霍頓房屋 (DHI) 2004 Q4 法說會逐字稿

Good morning.

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

Horton, America's Builder, fiscal year 2004 earnings release conference call.

After the speakers' remarks, there will be a question and answer period. [Caller Instructions] Thank you, I would now like to turn the conference over to Don Tomnitz.

Please go ahead, sir.

Thank you, operator Joining me this morning is Sam Fuller, Senior Executive Vice President of Finance;

Bill Wheat, Executive Vice President and Chief Financial Officer; and Stacey Dwyer, Executive Vice President and Treasurer.

Before we get started, Stacey?

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

Although D.R.

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

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

Horton on the date of this conference call and D.R.

Horton does not undertake any obligation to publicly update or revise any forward-looking statements.

Additional information about issues that could lead to material changes in performance is contained in D.R.

Horton's annual report on form 10-K and the most recent form 10-Q, both of which were filed it the Securities and Exchange Commission.

We will also be discussing non-GAAP financial measures during this call.

The reconciliation to the nearest GAAP number is available on our website at DRHorton.com, on the Investor Relations page through a link titled data table.

Thank you, Stacey and welcome to D.R.

Horton's fiscal year end '04 conference call.

D.R.

Horton, America's Builder, completed its 27th consecutive year of growth and increased profitability.

We are proud to be the largest builder in America for the third consecutive year.

D.R.

Horton, America's Builder, continues to distance itself from the competition, as we are the first builder to close more than 40,000 homes and the first builder to sell more than 45,000 homes in a fiscal year.

Our 43,567 homes closed in fiscal year 2004 are 20% greater than the number 2 builder in the U.S.

Our highlights for the year include: homebuilding pretax income increased 65% to $1.5 billion, Net income increased 56% to $975.1 million.

Diluted earnings per share increased 51% to $4.11.

Our shareholders equity increased 31% to $4 billion.

Sales backlog, or future revenue, increased 25% to a year-end record $4.6 billion.

Consolidated revenue increased 24% to $10.8 billion.

Gross profit margins on home sales revenue improved 220 basis points to 22.8% from 20.6%.

Our homebuilding SG&A improved 60 basis points to 9.0%, a record low for the Company and the industry.

Homebuilding debt to total cap, net of cash, improved 110 basis points to a record low 38.9% from 40.0%.

Our dry powder, at 9/30/04 was approximately $1.6 billion.

Our EBITDA coverage ratio increased to 7.8 times from 5.2 times.

Our return on average shareholders equity increased 420 basis points to 28.3% and our return on net capital increased 363 basis points to 18.4%.

Our fourth quarter highlights include net income increased 52% to $349.6 million.

Diluted earnings per share increased 50% to $1.47 a share.

Net sales orders increased 17% to $2.8 billion on 11,105 homes sold.

Consolidated revenues increased 23% to $3.5 billion and our homes closed increased 17% to 13,452 homes.

Net sales orders for the quarter increased 17% to $2.8 billion, or 11,105 homes.

Net sales orders for the year increased 24% to $11.4 billion, or 45,263 homes.

Sales in each of our regions increased in both the fourth quarter and the fiscal year in both units and dollars.

Our strong sales contributed to our record year-end backlog, 17,184 homes, with a sales value totaling $4.6 billion; a 25% increase over last year.

We are focused on delivering this backlog while continuing our strong sales performance to ensure our 28th consecutive record year in fiscal year 2005.

Our asset concentration corresponds with our top six homebuilding states.

The percentage of our assets in each of these states are as follows.

California with 26%, Texas with 15%, Colorado with 11%, Arizona with 8%, Nevada also with 8%, and Florida with 6%.

Our fiscal year 2004 sales dollar increases in our top six homebuilding states are: California, with a sales dollar increase of 16%;

Texas, 14%;

Colorado, 24%;

Arizona, 26%;

Nevada, 69%; and Florida with an 81% sales dollar increase.

We would also like mention a few markets where we saw sales dollar increases greater than 50% in the fourth quarter.

South Florida, up 172%;

Tucson, up 99%;

Portland, up 97%;

Raleigh-Greensboro, up 97%; the coastal Carolinas, up 86%; the Los Angeles area, up 61%;

Salt Lake City, up 51%.

No weather report here.

We're proud to announce our entry into the following new markets during the quarter: Daytona Beach, Florida;

Eugene, Oregon;

Reno, Nevada;

Las Cruces, New Mexico; and Huntsville, Alabama; among others through our strategy of starting up satellite operations in small and medium-sized markets, in which we send sales -- excuse me, in which we send sales and construction teams to those markets while keeping our back office function in our existing division offices.

We're capitalizing on our position as a low-cost operator in the home-building industry to begin profitably aggregating market share in these smaller markets.

Our fourth quarter total homebuilding revenues increased 23% to $3.5 billion from $2.8 billion in the year-ago quarter, with homes closed increasing 17% to 13,452 homes.

The average closing price increased 5% to $253,500.

For the 2004 fiscal year, total homebuilding revenues increased 25% to $10.7 billion from $8.6 billion in fiscal 2003.

This reflects a 21% increase in homes delivered to 43,567 homes and a 4% increase in our average closing price to $240,800.

By the way, our average selling price in California increased by only 2% in fiscal 2004.

The modest average closing price increases, for both the fourth quarter and the fiscal year, reflect our continued commitment to focusing on the sweet spot of housing demand.

First time and first-time move-up buyers by offering homes at prices that those buyers can afford.

Our gross profit margin on home sales revenues in the fourth quarter of fiscal 2004 improved to 23.6%, a 240-basis point improvement over last year.

For fiscal 2004, our gross profit margin on home sales revenues improved 220 basis points to 22.8% from 20.6% in the prior year.

Our goal is to continue to improve our gross margins by at least 10 basis points per year through continued strong pricing, 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 $3,300 per home, a total of $145 million through our national and regional purchasing programs, compared to our savings of $2,600 per home in the prior year.

This was another awesome performance from our national, regional and local purchasing managers, the premiere purchasing team in the homebuilding industry.

Homebuilding, selling, general & administrative expenses for the fourth quarter were a record low 8.1% of homebuilding revenues, compared to 8.6% in the fourth quarter of fiscal 2003.

For the year, our homebuilding SG&A expenses, as a percentage of homebuilding revenues improved 60 basis points to a record low 9.0% from 9.6% in fiscal 2003.

The primary driver of the improvement in our SG&A was the increase in revenues in both the fourth quarter and the fiscal year, which provided incremental leverage on the fixed component of our overhead cost structure.

We continue to focus on being the low-cost operator in the industry.

Other income for the fiscal year ended September 30, 2004 was primarily related to the change in the fair market value of our interest rate swaps, offset by minority interests and income from our consolidated joint ventures.

All of our joint ventures are consolidated, which provides excellent financial statement transparency.

Interest expense for the year included unamortized issuance costs related to our restructured and amended revolving credit facility.

Over the last two years we have taken advantage of the favorable interest rate environment to replace some maturing debt, to call some higher coupon senior notes, and to negotiate more favorable terms on our revolving credit facility.

