霍頓房屋 (DHI) 2005 Q2 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 Builders second-quarter earnings release conference call.

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

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

Thank you.

Mr. Tomnitz, you may begin your conference.

Thank you.

Joining me this morning is Sam Fuller, Senior Executive Vice President of Finance, Bill Wheat, Executive Vice President and CFO, 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 any 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 most recent corporate 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 itself from the competition by again closing more homes in America than any other builder over the last 12 months.

The second quarter of fiscal year 2005 was another record quarter for D.R.

Horton, America's Builder, as we continue to grow the bottom line faster than the top line.

We're proud to announce the following highlights.

Home-building pretax income increased 59% to $458.4 million.

Consolidated net income increased 56% to $294 million.

Sales order backlog, our future revenue, increased 33% to a Company record $6.2 billion or to 21,205 homes.

Home sales orders increased 23% to $4.1 billion on 14,401 homes sold.

Consolidated revenue increased 23% to $2.9 billion.

Gross margin on home sales revenue increased 250 basis points to 24.8%.

Home-building debt to total capitalization, net of cash, improved 80 basis points to 42.5% from 43.3% a year ago.

And at March 31st, we had approximately $1.6 billion in dry powder.

All of these accomplishments and contributed to a 53% increase in second-quarter diluted earnings per quarter share to $0.92 per share diluted share.

Sam?

Our second-quarter sales increased 23% to an all-time record $4.1 billion on 14,401 homes sold from 3.3 billion on 13,480 homes sold in the year-ago quarter.

Net sales orders for the first six months of fiscal 2005 increased 26% to $6.8 billion on 24,302 homes sold compared to $5.4 billion on 21,714 homes sold in the year-ago period.

Our strong sales contributed to our all-time record unit backlog, 21,205 homes, with the sales value totaling $6.2 billion, a 33% increase over last year.

This is the largest reported domestic backlog in the history of the home-building industry.

Our backlog gives us excellent earnings visibility for the remainder of fiscal year 2005.

We have already sold or closed 83% of our 50,000 projected closings for fiscal 2005 and we're now beginning to focus on fiscal year 2006.

Our asset concentration corresponds with our top six home-building states.

The percentage of our assets in those states are as follows -- California with 26%, Texas with 14%, Arizona, Nevada and Colorado with 9% each, and Florida with 8%.

Our second-quarter sales dollar changes in our top six home-building states are, in California, where we're the number one builder, our sales were up 40%; in Texas, where we're the number one builder, our sales were essentially flat; in Nevada, where we're the number four builder, our sales were down 33%; in Arizona, where we're the number one builder, our sales dollars were up 74%; in Colorado, where we're the number one builder, our sales were essentially flat; and in Florida where we're the number two builder, our sales were up 58%.

We would also like to point out a few markets where we had strong sales dollar performances in the March quarter.

Sacramento, up 89%;

South Florida, up 87%;

Coastal Carolinas, consisting of Charleston, Myrtle Beach, Hilton Head and Savannah, up 77%; the Los Angeles area, up 69%.

Last quarter, we mentioned we were planning to invest additional inventory dollars from the Pacific Northwest.

In the March quarter, Portland sales dollars increased 67% and Seattle's sales dollars increased 24%.

Stacey?

We are seeing definite signs of recovery in a couple of markets that we've mentioned before is weak.

For example, in the March quarter, Raleigh/Greensboro sales dollars increased 61%, and Salt Lake City sales dollars increased 79%.

A few builders continue to report weakness in the Midwest.

Our Midwest region is made up of Chicago and Minneapolis, the two strongest markets in the Midwest.

Both of these markets reported sales dollar increases greater than 25%.

Our second-quarter home-building revenues increased 23% to $2.8 billion from $2.3 billion in the year-ago quarter.

Home sales revenues increased 20% to 2.7 billion on 10,601 homes closed.

Our higher than normal land sales revenue included the sale of a commercially-zoned piece of property in our West region.

We purchased this land at the same time we closed on the adjacent residential property.

Our gross margin on this parcel was slightly less than the margin for the other land sales in the quarter.

Home-building revenue for the six months ended March 31st, 2005 increased 19% to $5.3 billion on 20,281 homes closed compared to $4.5 billion on 19,065 homes closed for the same period of fiscal 2004.

Home sales gross margin in the second quarter increased 250 basis points to 20% (ph) from 22.3% in the year-ago quarter.

For the six months versus (ph) 2005, our home sales gross margin improved 260 basis points to 25% from 22.4% in the year-ago period.

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

In addition, interest in cost of sales decreased by approximately 40 basis points in the second quarter compared to a year ago and approximately 60 basis points in the year-to-date period compared to the prior year.

Home-building SG&A expense for the quarter improved 30 basis points to 9.4 percent of revenues compared to 9.7% a year ago.

For the six months ended March 31st, 2005, our home-building SG&A was 9.9% compared to 9.8% a year ago.

We continue to leverage the fixed component of our SG&A costs as we penetrate our home-building markets.

Our stated goal for our fiscal year '05 SG&A is for it to be in the low 9% range.

Financial services revenue for the March quarter increased 19% to $49.8 million from 42 million in the year-ago quarter.

For the six months ended March 31st, financial services revenue increased 15% to $95.8 million from $83 million in the year-ago period.

Financial services pretax income for the March quarter increased 8% to $19.6 million compared to 18.1 million in the year-ago quarter, and for the six-month period was $37.2 million compared to 36.8 million last year.

(technical difficulty) financial services earned more than $10 million in pretax income for the first time in Company history.

Ninety-four percent of our mortgage company revenue is captive, reflecting our continued commitment to focus on the homebuilders business.

In the past 12 months, we have improved our capture rate Company-wide to approximately 68% from 66% this time last year.

For the quarter, our consolidated net income increased 56% to $294 million from $188.6 million last year.

