assure you before too long we're going to be 2, 3, 4, 5 in 10% of that market.

That's fine.

I was hoping, even if it's less than 1%, it was more than it was last year.

Definitely.

Yes.

Well, that's great.

Thanks.

Good lucks, -- luck, guys.

Your next question is from Steve Fockens with Lehman Brothers.

Hi, good morning, guys.

Just two quick questions.

One, on the gross margin front, given the view of plus 10 or maybe 20 basis points over the next few years, you know, relative to the last three or five where it's averaged about plus 80 or 90, are you just being conservative?

Is it a reflection of maybe you're fairly far along in gross margins?

Is it a kind of outlook of what the overall environment might be?

Or better ways, is there a certain gross margin level where you'd say, wow, I don't think we could really get any better than this and what kind of level might that be?

Well I will tell you first of all, we don't have any of those negative attitudes here.

And I would -- and if, if you will back up, two years ago, we had as an example, we -- bonused our division presidents for a 20% gross profit margin.

We two years took it to 21%, we're probably ging to take it up again next year.

Also, two years ago, we had as a bullet point for them to hit a 15% ROIC.

We took that from 15 to 20%.

So basically we are continuing to take up their bonus plan as they continue to improve their financial performance.

I would say to you that the reason, I guess I accuse Stacey of being too conservative all guidance.

I guess I'm too conservative on our guidance on gross margins but basically it's just a conservative position.

Okay.

So is it fair to say that maybe if you're 22% gross margin now, if you guys were at, let's just throw a number out, 25% in three or four years, would you be shocked, would you say right now, that's a real stretch?

Or, when you think of your even three, five and even longer term goals what kind of a level do you think, gosh, it's really going to be a lot harder to get there or is it at this point just too hard to tell?

We plan on increasing them every year but I can tell you and Stacey will probably squirm over here, but you took the words out of my mouth when you said 25% because that's clearly a midterm goal that I would like to see our our company hit, and that is a 25% gross profit margin.

Whether it takes us two years or four yearsI don't know, but clearly based on our past performance it's clearly possible to achieve.

Okay great., fair enough.

And one last question on the ARMs, do those tend to be one, three, five, or seven years?

What are the ARMs, one, three, five, seven?

I believe the majority of them are five years right now.

The majority are five years.

Great, thanks very much.

Your next question is from Mike Kinder with Citigroup.

Yes, most of my questions have been answered.

One question was on the '05 and '06 revenue and closing targets that you gave.

Are those purely -- you mentioned acquisitions, you know, something you'd look at opportunistically .

Is there dependence on acquisition at those numbers or is that what you think you can do internally?

100%. organic Mike.

Okay.

For both years.

Okay and in terms of acquisitions, should we expect it to primarily to be local, single market-type deals that you're looking at or is there any desire to look at anything bigger?

All of the above.

Okay.

Thank you.

Yes, sir.

Your next question is from Kent Green with Boston American Asset Management.

Yes, great quarter as usual, fellows.

My question really contains first a followup on the acquisition.

So, what, is there really any markets out there or geographical areas that you, you would still like to make acquisitions in?

Or, you know, and at what price would you like to pay, just refresh our memories on, you know, what the goal, what the standards are?

We don't need to make any acquisitions, in these specific markets.

We've gone into a couple of markets recently as Greenfield's, specifically into the Pennsylvania market and specifically into Tampa -- and to the extent that we can make an acquisition, to supplement our existing proven profits of our managers, we would do that.

The price which we'd pay relative to what people are asking today, it's all too high.

But Stacey can tell you the two parameters we looked at most importantly.

We have two parameters, many more in addition to theses, but these are the two primary.

If we were issuing stock in a transaction we want the transaction been to be accretive to our our existing shareholders within a year and if we do pay a premium over market value, and that' is market value not book value, then we would expect to earn that premium back in a period of two years or less.

Okay, very good.

One final question.

A lot of people have been talking about, as prices go up, particularly in markets like California, shift to townhouses, condos, you know, that kind of step.

Are you in that business, or would go into that business and what extent is that growing at D.R. Horton?

Actually our attach prod...to answer the question directly, yes.

Our attached product or multi family portion of our business is growing, as we continue to try to hit the sweet spot of the affordability index in each one of our markets, as well as we try to profitably aggregate a larger portion of the market.

In Chicago, we're doing, in the market where we are doing a mid-rise condo, in downtown San Diego, we've done four mid-rise condo projects, all very successful.

So we are continuing to look at different ways in which we can continue to expand our business.

The other thing we look at, and I keep getting this question is you know what happens to single family permits in this country.

And I tell you as a company, we are not looking at the new home starts across the U.S.

We are looking at the total housing industry in the U.S.

So to an extent as an example in Austin, Texas where there may be 10,000 new homes build this year there may be 18,000 existing homes so we look at that as an market as a 28,000 unit possibility.

We're trying to carve back -- not only for all the medium size builders and larger builders in the new home industry, we're convince people not to buy an existing home but rather to buy a new home.

They said that Wal-Mart couldn't keep expanding and you have become very, very a large home builder now.