As a result, our consolidated interest incurred for fiscal year 2004 was $242.6 million, less than the $246.9 million incurred in fiscal 2003, even while our inventories increased at a 29% rate.

Our EBITDA margin improved 275 basis points in fiscal 2004 to 17.4%.

As a result of our increased EBITDA and our decreased interest incurred, our coverage ratio in fiscal 2004 improved to 7.8 times from 5.2 times in fiscal 2003.

Return on net capital has also improved as we continue to deleverage our balance sheet and strengthen our operating metrics.

Return on net capital this year was 18.4%, a 363 basis point improvement over last year.

Financial services revenue for the quarter was $51.1 million compared to $52.3 million in the prior year quarter.

And for the year, financial services revenue increased 4% to $182.8 million.

Our company-wide capture rate in the fourth quarter improved to approximately 74% from 64% a year ago and for the year, our company-wide capture rate was 71%, versus 66% in fiscal year 2003.

Financial services pretax income for the September quarter was $18.2 million compared to $28.3 million in the year-ago quarter and for the year was $74.7 million compared to $93.5 million last year.

Ninety-three percent of our fiscal 2004 mortgage company revenue was captive, reflecting our continued commitment to focusing on supporting our home builders business.

Our average FICO score was 717 this quarter and 716 for the year, up from our average of 710 in fiscal 2003 and 704 in fiscal 2002.

Our average loan to value was 83% this quarter and 84% for the year compared to 85% in fiscal 2003 and 87% in fiscal 2002.

For the quarter, our consolidated net income increased 52% to $349.6 million from $230.7 million in the year-ago quarter.

Our diluted earnings per share of $1.47 for the quarter represents a 50% increase from the 98 cents per share reported last year.

In fiscal year 2004, net income increased 56% to $975.1 million from $626 million in the prior year, with diluted earnings per share increasing 51% to $4.11 per share from $2.73 a year ago.

We continue to focus on maintaining a strong balance sheet.

Stockholders equity grew 31% to $4 billion.

Our $975.1 million in net income represents a 28.3% return on average stockholders equity, up 420 basis points from fiscal 2003 and a 32.2% return on beginning stockholders equity, up 459 basis points from fiscal 2003.

Our homebuilding leverage ratio, net of unrestricted cash, improved 110 basis points to a record low 38.9% from 40% a year ago.

The 38.9% is 150 basis points below the average of the home builders that are rated investment grade.

Our goal is to continue to maintain our homebuilding net debt-to-cap ratio at an investment-grade level.

Our lot and land position is 268,000 lots owned and controlled, approximately a four-year supply of land; 41% of these lots are owned and 59% are optioned.

Two years ago, the owned percentage of our lots was 53%.

Last year, it was 49% and this year we're down to 41% owned.

This reflects our low risk approach to controlling our land supply and our commitment to keeping a strong balance sheet by controlling rather than owning an increasing percentage of our lot supply.

At September 30, 2004, we had approximately $1.6 billion in dry powder, with approximately $480 million in homebuilding cash and $1.1 billion available on our homebuilding revolver.

D.R.

Horton, America's Builder, has consistently delivered on what we have promised and we certainly plan to do so in the future.

For the first quarter of fiscal year 2005, we are issuing earnings per share guidance of 85 to 90 cents per diluted share, which is approximately a 10 to 15% increase over the 78 cents reported in Q1 of '04.

This assumes that our backlog conversion rate stays in our historic range of 55 to 60% of September 30 backlog units.

We're using a share count of approximately 237.5 million diluted shares for the first quarter.

The Company is issuing fiscal year 2005 earnings per share guidance of $4.50 to $4.70, approximately a 10 to 15% increase over the $4.11 we reported in fiscal year '04.

Our goal for fiscal year 2005 is to achieve greater than $12 billion in revenue on more than 50,000 homes closed.

We expect to earn about 35 to 40% of our net income in the first half of the year and approximately 60 to 65% in the second half.

Our earnings per share estimate for fiscal year 2005 is based on approximately 238.5 million diluted shares.

We believe this guidance is very realistic, especially for the first quarter.

As always, we will continue to update our annual guidance as we gain more clarity through the year.

Thank you, Stacey.

Now to give you some idea of what to expect from D.R.

Horton, America's Builder.

We plan to continue to focus on the basics of the homebuilding business and distance ourselves from our competitors by capitalizing on our industry-leading homebuilding machine.

Our 43,500 homes closed in FY '04 was 20% more than the number 2 builder and 69% more than the number 5 builder.

Our SG&A was the lowest in the industry.

Our operating margins were the highest of the top five builders and our pretax income in fiscal year '04, was 16% more than the number 2 builder and 145% more than the number 5 builder.

Our trailing 12 months backlog conversion rate was the highest of the top five builders.

Our homebuilding debt-to-cap, net of cash, was 150 basis points lower than the average investment-grade builder.

We have the leanest land and lot position in the industry with an increasing percentage of our lots optioned.

And we have high financial transparency.

We have no unconsolidated joint ventures.

Our balance sheet is what you see is what you get.

And our earnings are consistently driven by our core homebuilding business, with only a small impact from financial services and land sales.

We have a unique product niche with our customization of production homes resulting in less exposure to increasing interest rates.

We have tremendous geographic and product diversification.

We have the most experienced management team in the industry.

Our Chairman, Don Horton, and myself, have been partners for over 22 years and our regional presidents average over 18 years tenure.

Our specific goals include continuing to grow the top line 10 to 15% annually, continuing to grow the bottom line 15 to 20% annually, in fiscal '05 closing 50,000-plus homes and generating revenues of greater than $12 billion, in fiscal '06, closing more than 60,000 homes and generating revenues of greater than $14 billion.

Continuing to maintain our disciplined growth approach by implementing and continuing to maintain regional inventory caps for the third consecutive year, continuing to have the lowest SG&A in the industry.

Finally, D.R.

Horton, America's Builder, had the goal of being the first builder to 40,000 homes, which we accomplished in fiscal year '04.

Now we have the goal of being the first builder to 50,000 homes, which we will accomplish in fiscal year '05, while continuing to improve our financial metrics.

We have heard from numerous investors and we firmly believe that this continued superior performance will ultimately command a superior PE to our competitors.

Clearly D.R.

Horton's 27 year decentralized approach to the homebuilding business, with centralized controls has proved to be the superior homebuilding business model in America.

This concludes our FY '04 conference call.

We'll now host questions.

[Caller Instructions] Michael Rehaut, J.P. Morgan.

Just a couple of quick questions.

First on the margins.

Very strong expansion and certainly well above a 10-basis point annual improvement year-over-year.

Can you give a little color on what drove it, specifically in the fourth quarter, particularly in terms of gross margins versus -- you know, price versus purchasing or construction efficiencies and -- or mix?

And, you know, what you expect that margin -- the operating margin can go to over the next couple of years?

Clearly, Mike, our -- it was about 50% pricing power across the U.S. in '04 as well as in the fourth quarter; and about 50% purchasing savings.

And, as you can see, that-- clearly our national purchasing savings exceeded our own expectation by a considerable amount, $3,300 per unit, versus $2,800 per unit.

On a going-forward basis, we know we have the largest scale.