The 56% rate of increase in net income is more than double the 23% increase in total revenues, continuing our tradition of growing the bottom line faster than the top line.

Our diluted earnings per share for the quarter increased 53% to $0.92 per diluted share from $0.60 per diluted share in the diluted share in the year-ago quarter.

For the six months ended March 31st, 2005, consolidated net income increased 43% to $535 million from $374.2 million last year.

Diluted earnings per share for the six-month period increased 42% to $1.68 per diluted share from $1.18 a year ago.

We control approximately 296,000 lots at March 31st, 2005, of which 48% are owned and 52% are optioned.

Our home-building leverage ratio, net of unrestricted cash, improved 80 basis points to 42.5% from 43.3% a year ago.

Our goal for fiscal 2005 is to continue to maintain our year-end home-building debt-to-cap in the low 40s.

At March 31, 2005, we had approximately $1.6 billion in dry powder with approximately $526 million in cash and $1.1 billion available on our home-building revolver.

On April 1st, we used $200 million of our available cash balance to redeem our 10.5% senior notes at their maturity.

The Company expects diluted earnings per share for the quarter ended June 30, 2005, to be in the range of $0.98 to $1.02 on approximately 319 million diluted shares.

The Company is raising its guidance for the year to approximately $3.95 to $4 per diluted share based on approximately 318.5 million diluted shares.

The fiscal year earnings guidance represents a 28 to 29% increase over the $3.09 reported in fiscal year 2004 and is a 13 to 17% increase over the original fiscal year '05 guidance that we issued in November.

This increased guidance reflects the strength of our operations and our record backlog and is based on approximately 50,000 homes closed and approximately $13 billion in consolidated revenue.

Thank you for joining the DHI Q2 conference call.

We were 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 to the for DHI 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 best markets, with the best home-building business model in America.

Finally, and most importantly, DHI enters Q3 with 83% of our fiscal year '05 projected closings of 50,000 homes already closed or sold.

Incredible earnings visibility, and we're now focusing on our projected 60,000 closings for fiscal year '06.

At this point in time, we'll answer any questions.

(OPERATOR INSTRUCTIONS).

Margaret Whelan with UBS.

Good morning, everyone.

Well done.

Tough quarter again.

And I have three questions.

The first one is regarding your gross margin and expansion, which was better than we expected.

Will you just give us a sense -- I think it was Bill who said it was pricing power and then controlling the construction costs, but where do you think the spread is and where is the opportunity in leveraging your size, the scale, the pricing power, and so on?

Again, as I've said many times before, I think about half of our margin expansion is through our pricing power, which we still have significant pricing power in places like Phoenix, California, Las Vegas, Florida, and certainly in the coastal Carolinas.

The bottom line is, is as our volume continues to increase, as I've mentioned before, we continue to achieve greater economies of scale.

And as we have pointed out before, we are closing almost 20% units on an LTM bases than our second-closest competitor and that translates to significant purchasing power with our vendors and our suppliers.

Do you have a sense for what that was in the quarter for homes?

In terms of our purchasing (ph)?

You know, like you've given us that number before;

I think it's around $3,000 of savings.

Well our goal for fiscal year '05 is to save about $3200 per home, Margaret.

And we anticipate that that will pull through in the next two quarters.

Great.

And the second question I had was about Vegas.

You said your sales fell about 30%.

Is that deliberate or just what's going on there?

Well I think it's a function of what's going on there, although I would tell you, as I've mentioned to people, investors before, we entered the fiscal year with a goal of selling 200 homes a month and closing slightly over 2,000 homes.

Obviously, with what happened in Q1 -- our Q1 -- in Vegas, we had a high cancellation rate quarter.

Our cancellation rate in Las Vegas has trended back down in the second quarter to a historical range.

And the bottom line is, we probably lost about 400 closings in the fiscal year out of Las Vegas because of what happened.

So, but we're back over the last two months of selling over 200 net sales per month, and so we're on track to close slightly under 2,000 homes in Las Vegas.

So the Las Vegas market for us is very good.

And as we mentioned before, it will be one of our more profitable divisions in the Company this year.

Yes.

And the last question had two parts.

One is in terms of the earnings guidance you've given us for '05 -- for the rest of '05 -- how much land sales should we expect in there going forward?

The land sales that you saw this quarter was a total anomaly for the Company.

So I think our historical run rate has been somewhere around 25 to $30 million in land sales per quarter.

That's probably more what we would expect for the balance of the year.

Okay.

And several of you referred to this $1.6 billion in dry powder on your balance sheet.

I'm just wondering why you're allowing your share count to creep up.

Are you trying to ask why we're not buying back shares?

As I've said before, and after last year, Margaret, if we decide to buy back stock, it will be because we're buying it back and not because we said we're going to buy it back.

And at this point in time, we still see terrific investment opportunities, in particular, some of our hotter markets across the U.S., in some of the markets where we're trying to achieve greater penetration, like Maryland, Virginia and the Northeast.

So right now, we are choosing to reinvest in our business as opposed to buying back our stock.

You don't think you could do a little bit of both?

Not right now.

Michael Rehaut with J.P. Morgan.

Good morning.

Just focusing on the gross margin a little bit for another moment, the expansion this quarter is obviously very impressive.

I was wondering if -- how you think about that over the next couple of years in terms of -- in a more normalized pricing environment, what you guys would expect gross margins to do.

And in particular, if you would expect some of the more cost activities like purchasing leverage and areas of that nature that would help contribute to possibly an expansion again, a more normalized pricing environment.

Well, as I've said for the last three years at the end of every year the last three years, I've said I don't expect us to have as much pricing power in the ensuing years as we have had in the past year.

I've been wrong for three years and now four years and I'm glad I've been wrong.

But what we tell the street clearly is this, irrespective of pricing power -- the like of pricing power, that we expect to increase gross margins 10 basis points a year and we anticipate achieving that solely from more cushion -- cost of goods purchase.