Wal-Mart obviously you know changed a couple of formats which you seem to be doing and then going into foreign markets.

Any thoughts about foreign market?

We know one major home builder is already in a major city market.

I told Don Horton I'm good for the next ten years, and I can assure you that we can deliver the growth targets that we told are completely domestically.

We have no plans to go international.

Thank you.

Your next question is from Karl Dorff with Dorff Management.

Yes, good morning.

Good morning.

In the mortgage business, it's basically, excuse me, I lost my train of thought.

You broke it out into basically two problems within the area, I'm trying to get a better feel for how much of it is pricing and how much of the decline in earnings is from the expansion into California.

The question is, if you were not spending the money on expanding into California, what would the earnings in the mortgage side of the business look like?

Very frankly, there's overcapacity in the mortgage industry today.

I would look upon it today, as even though our earnings and our margins are good, they've decreased some from last year in the mortgage side of the business.

I would say to you that probably 2/3 of it is the competition in the industry, and the other third of it is our startup cost in California, and that's just a rough number.

So, basically, if you were not, didn't have the startup costs, your earnings would probably still be down in the mortgage business?

Yes, slightly, they would be.

Okay.

And the other question.

Let me say something to you.

Our decrease in our earnings and our mortgage company, since it's largely a facilitator of the homebuilding side of our business, is going to be down a lot less than any of our competitors.

I understand.

I am not, you know, I am not criticizing.

You guys are doing a great job.

Yes.

I apologize for being defensive, but I guess I am.

No, In fact.

The other question is along those lines, you sort of like Rodney Dangerfield, you are not getting the full respect at least I think you deserve for the 27 years, consistant turnings, the kind of great numbers and results you are turning in in whatever environment.

What I'm really trying to do now is maybe put some parameters on it so that the people that just turned negative on the homebuilding industry primarily relating to the interest rate outlook maybe can get a better feel, and my question therefore is, what would it take for you to just have flat earnings with?

I understand what you said on higher interest rates, but the market does slow down, would a 300 basis point increase in interest rates from here hurt you, would flat home prices be enough to create that?

What kind of environment would you envision that might force your earnings, I am not even saying down but after 12 months from now to be flat?

I would say only one economic scenario, and that is a depression like we experienced in the '30s as opposed to a recession we have experienced several times over the past 27 years.

I don't see anything adversely affecting our potential to continue to profitably grow, both the top and the bottom line, other than an economic cycle I have never seen but read about, and that's the great depression.

Uh-huh.

That is highly encouraging.

Unfortunately, you know, too many people out there at least that are still not going to believe it in terms of giving the kind of multiple that I think you people deserve for what you have turned in.

Well I can tell you one focus that I've had, and I also believe that there are several other of my counter parts have been focusing over the last couple of three years but, for a company like D.R.

Horton which has had a 33% compounded annual growth rate over the last ten years on our earnings per share, I assure you that Stacey, Shannon and I and Bill Wheat send a fair time on the road visiting with investors because I truly believe that we deserve at least a 20 multiple.

Uh-huh.

That's why I was trying to give you the opportunity on that question, if parameters that you could put other than a depression which I don't think anyone's going to want to factor in were you know, let's say high enough to cause what I was suggesting, people I think can come to grips better with something like that than the response that you gave me although I am not saying that that response may not be the correct one.

Okay.

Thank you very much.

Yes, sir.

Your next question is from Margaret Whelan with UBS.

I just had a quick follow up, no one asked about M&A activity.

What are you seeing out there in terms of the pipeline and what's your, your appetite?

Well, Stacey can answer that question.

I will take the last part of the question first, in terms of appetite.

We -- we've grown about 50% since 1994 through acquisitions.

It's been a good growth strategy for us and we will continue to evaluate acquisitions.

In terms of what we're seeing righted now, Don mentioned earlier we are seeing quite a few deals out there.

It's just the pricing is not incredibly attractive to us right now.

Well, it's just, builders are just too expensive?

The expectations of what they could receive for selling a business right now seems to be a little high to us.

I guess, you know Don, BT is talking about the potential for a twenty multiple on Horton or for the industry and maybe one of you needs to step up and pay much higher multiple for one of these builders and prove you can make it work?

Well I guess one the thing that I would say to you is that I, with a great degree of pride commit our company to be 15 to 20 % EPS growth each.

Uh-huh.

I feel like that's a great return for our shareholders.

Uh-huh.

To the extent that we can find them an attractive acquisition where the analyst guarantee wouldn't be totally negative on it, we would do that deal.

But at this stage of the game, I'm yet to be convinced that the analyst community wouldn't absolutely tank us for doing something that is too out of the box.

But, you know, you as managers have a much better perspective on what's good value than we did.

All right.

And maybe you just need to make that decision?

Well, you know, we did that with Schuler.

Uh-huh.

As my daughter said, we got "dissed" for paying too high a multiple for Schuler.

But everyone's been dissed, you know, don't take it too personal it's the whole industry.