We believe we have the most economies of scale and as we said in our president's meeting in Hawaii recently, frankly we're going where no builder has ever gone before and I don't know to what extent we can continue to enhance our financial metrics on -- on the scale side, on the economies of scale side, but we believe we can continue to do it significantly.

But we're not going to promise anyone more than a 10-basis point improvement in gross margins annually for each of the next five years, is what we've committed to the Street.

And -- and is that -- the strong gross margin expansion this year, and the strong earnings growth this year, is that one of the reasons perhaps why, you know, your EPS growth guidance for '05 is below your long-term annual target?

Clearly what we want to do, and what we have done over the past several years, is we've been able to increase our guidance from the very beginning of each fiscal year, approximately 20% per year.

We are also clearly focused on some of the missteps our competitors have made over the past two to three months.

We do not ever want to be in that type of embarrassing situation nor are we going to be.

Therefore, as we have more clarity on our earnings, just as we have each of the last three years, we'll let you know about that.

But we are comfortable that we can grow the top line 10 to 15% and the bottom line 15 to 20% as a goal.

But we're going to give you guidance as we've just given you.

Stephen Kim, Smith Barney.

Okay, first of all, I wanted to just say, you know, congratulations on another really excellent quarter.

You know, very, very impressive results.

Thank you very much.

I wanted to, if I could, though, talk about the fact that, you know, you probably could have achieved similar results as you did here recently by-- and just as good returns probably with a greater amount of share buybacks and a -- maybe a slower rate of top line growth.

In your opening remarks, you talked several -- several points about the fact that you have a closings goal that's sort of sets you apart from the industry.

You've talked about -- you've emphasized your size relative to the competition.

You talked about distancing yourself from the rest of the competition.

And seems to imply, basically that there are benefits that -- to D.R.

Horton's size, you know, that basically, you're getting advantages over Centex, Pulte, Lennar, KB and that this advantage is widening.

Yet, if we look at those other builders and we can even add more, they don't seem to be having any difficulty growing, they're also putting up very impressive results.

So, I guess my question is can you point us to specific examples where your increased size and scale is actually preventing others in the industry from being able to grow or achieve their goals?

Do you believe, in other words, that your strategy is actually superior enough, because of your size, that you can put -- you're putting increasing pressure on your competition so that they will not be able to achieve their goals?

Clearly I can give you a great example and that's San Antonio, Texas.

Six or seven years ago, the largest builder there had 40% of the market, post-acquisition of the leading home builder in San Antonio.

At which point in time, which was about six years ago, we had about 8 to 10% of the market.

This last year, we had 24.1% of the market and they had less than that, about 20 or 22% of the market.

And by the way, during that time period of increasing our market share from 8 to 10% to 24.1% of the market, our gross margins increased from about 16% to over 24%.

So, clearly we see the benefit of scale, not only in terms of our margins and our operating performances, but actually of taking market share away from our competitors.

And you -- you also believe that those kinds of benefits accrue nationally it seems, as well?

Yes, we do.

And I also believe that we are doing something that no one else is doing, by generating and developing these satellite markets where we can go into these smaller markets like Las Cruces, New Mexico;

Huntsville, Alabama.

One of our competitors said he would let us have Huntsville, Alabama the other day when I was on a panel with him in New York and I appreciate that.

The bottom line is, is with our operating margin and our SG&A, specifically, we can truly go in these smaller markets now and do something that we've wanted to do for a long period of time and that is truly become the Wal-Mart of the homebuilding business; especially in these small markets and aggregate the small and medium-sized builders who are undercapitalized and have a lot higher cost structure than we.

You talked specifically about, you know, the San Antonio market where, you know, you've been able to grow your market share in that particular market and -- and you've benefited from that.

And now you're talking about moving into sort of smaller markets where I would think you're not going to be able to get the same kind of economies of scale moving from a moderate position in a reasonably large market to a very large position in a reasonably large market.

You're talking, instead, about maybe moving into a relatively small market and -- from basically a base of zero.

Are you going to get the same kind of efficiencies or gains inefficiencies or is there, you know, going to be a dreaded gum tax that you might have to pay when you get into some of the markets?

And are there enough of them to really make a difference, given that the size of your company is so much greater than it was back, let's say back in the mid-'90s?

Well, to answer your question clearly, yes, on a -- on a number of points.

One, when we go into the smaller markets, we have a great balance sheet and we are a preferred purchaser of lots from these developers.

Most of the time we're not even buying our lots, we're optioning our lots from these small and medium-sized developers at a very attractive price.

They've always been selling to small and medium-sized builders, who you don't know whether they're going to close one lot a quarter or two lots a quarter.

But we can go in there and give them consistency with our lot closings.

But also we're taking our national purchasing power, no different than Wal-Mart, to a small market and being able to drive down the cost of a home in that particular market.

We may not be able to get the same overall gross margin in that market, but when you get down to the pretax income line, we believe it'll be equal to or greater than what we're doing today.

And by the way, we're not going across the United States and looking for every podunk town of 10,000 population or less, Steve.

We're selectively going into these ancillary markets as they are adjacent to very large operators like Birmingham, Alabama, we're the largest builder.

And we can go 100 miles to Huntsville, Alabama and pick up 2 to 300 closings.

That's very incremental leveraged income for us.

Great.

If I could just get one more question in here, it relates to your margin goals.

You talked about 10% increases and certainly that seems a lot more achievable than, let's say, 50% you know per year, let's say.

But at the same time, I guess you're talking about moving into some of these satellite markets, et cetera, with potentially lower margins initially and so it would seem to me that your 10% growth in margins over the next several years is clearly relying on some efficiencies that we haven't yet seen.

Don't you believe to some degree that margins in the industry right now are probably a little bit higher than where they will be on a more normalized basis in a few years, just because of the interest rate environment?

And I'm not trying to say that the market is going to collapse or anything, but don't you think that maybe you could give back some of that, you know, as an industry?

And so, can you talk about, you think you can get 10%, but where do you think it might go if demand were to soften to a more normalized level?

Do you think margins might drop a couple hundred basis points, 50 basis points?

You know, is there a range here, of let's say down 200 basis points to up 30, that kind of thing?

Or do you not see it that way at all?

First of all, I don't see it that way at all, but let me backtrack.

What we're committing to is a 10 basis points improvement in our gross margin each year as opposed to a 10% increase each year.

I'm sorry, right.

A little bit of a difference there.

Secondly, we're not going to go into the satellite markets with the idea of diluting our current gross margins.

The only reason we're going to go in there is if we can maintain or improve our current gross margins.

On a going forward basis, do I believe pricing power is going to be as great in '05 as it was in '04?

No.

But guess what, for the last three consecutive years I've said pricing power won't be as great next year as it was the last year, and I've been wrong.

I don't know whether I'm gonna be wrong or right this year, but the bottom line is that in certain markets, certainly, we're approaching and -- and -- to the top end, perhaps of our pricing power.

But don't forget, we're geographically diversified.

We're in 21 different states.

The pricing power that we believe we may be losing to a certain extent in some of our major markets today, will be gained in other markets in other parts of the country.

Okay, thanks.

And I hope someday you guys get paid for the results you've already put up.

