霍頓房屋 (DHI) 2005 Q1 法說會逐字稿

Good morning.

My name is Angela, and I will be your conference facilitator today.

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

Horton, America's Builder, the largest builder, first-quarter conference call. (OPERATOR INSTRUCTIONS).

Mr. Tomnitz, you may begin your conference.

Thank you for joining our first-quarter conference call.

With me this morning I have Sam Fuller, our Senior Executive Vice President of Finance;

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

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 call.

D.R.

Horton does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

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

Horton's annual report on Form 10-K and most recently quarterly reports on Form 10-Q which are filed with the Securities and Exchange Commission.

Thank you, Stacey.

D.R.

Horton, America's Builder, the largest builder in America, continues to distance ourselves from the competition by again closing more homes in America than any other builder.

It was another record first quarter for us, no weather report here.

We once again grew the bottom-line faster than the top line, and we are proud to announce the following results.

Net sales orders for the quarter increased 31 percent to $2.7 billion or 9901 homes.

Our strong sales contributed to our record December 31st sales contract backlog oft 17,405 homes with a sales value totaling $4.8 billion, a 34 percent 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 percentages of our assets in these states are as follows.

California with 25 percent, Texas with 15 percent, Nevada with 11 percent, Arizona with 10 percent, Colorado with 9 percent, and Florida with 7 percent.

Our first-quarter sales dollar increases in our top five homebuilding states are as follows in terms of sales dollars.

California, where D.R.

Horton is the number one builder, up 28 percent;

Texas, where D.R.

Horton is the number one builder, up 11 percent;

Nevada, number four, down 50 percent;

Arizona, where D.R.

Horton is the number one builder, up 68 percent;

Colorado, where D.R.

Horton is the number one builder, flat;

Florida, where D.R.

Horton is the number two builder, up 74 percent.

We have mentioned over the last couple of years that we were increasing our inventory levels in the New Jersey, Philadelphia, Washington D.C. and Florida markets.

Sales in each of these markets were up more than 40 percent with each of our three Florida divisions reporting a 40 percent or better sales dollar increase.

We are now seeing recovering market dynamics in the Pacific Northwest, and we are planning to invest additional inventory dollars in both Portland and Seattle.

Those markets have sales dollar increases greater than 50 percent.

Arizona continues to be strong with Phoenix sales dollars increasing 60 percent and Tucson increasing 150 percent.

Raleigh and Greensboro is a market that we have mentioned is a softer market, but we are seeing definite signs of a recovery there.

The economy is showing signs of life, including a new Dell facility which is being built in the Research Triangle Park.

Sales dollars were up 180 percent in Raleigh and Greensboro.

The Coastal Carolina divisions, which includes Charleston, Myrtle Beach, Hilton Head and Savannah, Georgia, continues to be a top performer with sales increasing 92 percent.

Hawaii also saw strong sales with an 87 percent increase.

California continues to be strong with a 28 percent increase in sales dollars.

Southern California saw a 16 percent increase, while Northern California increased 58 percent.

Our first-quarter homebuilding revenues increased 14 percent to $2.5 billion from $2.2 billion in the year ago quarter.

Homes sales revenues increased 15 percent with homes closed increasing 5 percent to 9680 homes and the average price increased 10 percent to $253,000.

The average price increase was driven by product mix, pricing power in certain markets, and also reflects our efforts to invest more inventory dollars in higher average selling price markets like Washington D.C., New Jersey and Philadelphia.

Our gross margin on home sales revenues in the first quarter of fiscal 2005 was 25.2 percent compared to 22.5 percent in the year ago quarter. 90 basis points of this improvement was due to a lower percentage of capitalized interest flowing through cost of sales.

Our debt to capitalization has steadily improved over the last two years, and we have also taken advantage of the rate environment to retire some higher priced debt and to issue more favorably priced debt.

In addition, our margin improvement reflects our continued pricing power in many markets, our continued focus on controlling our construction costs, and our continued per unit cost savings with our national purchasing program.

Homebuilding SG&A expense for the quarter was 10.4 percent compared to 9.8 percent last year.

We expect our fiscal year 2005 SG&A rate to be in the low to mid-9 percent range.

As always we will continue to be the low-cost operator in the industry.

Our financial services revenue increased 12 percent to $46 million from $40.9 million in the prior year.

Financial services pretax income was $17.6 million compared to $18.7 million in the year ago quarter.

Our companywide capture rate in the first quarter improved to approximately 67 percent from 65 percent a year ago.

92 percent of our first-quarter mortgage company revenue was captive compared to 91 percent for the same period last year.

Our average FICO score was 715 in the first quarter compared to 713 in the first quarter of fiscal 2004.

For the quarter, our consolidated net income increased 30 percent to $241 million from $185.6 million in the year ago quarter.

Our diluted earnings per share of $1.01 for the quarter represents a 29 percent increase from the 78 cents reported last year.

Our lot and land position is approximately 293,000 lots owned and controlled. 48 percent are owned and 52 percent are optioned.

This is approximately a four-year supply of land.

Our homebuilding leverage ratio, net of unrestricted cash, was 43.4 percent compared to 42.9 percent a year ago.

Our goal for fiscal 2005 is to end the year with a net homebuilding debt to cap ratio in the low 40s.

At December 31st, 2004, we had approximately $1.4 billion in dry powder with $313 million in cash and $1.1 billion available on our homebuilding revolver.

The Company expects diluted earnings per share for the quarter ended March 31, 2005 to be in the range of $1.00 to $1.05.

This estimate is based on approximately 237.8 million diluted shares for the second quarter.

The Company is raising its fiscal year 2005 guidance to a range of $4.75 to $4.90 based on 238 million diluted shares.

The fiscal year guidance represents a 16 to 19 percent increase in the earnings per share over the $4.11 reported in fiscal year 2004.

Our goal for the entire fiscal year is to achieve more than $12.5 billion in consolidated revenue on approximately 50,000 homes closed.

Thank you, Stacey.

D.R.

Horton was the first builder to close more than 40,000 homes, accomplished in fiscal year '04.

Our goal is to be the first builder to close more than 50,000 homes, which we will accomplish in fiscal year '05.

Our goal continues for D.R.