So on a more normalized market, without any pricing power which, quite frankly, we haven't experienced that for four or five or six years.

But I expect this Company to continue to increase its gross margins by 10 basis points a year.

And aside from I guess the purchasing program that you have in place, do you have any other type of initiatives on the cost side, whether it be in some ways reducing construction costs for labor or streamlining construction process that you are working on over the next couple of years that might positively contribute to margins in sort of picking up the slack so to speak when pricing -- at some point goes back to a more normalized growth pattern?

Yes, that's a constant process for us, Mike.

Every day, we're challenging the costs that we're putting into the homes.

We're challenging the designs of the homes that we're building to make sure we're doing it the most efficient way.

We're challenging the systems that we have, whether it's a computer system or just a procedural system, to make sure that we're building as efficiently as we can.

So yes, that is definitely an ongoing process and we continue to be more efficient as we move forward and leverage our size.

The one thing that we have not focused on is vertical integration and we -- I know some of our competitors have in the past and some do today.

And frankly, we believe that our best cost saves are just by increasing the efficiency of our purchasing.

And as Stacy said, challenging our construction designs and dealing with our vendors and suppliers.

And just to follow up on that comment, if you're not doing vertical integration within your own house, are you looking to suppliers to provide more integrated solutions vis-a-vis the Remasco (ph) or other suppliers that are out there that try and offer more of a complete service to your operations?

Well certainly, we're trying to take advantage of their R&D and we do.

But clearly as Don Horton mentioned awhile back is today we have all of our presidents in from our 67 markets across the country.

And we have what we call a streamlining meeting, which is basically how we convert a contract to cash more quickly.

And that includes how do we drive our margins higher at the same time.

So largely we're dependent upon ourselves.

To a certain extent, obviously our suppliers and our vendors are also helping us in that regard.

But basically, as Stacy said, it's a day-to-day bidding and increasing our efficiency of our processes.

Dan Oppenheim with Banc of America Securities.

I'm wondering if you can talk a little bit more about margins and also the satellite markets where you've been expanding and how you're seeing that work towards improving your margins at this point and sort of growth in sales in those areas.

Well, our satellite market expansion continues to proceed very well.

We've shared, I think in the past, the significance in the Portland market going into three or four adjacent markets and the Seattle market in a couple markets; a lot of (ph) San Antonio, two or three markets, down to the Laredo and McAllen and Brownsville, even in the Florida market, down to Daytona Beach, Fort Myers, and Naples and places like that.

But clearly with our extraordinarily low SG&A relative to everyone in the industry, we're still able to export simply our construction and our sales teams to these satellite markets, leading (ph) the back office and the core division and basically leveraging that back office overhead.

So as a result, our division presidents, as they achieve greater and greater market penetration on their core markets, are spreading out to these satellite markets where we're able to profitably aggregate market share from those small and medium-sized builders.

Great.

Thanks.

And the other question is just wondering about just in terms of the goal of delivering 50,000 homes for the year, if we look at what that implies for deliveries in the third and fourth quarters of the fiscal year, it would certainly be an acceleration in the growth.

Would we need to see an acquisition to get to the 50,000 at this point?

Are we talking about the dry powder?

Is that still sort of organic growth?

Clearly, it's all organic growth and our goal of 50,000 this year, 60,000 next year and 100,000 by the decade, again assumes no acquisitions and is all organic growth.

Although as you know, on a day-to-day basis, we're constantly looking at acquisitions.

Unfortunately, Stacey hasn't been able to make any of them (inaudible) yet.

Yes, and just circling back to our backlog and our closings as a percentage of our deliveries, we're at 83% today.

So we basically have another month of homes that we need to sell and then we're moving on fiscal year '06.

Greg Gieber with A.G. Edwards.

Good morning, Stacey and gentlemen.

I know for whatever peculiar reasons you have, you don't like -- you're one of the few home builders that never gives out community count.

But I wonder if you could just talk about your plans and community count, perhaps in qualitative terms when you look at your growth or the year in '05, will you be growing community count equal to or greater than you grew it in '04, and perhaps put it a lot greater, a little bit greater or less or whatever.

Right now, Greg, we're on track to grow it a little bit greater than we did last year.

A little bit greater than last year.

Okay.

Now, if I take that to your lot position, what's your best guess as to the number of lots you will own come either the end of the fiscal year or the end of the calendar year -- however you think about it, the lots you own, not control.

Well as you know, Greg, we're going to target to keep our lot count in the 3.5 to four year supply range.

So as you look at our projected goals for our closings at 60,000 in fiscal '06, and then on towards 100,000 at the end of the decade, we're going to have around a four year's supply of lots controlled at the end of the year.

That will pretty much give you where we'd expect to be at the end of this fiscal year.

I was really thinking about not controlled, but actually if you could give me owned.

Owned, it will be slightly less than 50% of the total controlled position would likely be owned, typically around a two-year or less supply.

Okay.

Now, could you give me your cancellation rate for the quarter versus what it was and also talk, not just about your overall Company average, but were there any particular markets where you saw an adverse movement where to be sustained you would start to get worried?

Our overall cancellation rate was in our historic range of 17 to 19%.

And for this quarter, it was lower than it's been for the past quarters.

In answer to your question, as regards the specific markets, but we've only seen positive trends in terms of our cancellation rate, specifically Las Vegas, where we had a higher than normal cancellation rate in Q1, that trended back down to its normal range.

So the bottom line is, is that we're not seeing any higher than normal cancellation rates in any markets.

Okay.

That sounds good.

Finally, can you just comment on the pricing trends in California by the different submarkets there, Sacramento, Bay Area etc.?

Well, Sacramento continues to be an extraordinarily strong market for us.

There's good pricing power in the Sacramento market.

Both from a constrained lot supply as well as the job growth in the Sacramento market continues to grow at a higher than normal pace.