Believe me, we're working on that.

Margaret Whelan, UBS.

Just to Steve's question.

I think it's clear the results are exceeding your peers, if you look at your margin expansion, your SG&A, just can't find the bottom, which is always good.

Your backlog conversion ratio is particularly impressive and it's clear that your decentralized model and this machine you have in place is working.

But can you just speak to that a little bit?

Because it's so far ahead of your peers.

Do you think that's because of your production system?

Is it because of the efficiencies Rick has captured in the procurement, maybe you're delivering more quickly?

Is it that you know your customers better than others?

Or how do you think about it?

I think about it if in one specific way.

And you met for the third, fourth, fifth, sixth time Jim Frasier in Las Vegas over the last couple of days.

And I can tell you that, one, the culture in our company from inception has been we never had enough money.

So, one of the things that we focused on was how quickly could we convert a contract to cash?

And that's embedded in our culture of our company.

But secondly, I would say to you that we have -- I've said this for a number of times and people always say well I can't put this in my business model, but we have the best operators in the industry out there, across the country.

And they are properly incentivized to have a strong backlog conversion.

And third and most importantly, I can assure you in each one of our markets, as you know, we are trying to focus on how to aggregate market share, not only from the 80% of the small and medium-sized builders, but the bottom line is we're also trying to aggregate market share from the entire industry.

Our division presidents, we have one of the longest tenures of our division presidents of anyone in the industry.

And I'd just say that our people are great and they're outperforming our competitors' people.

And -- and that's because maybe you changed compensation structure to add the inventory turn?

When was that?

And how much has changed since then?

Well, three years ago we added the inventory turns to our division presidents bonus plan.

And I think that has truly enhanced our backlog conversion.

Okay.

And so you think the margins and the conversion rate, where they are now, are definitely sustainable or close to?

Well, I say that our backlog conversion has consistently increased over the years while our competitors’ has decreased.

So I would be very disappointed if our backlog conversion didn't maintain its current level or increase.

And on the margins, and I know that's a big question everyone has, I look at our 10-basis point improvement in gross margins and what I tell investors is clearly one thing, we believe we can improve our gross margins by 10 basis points a year in '05, without any pricing power, simply by continuing to increase our purchasing power through our economies of scale.

Yeah, I agree.

And the second question I have is just regarding your growth going forward.

You -- you had been more acquisitive in the past and you slowed that down because your balance sheet got a bit stretched, but it's definitely back in check now.

So how are you thinking about the M&A pipeline going forward?

What opportunities are you seeing or what are you considering?

Well, one thing we're proud to be able to say is the numbers that we're giving you for growth over the next three to five years are all organic, but yet at the same time, we've done 17 acquisitions since 1994 and we plan on continuing to be a consolidator in the industry to the extent that it makes financial sense for us to be one.

In other words, it's on a deal by deal basis.

William Nobler, Atalanta Sosnoff.

Your first quarter guidance seemed a bit conservative.

Did the hurricanes in Florida and/or the rains Southern California that others have referred to slow up the first quarter?

Well, we're not here to give you a weather report and we don't want to.

I can assure you that we see our deliveries for the first quarter as being, obviously, stronger than last year.

I believe our guidance that we've given you of 10 to 15% increase in '05 over '04 in Q1 is a clear picture of what we see today and to the extent that we can exceed that, then we'll be proud and you'll be proud.

Also -- also, in terms of the pricing.

In your forecast, what pricing changes are you assuming?

We always assume flat pricing going into the next year, Bill.

Now, looking at your backlog, you have a backlog almost equal to, I guess a 30% of your annual forecast.

Is your pricing in that backlog flat with a year-ago?

The average sales price in our backlog is very consistent with where it was at 9/30 last year.

One of the things that we might point out is that we have truly focused on trying to, as we said earlier, be in the sweet spot of the affordability index across the United States, market by market.

And one of the things we're most proud of is that our average sales price has remained rather consistent.

Joel Walker, Karlin Financial.

Just wanted to talk to you guys about the best ROE you see going forward, I guess you can buy back your stock at about 13%.

Just based on higher land prices and material prices, what do you think the best ROE is, land investment or the actual share repurchases?

Well, we believe in '05 and '06 that we -- that -- that the investment of our profits back in our land would be the best return for our shareholders.

It could --that obviously could change relative to where we're at -- our equity prices could go.

Obviously we're hopeful that it continues to go up and it makes our investment in land a simple conclusion as it is right now, but currently for this year and '06, we're anticipating continuing to grow our inventories, although at an increasing rate, at a decreasing rate relative to the previous fiscal years and that's why we've implemented inventory caps, this will be the third consecutive year.

And one more question, I guess, if land was the best investment, what regions do you see just based on land prices, material prices, you know, all of the above?

What regions do you expect to -- or see the best ROE or the best place to actually buy a plot of land right now and develop it?

Clearly one of the things that we've been focusing over the last several years is redirecting a number of our inventory dollars into the Maryland, Virginia, Pennsylvania, Delaware area.

We created a new region to focus on that.

Also, the -- the whole New Jersey market is a very strong market for us.

We've redirected a lot of inventory into the state of Florida.

We have three awesome performers in the state of Florida, delivering terrific returns for us.

And we believe Florida will continue to be a very strong market for us on a going-forward basis.

Coastal Carolinas, is an exceptional market for us, from Myrtle Beach to Hilton Head to Charleston to-- to Wilmington, that whole area down through there is very, very strong for us.

So it sounds like it's predominantly east coast and that's where you see the best investment as of currently.

It's interesting that you say that because obviously we have, Stacey mentioned 26% of our assets in California.

And we have been redirecting, that was as high post the Schuler merger right at about 30%.

And even though California is giving us great returns, we believe on a going-forward basis that we can achieve some greater returns as we move forward to the next three to five years, more so in the east than in the west.

And what about the Midwest and central regions?

It seems like land hasn't increased near as much as it has near the coast.

I mean, just going forward.

I know the job market's not near as good, but just based on that, do you think, you know, is that an attractive area going forward, if you were to buy land today?

We believe we're in the only two markets -- good markets in the Midwest and that happens to be Chicago, where we have an awesome division and then Minneapolis/St.

Paul.

If you look at St. Louis, Kansas City, Cincinnati, those markets, Nashville.

We extracted ourselves from those markets probably about five years ago, just simply because one, we couldn't get the returns we wanted and secondly we had a lot better markets in which to invest our money.

So, I look at the two best markets in the Midwest are Minneapolis/St.

Paul and Chicago.

All right, but would you be against any acquisitions in the Midwest, just based on some of these builders that have underperformed and probably could pick them up a lot cheaper than you would a west coast or an east coast builder?

At this stage in the game, I don't see anything in the Midwest that would cause us to redirect our investment from California, Florida and Texas and our other markets.

Lorraine Maikis, Merrill Lynch.

Could you talk about the acquisition climate and how, if at all, that's changed over the past few years?

And what you expect as rates begin to rise, or continue to rise.

Lorraine, this is Stacey.

We continue to evaluate acquisitions.

There are a lot of smaller builders on a continual basis who are available for sale.