Horton to be the first builder to close 100,000 homes, which we believe will occur in this decade, all the while continuing to improve all of our financial metrics as we have done since our IPO in 1992.

This performance has been accomplished by having the best people operating in the superior homebuilding model in America.

We firmly believe we deserve and we are working diligently to realize a 5 P/E spread over our competitors in fiscal year '05.

As we say, 5 in '05.

We have earned it, we will earn it in the future, and we deserve it today.

Thank you for joining the DHI first-quarter conference call.

We will entertain any questions you have at this time.

(OPERATOR INSTRUCTIONS).

Ivy Zelman.

Credit Suisse First Boston.

It is actually Denis McGillen for Ivy.

Just a couple of quick questions.

Can you kind of run through a little bit on the SG&A front and where the diversion was this year.

We have obviously seen an increase where we have come to expect too much, or do you guys always improve year-over-year?

Well, first of all, I would say clearly we are the low-cost provider in the industry.

As we said, we will be the low-cost provider in the industry at the end of the fiscal year.

Clearly we positioned our SG&A to be able to deliver a record number of homes and revenue in fiscal year '05, and that will work its way up through the rest of the quarter.

But again at the end of fiscal year '05, 9/30/05, we will be somewhere in the low 9s as we have said, and we will be the lowest SG&A provider in the industry.

But there was not anything particular to the quarter whether it be a ramp-up in advertising or something along those lines?

No, sir.

Interesting also if you could talk in general when you look at a market like Las Vegas and the communities that you have coming online there, (inaudible) first quarter or second quarter for you guys in the spring selling season, are those communities reflective of the demand that you saw in the marketplace six months ago, nine months ago?

Can you give us an idea of whether that is reflective of what you were expecting to be able to sell based on the trends in August or the trends in May, or just kind of give us an idea how those communities coming on will reflect the current demand?

Our Las Vegas division is positioned based upon the 5000 people who continue to move into the Las Vegas market each month, clearly post one of our competitors having an issue there, it is transferred to the other builders in the other market.

We believe that over the -- it will take six to nine months for that market to come back to equilibrium.

We are positioned to have Las Vegas as being one of our top performing divisions, one of our top five performing divisions in the Company this year as they were last year.

We feel very good about the Las Vegas market, and we are positioned based upon what we believe the demand was going to be and is going to be, but there is just a period of where there is no equilibrium in the marketplace.

We are going to find that eventually, and I think it will take the next six to nine months to do that.

But bottom line is Las Vegas is a good market, and it is going to be a top performer for us this year.

Could you take a step back and let's just say in general and let's not focus on Vegas and looking at your plans for community expansion, if you were sitting kind of here two quarters ago and you were hoping to have X number of communities in Vegas, that's probably the same number of communities you end up opening because they are already further along in the process where they are probably going to come online.

Frankly, we would not change a thing in the marketplace.

We have got the right number of communities.

We have always been priced correctly in the marketplace out there.

We're dealing with the hand that was dealt us, and we're going to be very successful by fiscal year '05.

But we would not change a thing that we have done in Las Vegas.

Can you give an idea of what the community growth there would be right now?

We don't ever disclose community growth.

Just lastly kind of looking at the inventory turns and even adjusting for the FIN 46 impact a little bit below where we were expecting, I think where you guys have even targeted in the past, is that a one quarter issue?

Should we see that kind of reverse out through the end of the year?

Well, obviously we are building our inventories in order to be able to deliver the units that we are projecting for this year, and that did have an impact on our turns this quarter.

As we are looking at our turns this year, we are expecting to still be able to maintain close to what our turns were this past year for the whole fiscal year '05.

Our number is about a 1.4 turn.

Is that kind of in the ballpark?

That is what we delivered in fiscal '04, yes.

Margaret Whelan.

UBS.

Good morning, everyone.

Well done.

Top quarter again.

I wanted to talk a little bit about California.

It is obviously a strong market for you.

There is a lot of noise about the potential that it might be slowing.

And I am just wondering clearly with your Northern California and numbers being up so much that that is not the case.

But will you talk about your product mix and your pricing there?

Our product mix is everything from midrise condominiums in downtown San Diego where we are building six and seven-story underground parking levels up to $800,000 single-family detached homes.

We believe that we are offering a wider product array and price point than anyone else in the marketplace.

And if you look at our pricing in California in particular over the last two to three years, our pricing has remained relatively flat, up slightly by a couple of percent, and we believe that we're clearly focusing on the sweet spot in the market by hitting the affordability index and adjusting our entitlements and our product offerings relevant to what we believe is the sweet spot in the affordability index.

Do you have a sense for what percent of the products is attached and where that might be going to?

Companywide?

No, specifically in California.

We have the companywide number.

It is about (multiple speakers) 16 percent.

But I think it is a little higher there, right?

It is a little higher, and typically where we have higher land prices, we're doing more attached product just simply to hit the higher affordability index.

So it makes sense and you are not seeing any slowdown then at all?

I think California has slowed some, but not significantly, and our pricing power continues to be very strong in California and our returns continue to be very strong in California.

And we expect that to continue for all of fiscal year '05.

And across nationally now is there any market in which you are selling on an apples-to-apples basis the same homes for less dollars? (multiple speakers)

No, we're not.

(multiple speakers) commission (inaudible) nowhere.

Nowhere.

Not in the Carolinas or anywhere?

No.

As a matter of fact, as Stacey mentioned on an earlier part of the call, two of our weaker markets over the past two to three years has been Charlotte and Raleigh and Greensboro, and those markets are both firming up very nicely, good job growth in those markets and some median income growth in those markets for the first time in many many years.

And obviously with FedEx moving into the Greensboro market and Dell moving into the Research Triangle in the Raleigh area, Durham area, we see wonderful things happening in the Carolinas.

And if you look at the coastal Carolinas, which we talked about Myrtle Beach, Hilton Head, Charleston and Savannah, Georgia, their sales were up over 92 percent in the first quarter and continue to be a stellar performer for us.

So we look at the Carolinas as a very, very solid up-and-coming market.

Can you give us a sense -- your gross margin is really breaking away from your peers now -- of what you are doing differently?

Well, as we had said many, many, many times, we try to get people to believe us.

We believe we have the superior cost structure in the industry.