I don't -- I don't take it too personally but I do take it slightly personal but, at the same time, we uh.. obviously that was our best, not to "dis" our other 17 acquisitions but incredibly that was a perfectly well timed acquisition and we were even "dissed" by our competitors for having or continuting with that acquisition post 911.

Well it's worked out very well.-

Yeah and really Margaret we're in the fortunate position of not needing to do an acquisition to maintain our growth goals.

Sure.

I know.

I am wondering what the pipeline is like.

It's the same.

It's full and overpriced.

Okay, fine.

Thank you guys.

Uh-huh.

The next question is from Ken Jones with Wasserman and Associates.

I will make it quick.

I'm sorry to bother you again.

I thought you were on the beach by now Jones.

Yeah, I am on the beach.

I might add, I do think that you, that Rodney Dangerfield and you are similar.

Any way.

One thing about Rodney.

He has got a lot of money.

Yes.

The company is under, under, under appreciated.

Anyway, particularly your numbers and deliveries, and sales for the next couple of years, it implies, price will go down about $15,000 per unit, down five next year and ten the next.

Is that basically just a, you know, you gave 12 and 14 billion, I mean you're not rounding, you're not getting that accurate, obviously going out that way or do you in fact intend to go more, you've talked several times about hitting a sweet spot trying to get the affordability and so forth into the possibility of rising interest rates,do... are you really taking a, corporate stance to, in fact, maybe lower, keep your prices flat or lower through mix?

I can answer those, both those questions yes and yes.

The first question, is, yes, it's been a rough number that's been rounded.

Yes.

Okay.

I understand that.

Yes, therefore the question.

And the second part of it, Jim, is on a region and division by division basis, as we ask our division presidents to penetrate their markets more deeply.

They are typically going down the price curve because that's where some of the best opportunities are.

So

There's no question.

do I anticipate, even though we've got purchasing power, and we've got increasing land prices, I still believe that our average sales price will be pretty much flat to up slightly to maybe down slightly but the bottom line is going to be pretty flat because our people are still trying to hit that affordability index.

Your average sales prices are higher than lets say [inaudible] but are you going to be going to the real low priced stuff you know the 120s or you just going take out stuff of yours, your existing product and so forth, and trim it down and so forth and leave it as options?

I mean, is it a complete change and going more multi family or is it taking your products and just trying to cut cost out of them here and there?

Well, and that's going to be, and I don't mean to evade your question because I know that upsets you.

No.

It depends on, it all depends upon, for example, in San Antonio, we are down in Mission Laredo, I would say to you clearly we designed a smaller product with less amenities down there to hit the affordability index.

In California we're to a denser product.

We're building more dense condos, moe dense townhouses so that we can increase our affordability.

So it's just all going to depend upon each respective market.

I go back to something we've been "dissed" for in this company, that's the great strength our company, and that is our decentralized entrepreneurial division presidents.

They're out there in the marketplace.

I can tell you, I don't know what they ought to be building in San Diego.

But I can tell you Tom Noone our two division presidents in San Diego do know what they need to be building and what they need to be building in the future and that's where they are going.

One, two, you want to talk about one, but one, real fast, you are a 5.1% last debt offering was one of the lowest I have ever seen, I think I have seen one or two lower didn't you say in the last conference call that 80% of the people who bought that were buyers of investment grade paper?

Yes, they were.

Then, is it, is it a fact that perhaps the rating agencies are now not becoming that, are becoming obsolete if 80% of the buyers will buy your stock and yet the rating agencies won't give you an investment grade?

We really think that we're operating at investment grade credit.

Yes, but why would 80% of them do it, don't they, do they have a mandate to buy investment grade or can they go on to investment grade these buyer?

They think they can do both.

Certainly I wouldn't say the investment or rating agencies are obsolete.

Of course you wouldn't.

The -- but I can say it.

I'm not going to say that.

But clearly, for a number of years, I think, and especially the last four or five years, that 5.1% deal, I think the rating agencies or the investors are seeing through the ratings and they do a lot of their own due diligence and clearly I think that's why we have so many crossover buyers.

One last question, because I think the audience might be interested, and I didn't know this, people know that you take a lot of your top people on a cruise every two years and they know what you do on the ranch with the kids, but I just learned that you guys are offering houses to employees that are hard up and so forth at very low rates or to help them out.

Can you go, can you explain that real quickly?

Well, question -- yes, we have a program that Don Horton started as he did the kids camp, but he has a program that's called Homes for Horton.

And the bottom line is, that we have a committee which receives applications from all of our employees across the country.

And we evaluate them and as opposed to not being critical but [inaudible] business with Habitat for Humanity basically we call it habitat for Horton and basically we're providing homes for our more financially difficult employees, single parents and that sort of thing, to provide them at cost as opposed to a market.

No wonder you have probably the best devoted employees in the industry.

Well, thank you very much sir.

And I don't give compliments often.

I know that.

Okay.

All right.

Thank you.

At this time, there are no further questions.

Are there any closing remark?

Thank you for joining the D.R.

Horton second quarter conference call.

We look forward to the third quarter conference call.

Good bye.

This concludes today's conference call.

You may now disconnect