What we've seen in terms of pricing has not been attractive to us versus what we could invest those dollars just in inventory, since we generally already operate in most of the markets where the builders are for sale.

In terms of public builders, until there becomes some pretty distinct differences in valuations, you know, it's -- it's hard to get a deal to pencil right now, just in terms of accretiveness to shareholders and also in terms of the resulting goodwill that would end up on your balance sheet.

That's why that we are very proud to say we don't have to do any deals to achieve our growth goals.

And then if you don't find any good acquisitions, what should we look for in terms of your balance sheet by the end of '05?

Do you expect debt-to-cap to come down or inventory to increase?

Where will you spend your cash?

Well, right now our plan in '05 and '06 is to spend our free cash flow, which is really not free!

In additional investments and land and lot positions across the U.S.

Which, ironically, one of the things we didn't not mention -- I guess we did mention on our conference call is how we're leaning much more toward option deals than what we are land purchases.

So, I think with our scale as it was -- that we've accomplished across the country, that's helped us have a less risky land and lot position with our option portion of our land going up as high as 59% of our total land and lot position currently.

Also, we are not going to relever our balance sheet, as I indicated, I think we're going to attempt to maintain our net debt-to-cap ratio at about the 40% level.

I know I'm not supposed to be too humorous on the calls, but I've been nicknamed the BSB in the Company for last year or two because I was not that in the previous years.

But balance sheet boy, and we are definitely focused on maintaining a strong balance sheet.

Larry Horan, Parker Hunter.

Just wanted to go over your land and lot position.

I got the percent owned in '04.

But what were the total number of lots you controlled at the end of the fiscal year?

The total lots controlled was 268,000.

268,000.

What was the figure a year ago?

He's got it right here.

It was 179.

179,000 --

279,000 --

No, 179,000.

Oh, 100, okay.

And what percent of that was owned?

I think you said that on the call but I missed it.

It was 51 -- 51 -- no, no, 49%.

49.5%.

Okay, 49.5.

Okay.

It's curious to me, then, with those numbers showing a great improvement, in terms of number of lots under control, that at least the stuff on your balance sheet looks like the dollars have gone down considerably in terms of your assets on your balance sheet that are land-related.

And don't have some construction in progress on them.

Is that simply because your percentage optioned has gone up so much?

Yes, obviously the -- the percentage -- with the percentage option going up, our total controlled lots would be increasing at a faster rate than what is actually owned -- the owned portion.

So, while our inventory on our balance sheet went up 29%, our total control position went up by a greater percentage than that because of the greater percentage in options.

Okay, that's interesting.

You have a line here called consolidated land and inventory not owned and yet that's fallen from $153 million to $105 million.

You're going the wrong way.

Oh, I'm sorry.

Okay.

That was up about 50%.

I keep forgetting you're the only company I follow that puts the newest year on the right, not the left.

I was wondering how you got our inventory declining that much.

Yeah, no I was too.

But that's because I forgot when I looked at this sheet that you do it the opposite of everybody else I follow.

But that's something I just have to keep remembering.

Thanks a lot.

Ivy Zelman, Credit Suisse First Boston.

Actually Dennis Migulon (ph) for Ivy.

Just a couple quick ones.

You touched on the savings per home which seems pretty remarkable and it's very good data compared to what we get from any of the other builders.

But can you first talk about how you calculate that number and what you might expect you could drive that number to in the upcoming year?

In terms of how we calculate that number, when we started the program in 1998, we benchmarked the prices on every item that we were buying at that point in time because one of the directives from D.R. was that if we were receiving a rebate, we didn't want to just receive an increased rebate and then increase the base price and basically be at a net zero.

So we actually benchmarked what we were paying in terms of net prices in '98.

So, the $3,300 per home compares back to 1998.

And that's not adjusted for inflation in any way.

And where do we think that can go?

We've basically projected about $200 increase for next year.

That's consistent what we were projecting going into last year.

As I like to say, people keep asking me which inning of the ball game are we in in national purchasing?

I don't know whether we're in inning 3 or 4 or whatever, but I do know that as we consistently grow our volume, our discounts and our rebates continue to increase and we are aggregating more and more different items in the house under our national purchasing program; as well as the fact that we're renegotiating a number of our national programs because our volumes continue to increase at a rate greater than what the suppliers and manufacturers anticipated and what we anticipated.

I look upon national purchasing on a per-unit basis and our goal in-house is to try to have a 10% increase per unit each year.

Stacey, I wondering if you had brought up the backlog conversion ratio, just singling out the Midwest, is there anything that would have driven that number substantially higher than what we've seen in the last few years?

Nothing I can think of off the top of my head, Dennis.

I will check, and see there's anything significantly different with product mix.

But as Don mentioned, that's primarily Chicago and Minneapolis -- or actually only Chicago and Minneapolis.

I can't think of anything right off that would change that significantly.

And then just lastly, when you went through the different states and markets and the year-over-year increase in sales dollars, that was on a new order's basis, correct?

That's correct.

Realizing some of your fairly large markets are in there and, you know, some of them being in the 20%, some of them obviously much higher, probably from a smaller base, but with the overall company only up 17—-I don’t want to say only—-but up 17, and a lot of those markets up substantially higher, just trying to close the gap there.

Is there a couple of larger markets that you're having a little bit of trouble with?

Or can you just give me a little bit of color on that?

Well, those markets clearly don't -- or those numbers clearly don't average, as you know, because some of them are, as you indicated, very small and off to smaller basis.

So, just because there is a list of markets from 61 to 172% up doesn't mean that we have corresponding markets that are 100% down, you see --

No, sure, but there weren't any that were below it?

Or if there were it was only a percent or so.

The bottom line is each of our profit centers, we have 51 profit centers across the U.S., each one of our profit centers were profitable-- all of them profitable for the third consecutive year.

But to answer your question more directly, in Texas, we were up single digit last year and some of our other markets, I believe Atlanta, was taken.

Texas was up single digit in the quarter and --

Stacey, I thought you had highlighted that at 14%.

That's one of the things I wanted to clarify, Dennis, those were sales for the fiscal year.

Okay.

And so that was actually compared to the 24% increase in sales dollars we saw for the year rather than the 17% for the quarter.

Okay, now it makes more sense then.

Tony Campbell, with Knott Partners.

Yeah, actually, again, congratulations, these are wonderful numbers.

I have two questions.

At the end of '05, what percentage of your land will be owned and what percentage will be optioned?

Will that number change dramatically versus '04?

I would be happy to keep it at -- to get to us a 60% option and 40% owned.

As a matter of fact, when we put these inventory turn targets in for our division presidents almost three years ago, at that point in time, we were 55% owned and 45% optioned.

I told Stacey if we could reverse that, I would be very proud.

Clearly, once again, our division presidents outperformed our expectations and it's at 59%.

So, I would say to you, if it gets to 60% options and 40% owned, that's a really great percentage.

And my second question really revolves on the savings per home.

You know just recently, Whirlpool, Maytag announced price increases.

Obviously, copper's going up, et cetera.

I mean how do you approach these guys and say hey, you know, we're just not going to take your 4 or 5% price increase.

We recognize tools prices are up, but what do you do say we're going to make it up to you in volume but we won't take a price increase?