We believe we have the superior national purchasing --

What is actually making it superior?

Well, you have met Rick Rojas (ph).

He is an incredible guy.

I agree.

I think the other thing -- and I will also say to you as some of our suppliers and our manufacturers are listening, one of the ways we have gotten what we have out of national purchasing is it is a win-win for us, as well as our manufacturers and our suppliers.

Secondly, it was almost three years ago we appointed regional purchasing managers, and those people all of a sudden began to clearly make inroads on products that we are just purchasing on a regional basis versus a national basis.

And I would say the last point is to get back to our compensation plan for our division presidents.

If they save money on national purchasing or regional purchasing, that is a component of their bonus program on a quarter by quarter basis and an annual basis.

And we've learned one thing at D.R.

Horton -- if you pay them to do it, they will do it.

To motivate them.

Well, just my last question is just your priority on uses of cash flow side, please?

Say again.

Just the priority on uses of cash this year.

Share repurchasing, potential dividends?

I want to be able to clearly say on this conference call that you'll never hear the words that we're going to repurchase our stock out of my mouth again.

We are going to continue to reinvest in the business, and when we start repurchasing our stock, you will read about it.

Okay.

Dividends, acquisitions?

We are going to continue to increase our dividend as we have pretty much on a historical basis.

In terms of acquisitions, as you know, Stacey heads up our acquisition effort, and we look at a lot of deals out there.

We are always looking.

Unfortunately Stacey just can't them to pencil (inaudible).

So there is nothing in the pipeline?

There are a lot of things in the pipeline but nothing imminent.

Michael Rehaut.

J.P. Morgan.

Good morning.

Just a couple of questions.

First, I was wondering if you could give us an update on your demographic mix in LTV for '04?

For the first quarter, Mike, LTVs were 82 percent compared to 85 percent a year ago, and really our demographic focus remains the same.

We are focused on the first-time, first-time unit buyer, and as Don mentioned, in California and across the United States we basically try to be all things to all people.

We probably have about 35 to 40 percent of our business first-time buyers, another 35 to 40 percent second-time buyers.

And then the remainder of the active adult are luxury type product.

Okay.

So 35 to 40 across first-time and first-time move-up?

Is that correct?

Or 35 to 40 percent just for first-time and 35 to 40 percent on the move-up?

Right.

Right.

Okay.

And then on the remaining, let's say, 30 to 30 percent or so, it is between active adult and luxury?

Yes.

And what would lean more -- would that lean more towards luxury or specifically to active adult I guess?

We do very little luxury.

I mean basically less than 10 percent of our business is really luxury.

And the other remaining component of the 30 percent is the active adult.

It would be a pretty big jump for you to have gotten all the way up to a 15 to 20 percent active adult number, right?

Why do you say that?

I did not think you guys were over 10 percent.

Well, we are continuing to expand that business model across the country.

We have got it in Minneapolis.

We have got it in New Jersey.

We have got it in Florida.

We've got it in Phoenix.

We've got it in a number of different markets.

We just don't talk about it a lot.

Okay.

Is it above 10 percent?

It is approaching 10 percent.

Okay.

Second question.

On the last quarter, you guys had a jump in markets served to 63 markets, and we thought that was interesting.

And you talked about your plans for sort of building satellite markets off core markets, leveraging your fixed costs.

Why don't you give us an update on that effort and where you see over the next couple of years your markets serve that market number going towards, and if you have an idea off of that, what type of topline growth that could contribute?

Let's back up and really talk about our goals on a going forward basis because our revenue growth that we have set on an annualized basis will be 10 to 15 percent, and our EPS growth will be 15 to 20 percent.

As far as our satellite markets are concerned, when we are in a market like we are in San Antonio, Texas where we've gone from 8 percent in 1998 to around 23 or 24 percent market share, we feel like with our low-cost SG&A and our low cost structure that we can go into the satellite markets, i.e. those markets that are not served by national builders today, and profitably aggregate market share from those small and medium-sized builders.

We believe we can be the Wal-Mart of the homebuilding business.

We believe we can take our storefronts into Brownsville, Laredo, Huntsville and smaller markets like that and effectively compete with those small markets, the small builders.

To what extent that is going to contribute to our topline growth is really going to be more of a function of how deeply we penetrate our existing markets today.

Because one of the things that we don't want to do is to begin to go into satellite markets before we establish a core business in a market, aggregate the market share, get at least double-digit market penetration, get a good subbase, good cost structure, and then we can start to export our cost savings to these smaller markets.

And do you have in front of you over the next couple of years the number of satellite markets that around many of your core markets that sort of it is in the plans or is potential candidates for expansion into?

Each one of our division presidents has satellite markets on their list.

Like Jacksonville, Florida going down to Daytona, Melbourne, (inaudible), Coco Beach and places like that.

But we are not driving that nearly as much as what the division president and the regional presidents are doing.

The regional presidents are looking at their market share and their capture rate in a specific market, and then as they can expand out into other markets on a low-risk business model like we are doing where in most of these satellite markets we are able to capture option contracts versus owned contracts.

Then it provides us the opportunity to enter those markets.

But we are letting the division presidents drive their market penetration in their respective markets.

Okay.

But in general you would say that this effort is today versus three years ago, let's say, something that this expansion into the satellite markets is something that is probably more on the forefront again today versus three years ago?

Yes, but clearly -- let me tell you what our -- we have a five-step goal for each one of our division presidents, and one of the -- the fourth or fifth step is for them to hit double-digit market penetration.

And after they hit double-digit market penetration, then they can continue to expand out into smaller markets.

But that is the main -- our main focus is our core business.

The satellite market is nothing more than an ancillary business which we think will consistently growth in the years ahead just simply because of our ability to go into those markets with our low-cost structure and aggregate the market profitably.

Very good.

Thanks a lot.

Appreciate it.

Greg Gieber.

A.G. Edwards.

You know when I go back and look at your orders growth on a year-over-year basis, I cannot remember when it has ever been a single digit number.

You have grabbed great order growth.

So I was expecting your closings perhaps to be up at least 10 percent in the quarter given your goal of 50,000 for the fiscal year.

Also, you only came in with a 5 percent increase, and outside the Southeast it was kind of disappointing across the board.