The San Francisco market is pretty much bottom line, as our cancellation right there is normal.

And there's not as much price in the San Francisco (technical difficulty) Minnesota and California market.

But we've entered (ph), and San Diego continues to be strong and all the L.A. area, including the Inland Empire, very, very strong.

So I look at entire California market.

We've entered a couple new markets there -- Fresno, and a couple other areas, east of 15 freeway in San Diego.

So we're trying to -- as a matter of fact, an interesting point is, is that we're moving more and more out of the San Diego market, which we feel like the land supply is slightly higher-priced than what we'd like to see and we're moving further East.

Into Riverside?

Riverside out of L.A., but we're going further out into the Modesto area and further out into the (technical difficulty), east of San Diego.

Greg (ph) Taylor with Lord Abbott.

Yes, could you comment on the housing start number?

It was a very big decline.

I know you're doing well and I know some of it was weather-related.

But from a macro national point of view, how do you see housing?

Flat, down 5 to 10% for the year, (indiscernible) on that?

I think at the end of the calendar year, the housing starts will be up, slightly less than what they were last year.

The one key factor that we've continued to talk about is that the large builders -- and D.R.

Horton being the largest -- will continue to profitably aggregate market share irrespective of what happens to housing starts.

So we're doing this.

If housing starts to stay flat, or if they decline, our portion of the market will continue to increase.

Right.

So you think a lot of this sort of 17.6% decline was weather-related or something else if you think starts will be flat nationally.

It's just -- and I agree with your story; it's just that a lot of people look at the headline macro numbers sometimes too much.

Well as you know, I hate to give weather reports.

I don't know if it's weather-related or not.

I look at those numbers, and unfortunately, we always sit around here and ask ourselves, who do they ask about those numbers, because rarely, if ever, do we get questions about our starts or our sales as the largest home builder.

But I think also those numbers are adjusted pretty dramatically from month to month.

So I don't put a lot of focus on those numbers on a month-to-month basis.

Lorraine Maikis with Merrill Lynch.

Thank you.

Just wanted to follow up quickly on Dan's questions about the pacing of deliveries this year.

If you look at the first-half delivery growth, it looks around 6% and your guidance implies a second-half growth rate of about 20.

Can you just talk about as you are entering the year, is this the type of pace that you were expecting?

Or has there been anything that's delayed the pace of closing for construction more than you expected?

Actually, when we started the year, we're pretty much exactly on pace with where we expected to be.

Our typical breakdown in a year is that we are in between 40 and 45% of our revenues and our earnings in the first half of the year and then the balance in the second half of the year.

Last year, it was weighted more towards the 45% in the first half.

This year, we're going to be more toward the 40% in the first half.

But I also think that it's interesting, is you see our margins expand, clearly, we could drive more volume at a lower margin.

But our choice has been is to continue to have good volume growth.

And as we told everybody, our revenues will grow 10 to 15% annually and our EPS will grow 15 to 20% annually.

But we're taking advantage in every one of our markets where we can to take advantage of pricing power at the expense of slightly lower sales.

Which I think is a good trade.

I agree.

And then it looks like you're outperforming some of your competitors in the Midwest, as you pointed out probably because of the markets that you're in.

But pricing in that region has been coming down for your orders.

Just wondering what type of strategy you're using in the Midwest to keep that unit pace growing.

One of the things that we've done across the country, and if you look at our California sales, has had the tendency also to increase at a slower pace than what some of the other builders have, largely because of the fact that we really focus on affordability and affordability index in each one of our markets.

And what you're really seeing in those markets is a focus on denser attached product where we can keep the price as affordable as we can.

So it's really a function of working our way down the price curve by building smaller units and denser product.

Thank you.

Stephen Kim with Smith Barney.

Hey, guys.

I wanted to see if you could address the issue of your average price in your beginning backlog because it's risen very dramatically.

And yet your average closing price didn't.

So I assume that's pent up demand for some pretty healthy price increases realized on the revenue line over the next few quarters.

Can you give some commentary?

Because I think the last commentary I had was that you thought you'd be between 245 and 250 for the year and that's seeming like it's got to be way out of date now.

I think if you take our guidance of greater than 13 billion on consolidated revenues and the 50,000 homes closed, you'll see that we have increased average sales price that we're working with a little bit in our guidance.

We have not taken it to the average sales price that you're seeing in our backlog, simply because that tends to be higher than the average closing price going forward simply because the higher-priced homes stay in backlog longer.

Okay.

Yes, I guess my view would be that this is something that is -- it doesn't seem to be a trend that's slackening at all.

Is there anything that you would say would be perhaps a little bit unusual about the 292 that I'm seeing is average backlog price?

Or is that something that we think could actually grow from here?

Well, I think it's truly a function of again, our pricing power and we're raising prices on a number of our markets.

I guess if you want to really look at one of the -- I think the drivers of that, we continue to, as I said before, when I answered Lorraine's question, we continue to work our way down the price curve and also build smaller, more denser units.

But at the same time, Steve, I was in Maryland just about three, four weeks ago and we're building condominiums there where we're all of a sudden being able to sell those for substantially more than what we've pro formaed them.

So I think it's really a function of the fact that we are experiencing good pricing power in a number of our markets and that's reflected in our backlog.

Well and part of it, too, is reflected of where we're choosing to invest our inventory dollars.

Because we've talked about investing more dollars in Florida, investing more dollars in D.C. and in the Northeast and also in Portland and Seattle, which will tend to have a slightly higher average sales price.

Now those decisions get made pretty much on a daily and weekly, and monthly basis, and so we're probably not ready to take our guidance to $290,000 for an average price just yet.

Got it.

Can you talk a little bit about why you think that the D.C. market looks so much healthier on a going forward basis than let's say some of the other extremely hot markets that have been hot for a long time like Vegas and Southern Californian and so forth?