What do you say to these guys?

Well, first of all we partner with our suppliers and manufacturers so there are times when their prices do go up and we accommodate them.

I always look at our cost structure one way, especially with our suppliers who are partners.

Basically we've got prices which are going up, we've got prices which are going down.

Our goal to our investors is to deliver a 10-basis point improvement year-over-year.

I would quote our division president, David Auld, in Orlando, when some investors called us about the concrete shortage and I guess when his concrete men called him and said that he was only going to be able to pour slabs three days a week and David said that doesn't work, and we're pouring our slabs five and six days a week.

And what did David say Stacey?

His exact quote was it's great to be in Horton.

In other words, we were enough of a demand factor, we had aggregated enough share in the Orlando market, as we have aggregated enough share in most all of our markets that for someone not to supply us would be a really stupid decision.

So then getting back to Steve Kim, what other markets would you like to get to be bigger in?

I'd like get bigger in each market that we're in.

I believe clearly as we've accomplished scale in each of our markets, some greater than others, that we continue to achieve greater and greater economies of scale in each one of those markets and as my goal with our division presidents, who are paid a bonus point for achieving the 20% revenue growth year-over-year, for them to continue to profitably aggregate market share from 100% of the home builders in their particular market.

We actually mentioned a few specific markets, too, Tony.

We talked about Washington, D.C., the New Jersey area and Florida, in particular.

Three years ago we were the number 5 builder in Florida and based on the most recent numbers we're seeing right now, we're going to be the number 2 builder in Florida this year.

Timothy Jones, Wasserman & Associates.

Let's go back a year, okay?

And last year if you recall, you said that you expected sales to go up 10% -- excuse me, 15% and you did 24% and your earnings to go up 10%.

And my question to you, that said is Don Horton would have a conniption if that happened.

Now, missing this from 315 to 411 is a pretty good miss.

Even for you.

But you're -- but you're comparing it to our beginning guidance at the beginning --

I understand -- I want to know, now, I lived through the last year.

I was alive.

I know you all don't think so.

Can you tell me what epiphany happened that you did not foresee to have you miss your guidance by that much?

Well, Tim I would be happy to answer that question.

One of the highlights for the year that we gave you is that our gross margin on home sales revenue improved 220 basis points.

Going into last year, we didn't assume that our gross margin was going to improve 220 basis points.

We were going with our 10 basis point --

I understand that.

So, significant pricing power and significant increases in our national and regional purchasing that we did not want to put into our guidance.

Because it wasn't happening at that point in time.

And significant leverage on our SG&A.

We have the lowest SG&A in the industry --

Yeah, but you had the lowest-- I've heard that song since you went public.

It improved 60 basis points last year.

Bill and I actually sat around --

It wasn't the SG&A it was the price increases really that surprised you --

Price increase is only up 5%.

Huh?

The average price only increased 5% for the year.

So, the real upside was in the operating leverage, both on the gross profit margin and the SG&A.

Well, give me a little bit of -- of better -- if your price only increased 5% over what you expected and you expected margins to be down at that point, if you recall, then what -- give me one, two, three, four, five, the factors that really contributed to the gross margins?

Well, clearly we had pricing power across --

Okay, 5%.

Say again?

You said your prices went up 5%.

Yep.

We had cost-saves on national purchasing, regional purchasing and I think that those can be -- and then -- go ahead-- and SG&A.

And SG&A.

And I -- I really don't believe that those three things could possibly account for the difference of 315 in earnings and 411.

Well I would say to you -- I can answer your question --.

I'm doing it in my head, okay and I'll do it on paper for you.

Our last guidance was $3.85, Tim.

I understand that, Sam, but I'm going back to what in the world happened, I mean because you only came in with -- you said 15%, up -- on the top side, you came in with 24.

Well, I'm going to answer your question this way...

That we, as opposed to developing some cutesy programs --

Some what?

What I call cutesy programs.

Cutesy?

That some of our competitors have sold to the Street about how they're going to do this and do that, we have focused clearly on one thing.

Building, selling, closing homes, making money, improving -- improving our operating efficiencies and focusing on our core business.

On a going-forward basis, we're converting a higher percentage of our backlog, we're driving down our SG&A, taking about -- taking advantage of pricing power and increasing our economies of scale.

So, all of those factors really came home in fiscal year '04, to the extent that they can continue to be improved on in '05?

I think you would think I was stupid to commit to you that we could do that same thing in '05.

I'm a bull on this industry, as you well know, and I think we're somewhat near the top on the margins.

It just doesn't get any better than this and most builders who are honest will say that, but you can still do very well.

Well, I would disagree with you.

You think it gets better?

I think for a builder like D.R.

Horton, who has the scale -- I don't know of anyone -- no one's been where we've been or where we're going and I don't know how many more economies of scale we can achieve on a going-forward basis, but I believe the scale and the profitability are directly related.

Well, this is a critical question that goes to the -- to the entire bulls and bears of this industry and you know there's nobody in the middle.

They're either bullish or they’re bearish, as you well know.

Yes.

So, I think I should follow it up.

And that is where -- and it goes all around, for example, Centex thinks they can raise gross margins by about 100 basis points a year for the next five years on cutting costs and so forth.

Other builders say we're somewhat near the top.

I mean it's all -- most of them don't say that they expect a meaningful decline.

Where do you see other than -- let's -- let us assume that we're somewhere near the top in -- in the -- in pricing flexibility over cost and somewhat near the bottom on interest rates, okay?

Which is probably not an outlandish assumption.

Where do you see the margin gains?

I see the margin gain that we're committing to, which is 10 basis points a year each year, coming-- it has to, strictly from achieving greater economies of scale and purchasing our -- our goods more cost-effectively.

And to the extent that we are the beneficiaries of any pricing power, then our gross margins should increase greater than the 10 basis points a year.

Well, you're being awfully conservative on 10 basis points, you do know that.

Yes, but I listen to our counterparts and other industries sit on CNBC and Bloomberg and talk about how they increased gross margins 4 basis points a year and -- and the analysts in those industries get really overexcited.

So, I'm trying to figure out why people don't get overly excited when we say --

I'd rather have you under.

We know what happens when certain of your competitors overpromise.

We won't have to go into that.

And we're just not going there with anybody.

Would you like to comment on one other thing that we've talked about?

And that is the dramatic rise in inventories at a lot of the public builders.

Do you have any comment on that?

Yes, and no. [ Laughter ] Yes from the perspective that D.R.

Horton has increased its inventories a little less than 30% last year.

Right.

And our backlog conversions have increased and continue to increase rather dramatically, relative to our peers whose inventories have grown considerably higher than our rate and their backlog conversions have decreased.

Isn't your inventory growing roughly in line with your backlogs?

Yes.

And that's our target going forward, is to maintain a disciplined growth strategy and grow our inventories in the ballpark of where we're expecting our overall revenues and backlog to be.

Aaron Robinson, Wachovia Securities.

I have two concise questions.

First can you -- [ laughter ] Can you update us on your share repurchase program and provide some specifics about how you frame the share repurchase decision?

Well, first all, as I apologize personally to the Street this year because I did say at the beginning of fiscal year '04 that we would buy back 3 to 5% of our stock, which we did not.