Is there something happening here?

Are you having trouble closing?

Is there a shortage of labor, materials or inspection?

Is there something that I am missing here?

And can you accelerate your closing rate going forward to get to your 50,000?

To answer your question directly, we don't have any problems.

We are not going to give you a weather report.

We are focusing on double-digit growth.

We took our revenue number up for the end of the year as Stacey told you from 12 billion to 12.5 billion, and we are 100 percent confident that we will exceed 50,000 units closed in fiscal year '05.

That is nice to hear.

So there is nothing particular in the slower closings in your first quarter here?

Again, we're not going to give you a weather report.

Okay, I will make no comment then.

I will the rains in Southern California clearly will have done my due to you.

No weather report here.

No weather report. (multiple speakers)

We are darn proud of what we did in Q1.

Okay.

Perhaps if you could give us a little guidance as how and where you have increased your guidance and what might happen to your average selling price during the year?

Well, our average selling price is obviously up in the first quarter and it is up in backlog.

For the year, we have our average selling price model probably slightly less than what we ran in the first quarter, and mostly that is conservatism on our part.

We are not ready to project the same increase in sales price that we see right now for the balance of the year.

Okay.

How about gross margins?

That came in much higher.

How sustainable is that increase?

Was there anything in particular there, or should that be bumping my gross margin assumptions for the year?

It was just darn good operating on our division president's part.

But we believe that we're going to have continued pricing power through the other three quarters of this fiscal year.

We are not ready to take you to that gross margin for the entire fiscal year, but we do see some good things out there right now.

Bill?

And as Sam mentioned, this quarter 90 basis points of the improvement in margin did come from our lower financing costs versus a year ago, and we do expect some contribution from lower financing costs for the remainder of the year, slightly less than the 90 bps this quarter, but we still do expect some contribution in margins for the remainder of the year from financing.

Okay.

The only other question I have, if you have it there, do you have any idea for your first-time buyers what the average income level is, at least for those that you finance?

That is not something we have ever tracked.

We can check with the mortgage company and see if that information is available.

If you could, that would be an interesting number to take a look at.

I will tell our FICO scores continue to improve, and our FICO stores are at 715, where they not, at the end of the --(multiple speakers) versus 713 last year.

Not to add FICO scores for somebody building in your price range.

Our FICO scores are up, and our LTVs are down.

So I think that is a great statement on the quality of our buyers.

It certainly it is, and it was a great quarter, guys.

William Knobler (ph).

Atlanta Softnel (ph).

Congratulations on another good quarter.

You know I remember some years ago an analyst asked a major consumer company how they achieved an improvement in margins, and the Chairman sort of looked at the analyst and said I guess it was just good management.

So with that as a backdrop, you know I think a lot of people on the call are probably asking themselves why the low conversion of backlog going into the quarter to produce only a 5 percent increase in closings.

And I asked that question, not that I don't have great confidence, you are going to make your revenues forecast and your unit forecast, but it was kind of surprising.

I was not surprised obviously at the price in the mix or the earnings, but the unit closing -- it looked like there was some reason why you converted less than historic percentages.

So maybe you can add some color on that.

The first piece of color I would like to add is one, our conversion rate of our beginning backlog of every quarter remains the highest in the industry.

Notwithstanding that, just like I mentioned to Mr. Gieber a few moments ago, we're not going to make any excuses.

We're not going to give you a weather report.

We are proud of our 5 percent increase in unit closings, and we're also very comfortable with our ability to close greater than 50,000 units in fiscal year '05.

So I would say to you that we had a great quarter.

We may have been slightly under your closing target, but again, we don't give closing targets.

And the bottom line is it that we feel very comfortable with what we accomplished in the quarter, and there are great, great quarters ahead of us.

Another thing, Bill, our first-quarter closings conversion of backlog typically run in the '50s anyway since, as you know, our last quarter of our fiscal year is the highest percentage conversion that we experience.

So although the conversion rate is perhaps less than you were expecting, it is consistent with our history.

Okay.

Would you say that the SG&A being higher is a function of the 5 percent unit closings?

In other words, you have your budget, and if you don't get to a double-digit or close to it unit closings so the SG&A percentage moves up and since you are very confident of your raised revenue forecast, that is why you expect to get back to the low to mid-9s?

Yes, yes.

Clearly.

Again, we're not making any excuses.

We have positioned this Company to hit the numbers that we're telling you that we are going to hit, and we are confident we're going to hit them.

Clearly if we closed a few units less than what we internally projected, then our SG&A obviously is going to go up some.

But nevertheless at 10.6 percent that is an incredible SG&A number.

Not exactly where we would like it, but it is going to be at the low end of the 9 to 9.5 percent range at the end of the fiscal year, which again is the lowest in the industry.

So no excuses.

It is up, but it is not going to be any higher than 9 to 9.5 at the end of the year.

Okay.

And when you invest as you have told us in places like Washington D.C. and New Jersey and Philadelphia, you invest dollars, is there a temporary lag in terms of the returns you know as you sort of gear up communities and put people and costs in and then that goes from a drag to a benefit?

You sound like one of our division presidents.

To answer your question, yes.

When they invest in inventory dollars, it affects one of their bonus points, which is their return on inventory.

There is a lag clearly because we're buying the land after it is entitled, but nevertheless we then still have to develop it and then we have to build the homes on it.

So there is a lag.

So as a result, if you look at markets where we have moved considerable dollars over the past three years, Florida and Maryland and Virginia, Delaware, Connecticut and most of New Jersey and most places, yes, there is.

But I look at our internal returns for those markets, and I am astounded at the returns they have been able to give us with those significant increase in dollars.

But to answer your question directly, yes.

Okay, keep up the good work.

Myron Kaplan (ph).

Kaplan, Nathan & Company (ph).

My question has been asked and not answered.

Thank you.

Dan Oppenheim.

Banc of America Securities.

I just wanted to ask about the land that you are controlling now.

It sounds as though there is less that is controlled through options than, let's say, what we have seen recently.

I believe you set the goal of having 60 percent optioned.

Is it something just temporary, and we should expect to go closer to the 60 percent over the course of this year?

I would expect that, yes.

I think it's more of a timing issue.