Well I think, first of all, as I've said on previous conference calls, every time we have a president elected, they always talk about downsizing the federal government, and I don't know that one of them has accomplished that in the time period that I've been in the home-building business.

A second part of it is that we're not one of the top 10 builders, believe it or not, in that D.C. market.

And so as a result, even though we're choosing to invest additional inventory dollars in there in both those markets, Maryland and Virginia and even in the Pennsylvania and Delaware market, we really just are putting our toe in the water and trying to slowly but surely expand that market.

So our positioning is low-risk, but the bottom line is we believe that it's a good, solid market on a going forward basis just simply because of the job growth.

And I think we listened to an economist the other day -- and you probably know this better than we -- but just Homeland Security has generated a ton of jobs in the Maryland and Virginia markets, which we're beneficiaries of by increasing our market share there.

Strong quarter.

Thanks very much.

Alex Barone (ph) with JMP Securities.

Thank you.

Great numbers.

I have a question here again regarding your 50,000 unit closings.

It seems to me that the conversion base (ph) from backlog to get there would have to be quite a bit higher than your historical pace.

So I'm wondering if you can sort of shed some light on maybe how you plan on achieving that or what you're doing differently maybe than you've done in the past.

Part of the -- the most straightforward answer to your question, Alex, is there's some definite seasonality in our backlog conversion.

So the backlog conversion you've seen over the last two quarters are typically the two slower quarters in terms of backlog conversion.

It will be picking up going into the third quarter.

And our fourth quarter is always our strongest backlog conversion.

So if you look at it on a year-over-year basis, I don't think we're looking to do anything out of the ordinary with our backlog conversion.

No, I mean I understand the seasonality, but I'm just kind of looking at it going back several years and I guess I've never seen the percentage that I guess is implied.

So I'm just wondering if there's --

What percentage do you think is implied, because I think what we've looked at before, if you look at our third and fourth quarters, especially our fourth quarter, typically it's in the mid 60% to high 60% conversion.

And in the third quarter, it's above 60% pretty much typically.

So if we back into the numbers, we're right in the sweet spot of our historical Q3 and Q4 conversion percentage.

Yes, I guess I was getting something more like mid '60s for third quarter and north of 70 for fourth quarter.

But anyway.

I guess another question I had was regarding your West division.

It seems you posted four quarters of fairly low unit growth there.

And I'm wondering how much of that is sort of just being offset by what happened in Vegas versus your other good markets and to what extent -- or how should we look at that market going forward in terms of your orders?

Well, I can tell you most of it is all in Las Vegas.

Clearly, like I said before, we probably ended up -- we're going to end up selling and closing 4 to 600 units in Las Vegas less than what we projected at the beginning of the fiscal year.

And when you track -- when you input that into our sales for that region, that adversely affects that percentage pretty significantly.

Our other three markets in the west are very, very strong.

Portland, Hawaii and Seattle have done well.

But on a volume basis, they just can't make up for what the volume we anticipated for Las Vegas.

Okay, and my comments are actually not a negative because obviously, you guys have been posting awesome price increases in those markets.

I guess I'm just trying to figure as I look into '06 to get to your 60,000 unit number, I would have to imagine that that region has to come back pretty strongly, and I'm just wondering if you feel that's the case.

Well I can tell you just based upon what we have mentioned to you in Las Vegas in our last 60 days, where selling net 200 sales a month in Las Vegas, that will bring that region back where it should be for us to get to our 60,000 units.

The other side of the issue is as we've got two other markets where we've invested quite a bit of money over the last two to three years, and that's Florida and the Maryland/Virginia/Pennsylvania market.

And those two markets are going to contribute significantly in '06 to our 60,000 units, much more so than what they've done in '05.

Okay.

So you would expect the growth rate and your D.C. and Florida to be much higher than all your other regions then?

Well, yes.

I would say that, simply because of the fact that we've invested more inventory dollars in both those markets.

Okay, well, great.

Thanks again.

Jim Wilson with JMP Securities.

Good morning.

Sorry to follow up on Alex.

But I was wondering if you could maybe color -- I mean you've talked a lot about moving more inland, particularly in places like California and stuff.

But just dollar shifts in capital deployment -- where more money is going into -- kind of by market -- by general market area, and possibly you're in as well, where you think you might be pulling more money out of.

I guess you did mention San Diego.

So you've referenced it a bit, but I was wondering if you could give more full color.

Well, let's be clear.

Post the Sewer acquisition of three years ago now, we had slightly over 30% of our assets in the state of California.

Over the last two quarters, we're down to about 25% in the state of California.

Doesn't reflect any negative opinions about the state of California, because it's a great market for us; but nevertheless, we believe that that's an appropriate level of inventory investment in California for us.

We are sending more money, as we've said, over the last two or three years, into the Florida market, which we have three excellent divisions and starting our fourth division in Florida now; we're opening the northwest Florida around Panama City and Pensacola.

So Florida is getting an increased portion of our inventory dollars, as well as Maryland and Virginia and the coastal Carolinas.

Clearly, those are markets where we see good potential growth, as well, as we've mentioned, in the Pacific Northwest.

And you can see our sales increases in Portland, which were over 60% and Seattle over 25%.

Those are good markets that we anticipate redeploying more money into over the course of the next two to three years.

So other than California, anywhere else that your inventory levels might shrink?

Well, quite -- they're not shrinking, but we're just -- (multiple speakers) but they're not growing as quickly.

And I will tell you that, obviously, we're not happy with Denver and our inventory levels have been growing at a much slower pace in the Denver market.

And for some reason, that market has been a tough market for the last couple, three years.

All right.

Very good.

Great quarter.

Carl Reichardt with Wachovia Securities.

Good morning, guys.

Just some numeric clean-ups since my brethren got the most of my big questions.

The cash build in the quarter -- is that largely related to the commercial land sale because it's significantly higher than we normally see as a percentage of assets during the quarter.