The reason for that is that we had alternative investments in land and lot deals across the U.S., which had higher returns than I anticipated.

So, therefore we chose to reinvest in our inventory as opposed to buy back our stock, which will be the best return for our shareholders.

On a going-forward basis, you will never hear share repurchase come out of my mouth again.

If we choose to buy back stock, you'll read about it, but you won't hear about it.

And then second, you know, all of the big public builders have relatively aggressive growth goals for 2005 and they're really all based on taking market share.

Uh-huh.

Everybody quotes scale, efficiencies, better buying practices, can you talk about what specific things D.R.

Horton is doing differently than others?

You know, specifics rather than suggesting that Horton is better at certain things than everybody else.

Well, clearly I would say to you that when we are the first builder, as we said, to get over 40,000 units closed and 40,000 units sold in a fiscal year, and I believe strongly that we have the best national purchasing team in the U.S. amongst all the home builders and that goes -- goes -- starts at the national corporate level here, goes down to the regional level and then goes down to each one of our 51 profit center purchasing managers.

And I think those men and women out there are doing an absolutely incredible job telling the story to our suppliers and our vendors and even to our division presidents, telling our subcontractors.

As an example in Las Vegas, in 1996, when we closed 65 homes, to last year we closed right under 2,000 homes.

Those are incredible economies of scale and those are -- that's a story that you can get your subcontractors and your suppliers to buy into where they can see their way to do more business and more profitable business going forward.

So, I believe without a doubt that we're doing an incredible job on the purchasing side across the U.S.

I would also say that it is something you just can't put in your financial metric and I encourage you, as well as other investors, as there were a group of investors in Las Vegas over the last couple of days, to truly get out and meet our people.

We had a meeting with investors, where they met with one company before they met with our division president and I can tell you, walking out of that meeting, the investors were clearly saying my gosh, that's a difference between day and night.

Clearly, we, and we keep saying this, have the best operators in the industry and I would encourage you to get out there and experience that.

We have nothing to hide from any investor nor any shareholder, you may visit any one of our divisions because we're proud of our people.

And that's what is truly putting us over the top, is the best operators in the industry.

Steve Fockens, Lehman Brothers.

Just one quick question, where would you expect your percent of assets in California to be three to four years from now?

Or maybe not specifically, but would you expect the 30% post-Schuler down to 26 to continue to work its way down a little based your comments, Don, about maybe moving some assets toward the east?

Not to give our California people any -- any hiccup here or any concern but, clearly, as we grow our inventories and we move our investments around the U.S., it wouldn't surprise me if our inventory dollars in California weren't 22, 23%.

But right now we're very happy with them being at 25%, the return that we're getting out of the state of California and returns we've gotten and what we think we're going to get over the next three to five years with our operating team out there, are exceptional in the industry.

They're even exceptional to our company.

And clearly we're proud to have the California investment we have out there.

So it could come down a little bit, it could go up a little bit, but we're real happy with where it is today.

Greg Gieber, A.G. Edwards.

I wonder if, Don, if you could go a bit more into your satellite expansion strategy?

How many satellites are you now in?

If you look out maybe four, five years, how many more do you think you could be in?

And then what sort of criteria do you use to judge, you know, to decide to enter a satellite?

You know, how many permits have to be built there?

How far away from your existing markets?

And how many -- once you've reached a maturation point in one of these satellites, how many closings do you think you could get?

Clearly the first criteria is for the division president, in their core market, to get to be one of the largest builders in that particular market.

And then to -- to expand from there.

I guess a great example is in Seattle.

We're -- we're the number 2 builder in Seattle in terms of volume.

Without a doubt we're probably the number 1 builder in terms of pretax income generated by Matt Ferris and his people in Seattle.

But we're not really focusing on being the number one builder in Seattle simply because of the fact that we think that we would drive down our gross margins if we were.

So as a result we're beginning to expand out into some of the smaller communities around Seattle.

Same thing in Portland, we've gone down to Bend and Salem, Oregon out of Portland to get that growth.

In San Antonio, we're 24% of the market in San Antonio.

Where are we today?

We're down in Mission and Laredo, Brownsville and those areas.

So, as a result, to answer your question directly, what I want is a division president to have penetrated their market profitably and at that point, if they are going to continue to grow and they can get growth from some smaller market where we can get 100 or 200 closings, to answer your question secondly, I think that's a great add-on to our existing overhead structure in that particular division.

Could you talk about your -- how you price homes in Eugene and Huntsville and some of these satellite markets you go into?

Clearly your -- I would doubt, I don't know those markets at all, but I would doubt that you're facing any particularly large production builders and you have -- would have to have somewhat significantly lower costs of goods.

So, if you look at, you know, how much -- are you lowering prices?

How much, I mean relative to what a competitor will do to get the share, are you just accepting the higher margins and bringing it all back to Fort Worth?

We're trying to accept the higher margins because one of the things we don't want to do is go into a market and undercut the competition and drive our own margins down.

What we're really trying to do is take a superior building program, a superior product with superior costs with a superior warranty program to a small and medium-sized town, where when that purchaser does buy that home, one, it's a quality home, built on time, built with quality.

But most importantly, we're there, two years, three years, or four years from today to perform the warranty on that house, which is a very difficult thing to do if you've ever been to a smaller town and builders, once they get the check, they have a tendency to forget about you.

We think that's one of the driving forces in terms of going and profitably aggregating the market share in these smaller satellite markets is just by our performance and our warranty program.

Okay, so, essentially you're just accepting the price structure that the local builders are setting and pocketing the difference.

Do you have any idea just how much better your margins are compared to the builders in the smaller markets, the large builders in the smaller markets?

Well, Greg, that's an interesting question because one thing we find in the smaller markets is that the smaller builders generally aren't trying to accomplish the same financial metrics we are.

So, if they're closing at $150,000 home, they may be happy with $20,000 worth of gross profit.

Whereas for us to hit our -- well, just call it a 20% margin, we'd need 30%.

So part of what our lower cost structure is letting us do is go in and actually compete with them in the current pricing environment and still maintain our margins.

Good point.

Thank you.

Susan Berliner, Bear Stearns.

Two quick questions.

One, if you can just tell us where you ended the year in terms of any free cash flow?

And number two, I know you've talked about it a lot, I just was wondering if you could just update us with your conversations with the rating agencies and see if there's any progress been made there?

With respect to cash flow, due to our inventory increase during the year, operating cash flows on our cash flow statement will be about negative 400 million.

And we -- we've actually just recently met with Moody's in the last week or so and have presented our year-end results to them and -- and have had discussions about our plans for the coming year and -- and we are optimistic that with the metrics that we have, that at some point here, we will be recognized with an investment-grade rating from Moody's.

I wanted to add one thing to Bill's comment on the cash flow this year.

If you look at last year, we had positive free cash flow in the other direction and basically what we've done is take the opportunity to reinvest those dollars that we didn't get invested in the inventory last year.

Right, we're really focused on efficiently reinvesting our cash on a consistent basis.

Great, so can I just be clear that I understand?

Last year you had positive free cash flow about 335 million.

And this year it came in about negative 400?