We did close a very very big project in one of our markets, which frankly was the one that probably put that whole calculation out of whack.

Okay and second question.

Given what has happened in Nevada after the big run-up in prices over the past year, now that it is cooling off, are there other markets where you have some concerns about prices and affordability?

Pricing went up too quickly and affordability declined declining so that we could see that type of slowdown?

No.

Okay.

Thank you.

Tony Campbell.

Knott Partners.

I'm wondering if you could just remind us what your ASP is for '04 -- '05 that you are basing your estimates on?

I wonder if you could also talk about what kind of price increases you are seeing in cost of materials and labor costs?

Stacey, do you want to talk about ASPs?

Yes, the ASP that I use generally in the model, Tony, was somewhere around 245 to 250.

We ran several iterations, which is why you end up with a range instead of we did not just say our ASP is going to be at.

The most significant material -- are you there?

The most significant increase in material prices really has been in roofing material. (multiple speakers).

Hello?

Yes, are you still there?

Yes.

Okay.

The most significant increase in material cost happened to be in roofing due to hurricanes and plants coming online out in the West, which have been delayed in terms of roof tiles.

But other than that, that is not really obviously impacting our gross margin.

So what do you think annually of the cost -- what are you budgeting both material and labor cost to be up annually?

We are actually budgeting it to be down.

Okay.

All right.

How much?

Once again, if you go back into our national purchasing, the incremental costs saves per unit, we're looking at increasing that $300 to $400 per unit in our national purchasing alone.

That does not count as we increase our volume.

To answer to your question directly and succinctly, $300 to $400 per unit.

Thank you.

Don, this is David Knott.

If I look at your average price of 253 in homes close, 253,000 -- that is up from 231.

It's about a 9.5 percent increase.

If you were to look at apples-to-apples where you are putting out in given communities the same house so there is no mix change or change from state to state or whatever, you're not doing a bigger house but the same house.

What would you say your price went up last year, apples-to-apples?

You were just saying --

The same 2000 square foot house on the same lot, in the same community, in the same place sort of thing.

I don't know if you can compute that very easily or have that number, but what was your (multiple speakers)

To answer your question, we do not have it.

We probably could not compute it.

And if you're asking for a wild guess, I would say about 3 to 5 percent.

3 to 5.

Okay, thanks.

Timothy Jones.

Wasserman and Associates.

Sorry I missed you at the Orlando show.

We did a good loan job of hiding from you on Friday.

I ran into Strudler (ph).

I guess you were out surfing.

Yes.

Okay.

I'm going to give you a nice little question, and I do not want to answer to be that you walk on water.

And then I'm going to give you a Nolan Ryan fastball, no touchy-feely.

Ready?

The easy one is this.

Ryland implies that their costs are going to be up, that they were up 2 to 4 percent last year and about the same on the average price.

This year about 2 to 3 percent.

First of all, you are budgeting material costs down.

I mean, even the 3 to 4, if your competitors are looking for it, increases of 3 to 4 percent in both labor and the cost of volume buying.

And they are doing volume buying, too.

Where is the difference?

Or another way to put it, Ryland, you and Ryland had about the same bottom-line, but you would not know you're in the same business.

Their gross margins in the quarter were down 50 basis points.

Yours are up 270 -- 170, excluding the 90 basis point based on this homes.

And your SG&A was up 50 and theirs was done about (inaudible) 90, which was adjustments at year-end.

But the gross margin -- I mean this kind of a difference of two companies reporting for the same period -- and I'm a little perplexed.

I know you're doing the volume buying, but that is an awfully big difference.

Well with all due respect to Ryland, who I have a lot of respect for, I think there is a big difference between being able to tell your manufacturers, your suppliers and your laborers that you're going to do 50,000 units versus significantly fewer units.

What is Ryland's projection out there? 15,000, 16,000, 18,000 units.

And then you take that -- that is still a good amount of units, especially in the markets they are in.

They have obviously some muscle there, too.

They are in the top five in most of the markets.

I can tell you as I go to the Builder Show every year for one main reason that has turned out to be a secondary reason over the last three years, the secondary reason seems like there a lot of equity analysts who are using it as a show for themselves.

But that is all right.

But I go there for Rick Rojas to visit with our manufacturers and our suppliers.

The real bottom-line is, as you walk around the floor and I visit with Rick Rojas and our suppliers, our vendors and our manufacturers, I can tell you 50,000 in '05, 60,000 in '06, and 100,000 in this decade gets a lot of people's attention.

And it is just like did we have roofing material issues in December?

Yes.

Did we give you guys a weather report?

No.

Did we meet with our roofing suppliers in Tucson, Arizona, myself included, to make sure they understood where we were going?

Yes.

Did they supply us all the roofing materials we needed?

Yes.

The same thing in Florida.

So I can just tell you, you cannot put it in your model, but as you're walking around and visiting with these people, I can tell you one thing.

If I am working for Carrier Train (ph), Whirlpool or anybody else and I can see doing business with one builder and they are going from 40 to 50 to 60 to 100,000 units, I know which horse I'm riding, and I know who I'm going to give the best price to.

Okay.

Here is a toughie.

First of all, after walking 18 miles around that show, that is the first one I have been in and it was one day in 37 years, I will never go back to one of those shows.

You must have not have had --

Never.

You must have not have enough Coors Lights to --

(multiple speakers) she was on fire, but I could not --.

Anyways, here is a tough one.

Now Sam and Stacey, listen up carefully.

Okay?

I'm doing this in my head.

All right?

You are saying that your deliveries were up 5 percent in the first quarter, and they are going to be up about 16 percent for the year, which implies about 20 percent increase in deliveries for the rest of the year.

You would then say -- that was 16 percent topline growth.

And you're saying 16 to 19 percent on your EPS, which implies roughly flat margins.

And since your margins were up 450 basis points, it implies roughly a 20 percent unit growth for the next nine months with lower gross margins.

That is how it comes out.

I'm doing this -- I don't even need to write it down.

I know it.

And either you're seeing something that is scaring the hell out of you in your margins and your backlogs because -- and you have been discounting or something -- or you were egregiously lowballing your estimate.

I can tell you one thing that D.R.

Horton is not going to do.