Certainly, the land sale was in the month of March, so that cash was available.

We also had a $200 million debt maturity on April the 1st that we wanted to make sure we had cash available to repay as well.

So certainly (ph) reflected.

Sure.

I understand.

And then just lastly, the 6 million in income on the other expense line, that's the swaps.

Is that right?

Yes, it is.

Okay, great.

Thanks, guys.

Steve Fockens with Lehman Brothers.

Good morning.

Just one question.

If you look at margins and/or returns on average in the Texas and Colorado markets versus your Company average, how would you quantitatively, if you could, but qualitatively, if you're likely, where would you place those?

Kind of at Company average, slightly below, significantly below?

I would put Texas slightly below and Colorado slightly below that.

Okay.

Thank you so much.

Timothy Jones from Wasserman & Associates.

How are you?

A couple things.

First of all, where was that piece of land, commercial land you sold?

It must not have been in a really hot market, because you said your margins on that were below the residentials.

Which is fairly -- not often the case.

Just to clarify, the margin on that piece of land was less than the average land sale margin that we reported for the quarter.

So land sale is not home sales.

Yes, I understand that.

And that was (multiple speakers)

What market was it in?

That was in our West region.

Where?

There's a difference if it is in San Diego or Fresno.

Tim, we do have a confidentiality agreement with the buyer.

And so we're not at liberty to disclose exactly which market that was in.

But it was not in Fresno.

Beautiful downtown Fresno?

Never mind.

I'm not sure the whole downtown Fresno would sell for that much, but anyway!

Just joking.

Anyway, (multiple speakers) digress.

What are you doing to curb speculative units, especially in Las Vegas and Phoenix?

I mean I just talked to NBC (ph) and they're not using -- they were talking about raising the down payments, trying to at least in those markets and curving potential homebuyers.

You know very well that you can be a second homebuyer and put one mortgage in your name and the other in your wife's name and they won't pick it up on the mortgage application.

Well, actually, Stacey can explain some pretty simplistic approaches that we take.

Right.

We do have clauses in our contracts that people are signing that -- where they say that they are not buying the home for investment purposes.

We also have the Realtors sign that they are not bringing in someone who is going to be an investor in the property.

In a lot of locations, we'll do record searches to find out if they own another home in the area.

And if there's not a contingency on the contract, then we'll basically call and ask that question.

If people go to the decorator centers and don't put any upgrades in the home, you can kind of identify investors that way.

And what have I overlooked?

That's really pretty much it in most of our markets.

Adding that substantial down payments on any changed in your designs or the decorator finish (ph)?

We're not really -- one of the beautiful things about our business is about half of our business is production housing and the other half is the customization of production housing.

So the bottom line is, we get real -- I think we get a clearer picture than other builders because a lot of our customization of production housing, the people spend a lot of money on upgrades.

So if you have someone coming into the model and buying a customized production home from D.R.

Horton and they're not getting any upgrades, that's pretty much a red flag they want (ph).

Right.

And when people do make those upgrades, they generally put down somewhere between 50 and 100% of the upgrades at the time they select the upgrades.

So we do have substantial earnest (ph) money deposits and option deposits from our customers.

And that's why, if you look at our cancellation rate relative to other builders, we run one of the lowest in the industry.

Well what percentage?

There are a lot of legitimate buyers that are stretching for a home.

You know it as well as I do they just can't afford upgrades that are still not speculators.

How do you sort of check one out against the other?

With the records on -- if they own other homes or what?

Well, and that's what we've done in Clark County for a number of years in the Las Vegas market.

We simply search the Deed of Records for Clark County and find out whether or not there is a home in the wife's name, the husband's name, or whoever is contracting to buy the home.

And I think that's probably the most efficient way to do it.

But secondly, these Realtors who are signing an affidavit that they're not representing an investor, they are licensed in all of these states.

And the bottom line is that they could lose their license if they sign an affidavit representing that they are not representing an investor when they are.

On the other side of the coin, some investors are good buyers for us.

Right.

There's a total difference in an investor who's looking to buy a home and basically sell it the day after they close.

And that's really who we don't want to sell to.

We don't want to be competing with our own home when we're selling new homes.

Furthermore, we don't let our buyers trade our paper.

Bottom line is you sign a contract, you must close the house.

You can't just assign the contract to somebody --

Don't (ph) allow (ph) that very good.

You cannot assign the contract?

No, sir.

You must sign -- you must close the contract yourself.

You cannot flip the paper.

In Naples, I've seen homes sell twice in one day.

So they can't do that there?

We don't do that in any of our markets.

You contract a buyer home, you must close it.

You cannot assign the contract to someone else.

That's very good.

And these -- I know that these questions -- most builders are doing it on the legality of holding these people -- the sign (ph) -- essentially the buyer that they won't sell it within a year.

And I think Ryland might be going to court on that.

I mean has there been any court case to see whether it is legal or not?

It certainly dissuades the speculators because you tie (ph) them up anyways.

We have not gone to court with anyone.

Nine times out of 10, when you put that cause before the buyer, if they are an investor, most of the time, they'll go someplace else because they don't want to deal with a potential legal issue no more than we do.

So to answer your question, we have not taken them to court.

I do not know, but our attorneys tell us that in some states it's enforceable, in other states, it's not enforceable.

But the bottom line is if we ask them to sign it, that basically dissuades most of them from signing the contract.

The most interesting thing that I haven't heard is you said the Realtor could lose their license if they knowingly do that and sign that.

I've never heard that before.

Yes, Realtors are licensed in virtually every state that I know of.

And if they sign an affidavit, they can lose their license.

That's very interesting.

Thank you.

William Knobler with Atlanta Softnas (ph).

Thanks again -- another very good quarter.

I want to go back to the comments about gross margin.

Clearly you're using prices in markets where you can to emphasize profitability versus volume.