I think it was a little over 400 last year.

Okay.

And it's going to be about the same number this year.

In the opposite direction.

Net to about flat.

Just one, I guess additional housekeeping -- can you just update us if there's anything different from what you said on the last conference call in regards to cancellation rates and speculative development?

Our cancellation rates have continued to run in the historical range of 17 to 19%.

The only time they've gotten higher than that was in the two quarters post to 9/11.

Our can rate for fiscal '04 was down 40 basis points from a year ago in dollars.

Josh Stable, Natexis.

Just one quick question, just a clarity on a comment I heard about, you know, continuing to grow your inventory but at a decreasing rate in years past.

I was just wondering if you could maybe talk about it.

Are you seeing land prices kind of going up and not seeing deals that are as attractive as they were?

Or is there--maybe you could talk about the environment of buying land now?

I can tell you that one, are land prices going up?

Yes, in most parts of the country.

Have they stabilized some in some of the hotter markets?

Yes, they have.

Clearly, I know I'll scare Sam and Bill and Stacey, but if Don Horton would give us an additional $1 billion, we could have it -- we could have the land bought and invested in six to nine months, so, there's no scarcity of land deals.

Clearly what there is a scarcity of is entitled land, and clearly that's driving the constrained supply side of the equation.

So, as a result, we have good demand out there.

We think the demand's going to continue to increase.

One thing that I -- I would ask people to keep in mind is that in the past three to four years, we've been in a declining economic environment where unemployment has escalated in a number of our markets rather dramatically.

Yet, we've continued to grow through those higher unemployment rates.

I truly believe as the economy strengthens and as we get job creation that we're going to--and certainly in '05 and '06, have a better economy in which to sell homes and we're positioned land-wise adequately to meet that demand.

I'm glad you asked the question, Josh, because one thing that's happened is Don has become a balance sheet boy and we've focused on controlling our leverage, is we put inventory caps in place for our divisions and so what we're doing now is cherry-picking the deals.

We're doing good, really good and great deals and we're passing on anything that's marginal that we might have done in the past.

You know, in the past we'd just go raise more capital to do the deals and now we're no doing that, we're taking a much more disciplined approach.

Which, I think is part of what you're seeing reflected in our gross margin.

So, I guess, what I'm hearing is that there are -- you're seeing deals out there obviously that you think are overpriced?

Hopefully you're not going into those, obviously, but I mean you are seeing prices of land kind of go up, maybe to unreasonable levels, or no?

I think it's on a market by market basis.

I think one of the most positive things you can say about D.R.

Horton is that, one, we have been the number 1 builder for the last three consecutive years.

That we have more than an adequate supply of land and lots on a going-forward basis, right now running about a four-year supply.

Okay.

The neater thing is that we've got 59% of that optioned as opposed to owned.

But the bottom line is -- is that we have not been forced to -- to go out there and try to go from number 3 or number 4 up to number 1 and go out and -- and increase our inventories as significantly as some of our competitors have in a high-priced land environment.

So, we look at D.R.

Horton today and that is, of the top five home builders, we've got the best operating margin, we've got the lowest SG&A, we've got the leanest lot position and we've got a balance sheet that's 150 basis points less levered than the average of the investment grade builders.

We think we're well positioned to profitably aggregate market share in any environment on a going forward basis.

Michael Rehaut, J.P. Morgan.

Just hoping you could possibly give some detail in -- in California and -- and Las Vegas in terms of, you know, recent trends in -- in pricing and demand?

Are you still seeing price increases?

Are things stabilizing there?

We've heard a lot of talk from the other builders about, you know, what's happened over the last month or two.

We just came back from Las Vegas and I can tell you North Las Vegas where the builder you're referring to lowered their prices rather dramatically.

That is a slow market in Las Vegas today.

Fortunately we only have one subdivision up there surrounded by three other subdivisions of that builder and we have 150 lots in that subdivision, where they've dropped prices rather dramatically and clearly we had to drop our prices in that subdivision, also, but to a lot lesser extent.

The rest of the Las Vegas market is extraordinarily strong and we anticipate in Las Vegas to make more pretax income out of Las Vegas in fiscal year '05 and that we did in fiscal year '04.

As to California specifically, we do not see the weakness that some of our other competitors are talking about, in Southern California, nor do we see any weakness in the entire state of California.

Our California region, which is the state of California, will produce more pretax income for the Company in fiscal year '05 than it did in '04 as it did in '03, as it did in '02 and as it did in '01.

So, both of those markets to us look very solid from D.R.

Horton's perspective and you have to realize that, especially in California, as Bill Wheat mentioned, our average sales price in California went up only 2% last year.

We're focused and have been focused the last 3 or 4 years on being in the sweet spot of the affordability index.

And, in California, I can tell you when you get down to 20% of the -- of the people in the state of California being able to afford your homes, you better be repositioning your product and doing something so you can get closer up to 30%, which is what we've done.

Well, you know, I think, you know, particularly when you talk about California, I think, you know, while some builders have been saying things are softening, I wouldn't necessarily say that they said they've become weak.

I think more, you know, deceleration or, you know, a -- a lower degree of price increases or, in other cases, price stabilization is more general characterization.

Is that what you're seeing yourselves?

Or --

We're seeing strong demand in each one of our California divisions.

We are -- have waiting lists in most of our subdivisions.

Pre-qualified buyers and we anticipate, in California, to have greater closings in California and greater pretax income out of the state of California in '05 than in '04.

And one of the key reasons that we believe we're seeing that is because of the price points that we are at.

We're at a low price point because we are focused on offering homes at affordable prices.

And Stacey, your might point out the differential between sales prices that we've experienced with some of our competitors.

Not necessarily by name.

Yeah, I think one of the builders that first mentioned some softness in Orange County, when I called out to our Orange County division, they basically said we're not seeing anything like that.

But the builder you're talking about is 3 to $400,000 above us in their price points.

We've focused on -- and we've taken criticism for this over the past couple of years, especially as interest rates have -- have tended to increase some that they thought that the entry level home buyer would be more adversely affected by increasing interest rates and I can tell you that is not going to happen, if a builder like -- as D.R.

Horton is doing, is repositioning our product.

We're not out there with a fixed price product that we're going to sell five years from today.

We're constantly repositioning our product so we can be, on a going-forward basis, in the sweet spot of the affordability end of it.

Even on the lower end though, I think most other builders that are at that lower end still have been able to raise prices more than 2%.

Is there a mix shift going on there that you only got a 2% price increase?

Or why haven't -- I believe on the low end, you know, there has been pricing gains in California, as well.

So, can you explain what's going on there?

Yeah, if you go back to our conference call of last year, Mike, we actually said we thought our average sales price in California overall would be down year-over-year because we were addressing the mix shift to maintain the affordability that we wanted to hit in California.

In Southern California, in particular, we were going to smaller product on smaller lots and we're doing a lot of attached product.

And that's really what you're seeing in our average sales price in California.

At this time, there are no further questions.

Mr. Tomnitz, are there any further remarks?

No, operator.

We thank you and we thank all the investors for joining our fiscal year '04 conference call.

Thank you for participating in today's conference call.

You may now disconnect.