We're not going to come on prior to the end of any quarter and apologize and reset our numbers.

We don't know if our gross margins are sustainable going forward.

We believe they are, but we are not going to calculate that into the EPS guidance we're giving you.

Further, there are a lot of people who look like idiots out there after the hurricane hit Florida and some other issues and the rains a bit in California.

We are not going to give you a weather report.

We are not going to look like an idiot.

We are going to give you guidance which is comfortable and you should take our guidance.

Is that another way of saying lowball?

You can read the tea leaves however you want to read them.

But I can tell you one thing that is not going happen at Horton, we're not going to miss a number on our watch.

There are a couple of other ones that are doing the same thing, but that is okay.

All right.

Thanks a lot.

Jim Wilson.

JMP Securities.

Thanks.

I think I have pretty much run out of questions, but I will just ask one.

Don, as you look and start to -- obviously as you're working that way down the field toward '06 and building up backlog, how do you see investment dollar shifts regionally?

Where do you -- you talked about how the Carolinas look good for you now, and you're positioning yourself for that.

What you see yourself doing and allocating dollars towards as you look further into '06 -- what directions?

Clearly we are still investing more dollars in the mid-Atlantic all the way from Connecticut to Pennsylvania to New Jersey to Maryland and Virginia, Delaware those markets.

That is a great market.

We don't have enough inventory in those markets and have not had.

We had transferred our Regional President, George Seagraves, out there a couple of years ago, and he is doing a great job as our Division President out there.

So they deserve more money.

The other place that Stacey mentioned to you we are seeing a significant turnaround in the Pacific Northwest, specifically Seattle.

A little bit less in Portland.

But those two markets look tremendously good to us over the course of the next two to three years and we're directing dollars there.

Hawaii has grown too, Don.

Yes and Hawaii clearly.

If Mike Jones in Hawaii could just spend more money, we would send him more.

It is a tough time getting land and title over there, Sam.

But that is also a very good market for us.

Obviously you talked about peripheral marks around big cities.

But anywhere really left that you don't have any presence at all that you feel you need to get into?

No, sir.

What we are really trying to do is just penetrate our existing markets deeper.

One of the guys I am most proud of in the Company is Brian Rome (ph) going from an 8 percent market share, while his top competitor had 40 percent market share to where we've got 20 percent, and now they have 21 or 22 percent in San Antonio.

We just want to profitably aggregate market share in each one of our core markets and then spin that off into our satellite market to take advantage of our scale and our cost structure.

Steve Fockens.

Lehman Brothers.

Just one quick question.

Could you provide a little color around the land buying environment in Florida versus, let's say, Southern California and Vegas in the context of can you option more land in Florida?

Are the land sellers more sophisticated, less sophisticated, any kind of color you could provide would be helpful?

Thanks.

Well, let me say, first of all, that in the state of Florida I don't want to talk about level of sophistication because as I have been in the land purchasing business for the last 25 years, most of them are pretty sophisticated.

I would say to you that in the state of Florida, yes, there are more opportunities to do options than in California and Nevada.

As we participated in the conference in Orlando and we told a group of investors, we're in a wonderful position in the state of Florida.

We began investing heavily in the state of Florida three and four years ago.

We have driven up our assets in Florida significantly while our returns have increased significantly.

We don't have to do the next deal in Florida anywhere from Jacksonville to Orlando to Tampa to Naples to Fort Myers to Miami.

We're in an opportunistic land purchasing position, and we think that is a great position.

So as a result I think Florida will continue to be a strong market.

I think it is a less risky market than California and Nevada, and we're there prepared with a great position to take advantage of it.

And I imagine your ASPs in Florida are probably quite a bit lower than California?

Yes, sir.

They are.

Joel Locker (ph).

Carlin Financial.

Just one quick note.

Everything else has been answered.

But just your percentage of ARMS this quarter compared to a year ago quarter?

34 percent this year versus 25 percent last year.

Lorraine Maikis.

Merrill Lynch.

The 16 percent of your product that was attached in 2004, can you comment on where you see that going over the next couple of years?

And then just talk about the profitability of that attached product versus your standalone home offering?

As land prices continue to increase across the country and in most of our markets, and as we keep D.R.

Horton properly positioned into the sweet spot of the affordability index, our attached product will continue to increase.

People are always asking us, well, gee you bill a 30 to 35 percent first-time homebuyer, isn't the margin lower on that than it is on the second-time homebuyer as well as the attached?

To answer my own question that I posed, is that we look at each unit whether it be a single condo or $800,000 home, like, each one of it has its own P&L and its own budget, and we pay our division presidents for 21 percent gross margin on each one of those units.

So irrespective of whether it is a 250 building condo in downtown San Diego or a $800,000 home in Maryland, our goal is to hit the 21 percent gross profit margin.

Any plans to get into more of a high-rise market?

We right now are what we consider to be low to midrise.

The tallest building we have done is in downtown San Diego.

It is seven above three.

And that is a nice -- I think we would limit it out somewhere around 10.

But we're not interested in doing the business model that one of our competitors has in the Southeast.

Thanks.

Then finally, last quarter you gave an interesting statistic about California.

You said your prices in 2004 were up only 2 percent.

Can you talk about how that trended in the quarter and what you expect for 2005?

Actually I don't know specifically how it trended in the quarter.

We can get back to you on that.

Probably a little bit higher than that.

Nevertheless, our game plan is in California to keep our price as close to the sweet spot of the affordability index.

If you take look at the affordability index, the one thing that our regional president looks at out there, Tom Noon, is that when 20 percent of the people can afford a medium-priced home in California, that is a bad number.

And what we are always trying to do is keep it closer to 30 percent than 20 percent.

Scott McCullough (ph).

ING Investment Management.

Congratulations on your quarter.

I'm glad someone congratulated us. (multiple speakers).

For a while I was wondering that 30 percent up was not enough.

Go ahead.

I'm curious in your efforts to become, as you have stated, to be the lowest cost producer, are you able to quantify what the value of an investment-grade rating on your debt would be?

Have you had discussions with the rating agencies?

Continuously.

I will let Sam Fuller talk about that.

Actually we do have contact with the rating agencies virtually continuously, and we are very anxious to get that rating.