In your next year's forecast, '06, where you're hoping to sell 60,000 units, whatever the margins shake out this year, would you just in your plan assume further improvement and do it without further price increases?

In our plan, we always assume flat pricing year-over-year.

And for our gross margins, we would generally plan to show the 10 basis point improvement that we talked about, not from pricing power, but simply from being able to leverage our costs further.

Right.

And in the financing that's taking place in the first half, have you noted any change -- more ons, more whatever as the buyers try to adapt to the higher prices?

This year in the second quarter, we ran about 33% adjustable rate.

Last year, we were running 27%.

But in the first quarter, our ARMs were up over 35%.

So we've actually seen that trend down a little bit this quarter.

And are you planning to expand in your MSAs -- I think you're at 63 MSAs; is that correct?

We're now at 67 as of this press release.

And how would the 67 compare with say a year ago?

We were in 51 a year ago.

Okay.

And my last comment/question -- you know, your multiple is 7 times.

You're doing everything possible that anybody could think of, whether it's sales, earnings, etc., backlog.

I understand you want to put your money in land rather than buy back stock.

But how do you view a 7% payout in your dividend relative to your forecast earnings, particularly at a time when dividends have a 15% tax rate?

Pretty pathetic, I think!

I would agree with that.

And I think it's all well and good and I'm very much in support of your aggressive expansion program and all the things you've done so well.

But it seems to me that in terms of shareholder return, one servicing would be a dramatic increase in dividend; a stock split is just more paper.

So you might think about that.

All right.

Clearly, I would say to you -- well at a 4-for-3 stock split translates into a higher yield.

Right.

One thing we usually do with our stock splits, although we've not yet declared our next dividend since the stock split -- is we continue to pay the same per-share dividend after the split.

So if we did a 33% stock dividend, theoretically, that could translate into a 33% increase in your dividend.

And further, I would say to you one of the things that Horton has done over the last three years is we have slowed our growth simply because we didn't feel like we were getting paid for our 32% pager (ph) on our EPS over the last ten years.

And so the bottom line is that's why we told people we're only going to grow 10 to 15 % on the top line and 15 to 20% on the EPS line.

I happen to be a firm believer -- and I guess the market will prove me right or wrong -- that over the course of the next couple of years that we and the rest of the major players in the home-building industry should experience a nice multiple expansion.

That's just my feeling and that's how we're positioning the Company, although we're not over-expanding the Company relative to our current returns that we're receiving.

You know, to end this conversation, I agree with you 100% and it's been a great investment.

But when I look each quarter at the so-called dry powder, which is increasing -- and as we both know, your debt is about to become investment-grade any minute, it just seems to me that you've perhaps lagged a bit on what you could pay out to shareholders.

Will it change anything overnight?

Probably not, but it will certainly help over the longer term.

Keep up the good work!

Thank you, Bill.

I appreciate the comment.

Jeremy Pinchot with Monness, Crespi, Hardt.

Hey, guys.

Another good quarter.

Most of my questions have been answered, but just real quick, and this might be too market specific, but is there anything going on in South Florida regarding the possibility of Miami Dade moving that urban development boundary?

We have not a lot of activity in the Dade County market, so it wouldn't substantially affect just.

We're further up in the Palm Beach and Broward County area.

So if they move that out, you wouldn't foresee that having a significant impact on your business?

No, sir.

No, sir.

Okay.

Well, thanks again.

Frank Milano with Strategic Investor Relations.

Good morning and congratulations on a strong quarter.

I appreciate you taking my call.

You alluded earlier to the basis of my question, which is the fourth division that you're starting around Panama City and Pensacola, Florida -- alluding specifically to a press release that was issued by the St. Joe Company on March 1st suggesting that they had sold you 83 homesites.

Could you give color on that?

Has that transaction closed?

Were those lots acquired or are they optioned?

And then ultimately, directionally, how do you see Northwest Florida playing into your Florida growth plans?

First of all, we've entered into a contract to purchase those; that's on a take-down basis.

Secondly, I look at Northwest Florida and I think it's a nice expansion to our existing Florida operations.

I don't perceive that Northwest market to be anywhere near in substance to Jacksonville, Orlando, Tampa, and Fort Myers and Naples.

It's a smaller market.

It's a wonderful market, good demand.

It's just hard to get there right now.

And as you may or may not know, the St. Joe Company is trying to get an airport approved there.

And I truly believe until that happens and it gets built, it's just a tough market to get to.

It's driven largely by people coming out of Georgia, even Texas, Louisiana and Mississippi, so I don't think the market can grow as much as people would like for it to grow, just simply because of the access to the market.

Do you see other specific areas when you talk about your fourth division, coastal communities, resort properties, any color and your thoughts on how to develop that space?

Well, are you speaking specifically in Northwest Florida?

Yes.

What we try to do in all of our markets is focus 80, 85% on the first and second time homebuyer.

Based upon the price of land in that Northwest Florida market, I think it's going to be more on the second time homebuyer.

Simply because of land prices are going to drive the end unit prices to be probably well above $200,000.

So when you talk -- I'm sorry.

So it's going to focus more on the second time homebuyer.

Okay.

And as you talk, a fourth division then, is that expected to drive 2006 more than 2005?

Absolutely.

We're going to have virtually nothing in 2005 out of that market.

Okay.

Thank you very much.

Tony Campbell with Knott Partners.

Good morning.

I am presuming, because you appear to be more careful maybe than some of your competitors in trying to discourage speculation, that with regard to I/O mortgages, (technical difficulty) a very small or insignificant percentage of your ARMs.

What are they and am I correct in that?

And what percent of your ARMs would be I/Os?

Stacey can answer that question in a moment.

But I'd just like to say I don't know for sure what our competitors are doing or not doing on the speculation side.

All we're trying to do in our Company is to make sure that we have a solid backlog and have as few investors in there as we possibly can.

So that's really what drives our businesses, when we look at our backlog, we want to have a high confidence in that number.