It would probably -- our last two debt issues, one of which was done in the current quarter, were priced at what we feel are pretty close to investment-grade levels.

But had we actually been formally rated investment-grade by other then Fitch, we probably would have saved about 50 to 75 basis points on those deals.

Do you think your inventory limits or controls are going to get you there organically, or has the rating agencies, you know, laid out stepping stones for what you need to do to get there?

Let me speak very clearly on that subject for Sam.

We have been there.

We're there.

We are just waiting for them to catch up and anoint us because we have deserved it.

Our debt to cap in the last fiscal year was 150 basis points less than the average homebuilder investment-grade credit.

And it is an absolute travesty in my humble opinion that we are not an investment-grade credit today.

I would have said the same thing, by the way.

But as eloquently? (multiple speakers).

Thank you very much.

Susan Berliner.

Bear Stearns.

Good morning.

Sorry.

It's hard to follow-up on a great question asked by Scott.

Just two housekeeping questions.

One was, could you give an update on the cancellation rate?

Yes, our cancellation rates have historically run in the 17 to 19 percent range, except for the four months post-9/11.

They are running slightly up.

There in the low 20s, or actually they are in the 20 percent range right now simply because of one thing, Las Vegas.

Okay, great.

The other question I had was just you've had a lot of positive color on all the markets.

Are there any markets -- I think you said last quarter that every market was profitable.

Is that the same for this quarter as well?

Yes and I'm proud to say that we have no weak markets in our 63 markets across the U.S..

We have some where we're trying to do better, but we see no weak markets out there today.

Thank you very much.

William Mach (ph).

Standard & Poor's.

Two quick questions.

You mentioned Florida being less risky than, say, California.

Is that strictly because of the pricing differentials or the mechanisms by which you talked about that you can buy the land?

Both.

I look at the largest risk in the homebuilding business as landownership.

And to the extent that you can option more lots in California than you can -- in Florida than you can in California, I thing that reduces the risk profile.

But also frankly we are offering a lower priced home average sales price in Florida than we are in California and other markets.

We are appealing to a larger percentage of the people who can afford our homes, and I think that is also low-risk.

Okay.

Just to get back to a little bit slower conversion ratio in the first quarter versus the same time last year, I can see why you might want to accelerate it.

But what are the objectives -- what is the motivation to slow that rate if there is one?

There is no motivation to slow it.

It was slower, although as Sam pointed out, it was slower than some people projected.

But, as Sam said, it was right in line with our historical Q1 conversion.

The bottom line is that again we're not going to give you a weather report.

We are proud of our quarter, and it was slightly lower than some people projected.

But again we do not give any projections on what our unit closings are going to be.

Okay.

Do you provide incentives to your people on a regional basis or on a local basis to accelerate that closing rate?

Absolutely.

Stephen Kim.

Smith Barney.

Congratulations on the strong quarter.

Just a couple if I could.

First of all, and I apologize if you mentioned this previously, but have you sort of outlined what you're thinking in terms of incremental land investment in '05?

Absolutely.

We have set inventory controls.

This will be our third consecutive year that we've got inventory controls in place.

And we are planning on -- Bill might speak to what our percentage inventory growth is projected to be.

We have inventory caps by region, and we're projecting inventory growth somewhere in the upper teens, somewhere in the other teens to the 20 percent range.

You might mention to Steve too that for the first quarter our inventory growth was at exactly the same rate as our revenue growth, 14 percent.

And over the long haul, we project our inventories to stay in line with what our long-term revenue goals are going to be and grow the company.

Okay.

Great.

Secondarily, I know there has been some discussion on the call here on gross margins.

Certainly I'm happy to see the strong gross margin here in the first quarter.

I guess sort of longer-term you have talked about national purchasing and things of that nature helping out the margin.

I guess just sort of from a longer-term perspective I just wanted to hear your thinking on the opportunities for gross margins over time, what you feel some of the critical drivers may be over the next few years to your gross margin?

Well, obviously I have been wrong for quite some period of time, but our goal is to increase our gross margins 10 basis points annually.

And I know everybody smirks at that.

But we have had significant pricing power for the last three to four years.

And as I said, I did not expect our pricing power to be as strong in '05 as it was in '04, and once again I evidently am wrong at least through the first quarter.

The drivers clearly are a couple of things.

One is our scale, and then we're driving the economies of scale on a national purchasing side with both our vendors and our suppliers as well as on our labor side.

If you are a framer and you have got 10 crews, D.R.

Horton can keep all 10 of your crews busy 24/7 365, and you're going to quote us a lower price as opposed to someone who's only going to keep your crews busy half the time or three-fourths of the time.

So I look upon it, on the labor side, the material side, and then I also look at it more on the thing Stacey said is on the landside.

When you are the largest builder in most of your markets, land sellers are coming to you typically first and giving you some of the best prices because they are certain that one, you will use it, and two, that you can close it.

Right.

Okay.

Great.

Thanks very much.

Congratulations on the quarter, again.

Earl Turnipseed (ph).

Private investor.

Good morning.

I thought I misheard when you said your P/E was going to be 5 higher than everyone else.

Did I mishear you?

That is my goal.

That is our goal.

But what about realism?

It is 9 and change right now.

From yesterday you have a 30 percent increase in earnings, and your stock is down 4 percent. (multiple speakers) and down further than all the other people.

Well, I can only ask a rhetorical question.

If you have had a company, which has had a 10-year CAGR on a PPS of over 30 percent, what should our P/E?

I understand it.

I am preaching to the choir probably.

I can tell you that I'm a private investor, and I am so far out of balance with almost all of my IRA in D.R. Horton.

So why I'm asking for is, how in the world do you get a P/E that reflects -- I mean other than you go in private?

I would say to you clearly the one-way exit we expect to get a higher P/E is by continuing to do what we have done for the past 27 years and continuing to outperform the industry.

Continuing to improve on everyone of our financial metrics.

And I'm a firm believer that even though we go through these periods of despondency like we are going through right now and have been for some time, that ultimately the market will recognize what we have done and anoint us with a proper P/E.

I think until -- and we've had several people tell us on the Investment Relations side that perhaps at Horton we have focused a little bit more on stock price or too much on stockprice.

But frankly to me personally that is a reflection of the investment community's feeling about what we are doing.

So we're out to tell the story of what we have done, and believe me, in the last four years, five years as Stacey Dwyer has been in charge of Investor Relations, she and Shannon Brooks (ph) spend a lot of time on the roads.

I hate to quote some firm that is a competitor, but it is one investor at a time.

We have brought a lot of investors into our stock over the last four or five years who were not investors prior to that.

And our goal over the next four to five years is to bring just as many if not more investors into our stock because it is a darn good investment.

Margaret Weiland.

UBS.

It is Dave Bolger for Margaret.

I think the question has already been answered.

Thank you.

Timothy Jones.

Wasserman and Associates.

Yes, a couple of things that you said at the end that I wanted to just clarify.

First of all, Sam, when you said your inventories were up 14 percent in line with revenues -- I don't have last year's number -- were you talking about total inventories including land or just housing inventories?

Total inventories.

And that has increased from September 30, '04 to December 31, '04.

How about the increase in revenues are -- how about how does it relate to year-to-year?

The increase in revenues was year-over-year --

Yes, (inaudible) .

But you can take the monthly -- you can take the three-quarter increase in revenues and compare it with an increase in revenues for year-to-year.

In other words, how much were your inventories over last year?

At December 31, our inventories were up 34 percent over last year, and that is clearly a reflection of what our closings and we expect them to be over the next few quarters.

You've got to start building the houses and developing the land before you can sell them and close them.

It is consistent with our year-over-year increase at 9/30 as well.

And it is consistent with our budget going into the year as well.

Okay, Mr. Dangerfield said at 10:57, that the largest risk in the homebuilding industry is excess land.

This has been Don Horton's mantra since he went public.

He virtually thought like -- two things before I will ask them this way.

He has said for years that he never wanted to have more than three years of land, then you sort of stuck up the 3.5 and I think probably the toughness on entitlements.

But you just said the first time that you had four years of land.

I mean I know that Don's and both of your feelings on excess land.

Is this through the entitlement process that is forcing you to do this?

Well, first of all, I know you have known Horton for a long time, Tim, but I have known him a little bit longer.

So I'm going to quote his exact quote.

And that is he has always said keep a three to four-year inventory of land and lots.

So I don't want to argue the point with you, but I do know what he said.

I have been with him long enough to know what that is.

Secondly, I would say to you that if I could have 100 percent option lots, I would have a 50-year inventory of land. (multiple speakers).

And what you see, what has happened to us is the option component up until this quarter has increased at a significantly higher rate than our own portion, and it will continue to increase at a faster rate than our own portion on a going forward basis.

This is what surprised me, the other thing that surprised me.

I mean five, six, seven years ago you were at 50-50 optioned and owned when the industry maybe was 35 percent owned -- I mean 35 percent options and 65 percent owned.

Now the industry is probably some of them are moving to 60 percent optioned, and you -- the last number was still roughly 50-50.

And I'm not quite sure what is happening here.

Okay.

Let's go back to the end of the fiscal year when we had 41 percent owned and 59 percent optioned.

And as I said earlier, the only reason that number got out of whack this quarter is because we closed a really big land deal that really affected it.

That was in the option count at September 30.

Now it is in the owned --

Can you tell me what market?

Yes, it is Arizona.

Lastly, Arizona seems to be just going crazy for every builder I see.

Just enormous numbers in new orders and so forth.

People selling 10 units net a month.

Are you worried at all that this market could be overheating and could be maybe the next Las Vegas?

These numbers as far as orders are just astronomical.

Well, to answer your question directly, no.

We have been in Phoenix for a long period of time.

Phoenix has got a great economy.

It continues to generate great job growth, good median income growth, and also it is a mecca for retirees, active adult people.

And it has got a lot of great things going for it.

Are you not seeing the speculation in price appreciation there that did you did see in Las Vegas?

No, sir.

We are not.

Thank God.

Thank you.

Tucson is strong, too.

It is really -- it is our most improved division year-over-year.

Any other questions?

Myron Kaplan.

Kaplan, Nathan & Company.

This is a series question.

Since you are choosing not to give weather reports and what not, then many of the other builders or most of the other builders do and to deliberately to yield less information, why do you think that with your growth, which is commensurate with your competitors, why do you think that you will be entitled to a higher multiple down the road?

Well, I would say first of all we have already earned the higher multiple.

Secondly, our margins continue to increase dramatically.

We have the most scale.

We had the most economies of scale, which is contributing to our margins.

And, furthermore, we have the lowest SG&A in the industry.

And I think the enviable in business model and growth record in the industry, and as I have said before, clearly we have earned it.

But are your return superior to your competitors?

Or to -- let's not say competitors.

Are your returns superior to the other large publicly owned home builders?

We believe they are if you look at them on an apples-to-apples basis.

One thing as a company we have chosen to do is keep our financials very transparent, and so we have not invested in joint ventures or off-balance sheet financing.

So 100 percent of the lots that we own are on our balance sheet.

So that in other words -- so that -- so that you feel that that is fine.

But don't you think that when you speak about transparency, that transparency also includes more detail about your relatively wide long operations?

Well, I think we are pretty transparent with our operations.

I don't know what we're not disclosing that we should be disclosing.

Well, you had a number of questions that you stonewalled about weather reporting and what not.

Sir, we had an excellent quarter.

We chose not to give you a weather report simply because of the fact that we're not apologetic for a thing on this conference call.

I don't think a question is requiring you to be apologetic.

I think it is just a request for information.

We had given you more than adequate information.

We are proud of our quarter, and we are not going to give you any excuses because our people outperformed everyone else in the quarter.

I guess as long as you are the sole judge of adequacy, I guess I will just -- okay, thank you.

Actually our investors are the sole judge of our performance. (multiple speakers)

Well, I'm an investor.

At this time, there are no further questions.

Mr. Tomnitz, are there any closing remarks?

Yes.

I would like to congratulate all of the employees of D.R.

Horton on a fantastic first quarter, and just to let our investors know we are proud of our first quarter, and that we're going to be even more proud of our Q2, Q3 and Q4, and that we will be the first builder in America to close more than 50,000 units in '05.

Thank you very much.

This concludes today's D.R.

Horton conference call.

You may now disconnect.