Yes, and I'm not sure the interest-only are specific to investors either.

What we're seeing right now is about 25% of our mortgages are interest-only.

And I presume that the FICO scores are much higher.

And if you could give us some flavor for how much higher they are.

I'm not sure we have that information for this quarter yet, Tony.

Last quarter, the spread was about 20 to 30 points on the FICO scores were going to be higher for adjustable-rate in general.

We didn't actually have that broken down for interest only.

But simply because of the type of product it is, it is going to require a higher credit score.

Thank you.

Seth Glasser with Barclays Capital.

Good morning.

I just wanted to actually ask a question regarding the Moody's positive outlook.

Just curious as to where your discussions are with Moody's.

And I guess also sort of what your personal timeframe is for the investment-grade rating for the possible upgrade?

Sort of what your targets are.

And I guess just thirdly, if there's anything specifically that Moody's still wants DHI to do before that upgrade might happen.

Let me answer the second part of that question and I'll let Bill answer the first and third (multiple speakers).

I'm trying to have a type B personality on this call, which I've so far maintained.

I can tell you the second part of your question is, it's way overdue.

And we've done everything and more that we promised.

And Sam Fuller and Bill Wheat have been up there.

We've been up there many times.

And I still will say it's a travesty that we haven't been upgraded simply because we've far exceeded everything we told them we were going to do.

And I would tell you in terms of my timing expectations, I just lost a bet, because I had a bet with our CEO that we would be upgraded by the end of March.

We do continue to have ongoing conversations with Moody's.

We've continued to deliver everything and more that we've promised.

And we will continue to work with them and until they are convinced that it's time to rate us investment-grade.

I mean to the extent that you're able to discuss it, are they still hung up on the large bank line and the potential for you to lever up for acquisitions?

Is there some way or something that they're looking for from you to sort of get over that hump?

We've discussed that with them extensively.

They fully understand our use of capital and the way that we go about allocating our capital.

They understand that we will not totally disavow not doing acquisitions.

But the record stands that we have not done an acquisition for three years.

And to the extent that we do do one, it will be one that certainly earns a good return for our shareholders and does not (technical difficulty) leverage out of our intended target range.

Totally understand that.

To answer your question directly, I think that does concern them.

But there's really nothing else specifically at this point that they're looking for you to do?

I mean it seems like you've sort of met their targets for the most part.

I think we've exceeded every target they (technical difficulty).

Okay.

We'll continue to keep our eyes on the tape then.

Thank you.

Joel Locker (ph) with Carlin Financial.

Hi, guys.

Great quarter.

I just wanted to say that first.

And actually, I was wondering what's for the third-quarter guidance of $0.98 to $1.02, what amount of closing are you just -- you know, rough estimate are you assuming?

Yes, we basically look at the historical range of what we converted as a percentage of our backlog, and that's generally somewhere between about 56 and 62% for the quarter.

Like last year was 60.9%.

Do you see it somewhat the same or a little higher, just to catch up to get to the 50,000?

Again, I pretty much ran the entire range to come up with the guidance.

So something in the middle like 59%, between your 56 and 62 historical?

Yes.

All right.

Thanks a lot.

Susan Berliner with Bear Stearns.

Yes, actually, my question has been answered.

Thank you.

Jerry Torbin (ph) with Litchfield Capital.

Good morning, good quarter.

I just had a quick question.

You seem to be pretty comfortable with the '05 outlook that you've given having completed 83% of that.

I was hoping you could give a little bit more color on your '06 outlook.

I will tell you that we have our lot position is in place for '06.

And we anticipate -- we're in the process, as we said earlier, we've got 17% more to fill the bucket to complete '05.

And we frankly, in some of our markets, are beginning to work on '06.

We feel very comfortable with the 60,000 unit projection for '06.

And not a major hurdle for the Company.

When you say you're beginning to work on it, is there a percentage that is completed comparable to the 83% -- do you have a percentage number (multiple speakers)?

No, sir, we don't.

Okay.

And then going back to the $3200 number that you gave as far as improvements on homes, where do you see that going?

Is there a cap on that number in your mind?

Is there a goal for that number in your mind?

Our goal is to try to increase that about 10% per unit per year.

Last year, I think we ended up with somewhere around 28, 27, $2800 per house.

And so basically, we're trying to increase it about 10% a year.

As I've said many times, not only are we entering into contracts on materials we have not entered into before, but we're also increasing our volume.

And as we increase our volume, we're getting better pricing and better discounts and better rebates.

So as we continue to penetrate our markets deeper and increase our portion of the U.S. home-building market, I see that number continuing to increase about 10% per unit per year.

One thing that we talk about internally is our theme at the end of the year was boldly going where no builder has gone before.

We're getting volume levels that no builder has hit.

So we don't actually know of a top side to that dollar that we can achieve in terms of savings.

Okay.

Thank you very much.

Nice quarter.

Mike Kender with Citigroup.

Most of my question have been answered.

I just wanted to follow up on rating agencies.

You talked about Moody's.

Any update on S&P?

I mean they're even further behind the curve at stable?

Yes, they are a bit further behind.

As you know, we got our upgrade from them about a year ago.

So we continue to talk with them and try to move them towards investment-grade as well.

But we would expect they would be behind Moody's on a timetable.

I think one positive factor was Beth came back from her leave of absence.

So at least she's back in the chair and knows our Company well, so hopefully we can start focusing on upgrade with her.

Do you guys have any meetings scheduled near-term with either agency, or is there anything we should look forward to?

Yes, we are scheduling meetings with them later in this year.

We update them quarterly and have phone conversations every time we have some new numbers to share.

So we do have meetings scheduled later in the year.

Okay thank you.

William Mack with Standard & Poor's.

Hi, I'm calling from Equity Research.

Thanks for taking my question.

I just wanted to follow up on the 17 to 19% cancellation range you gave for the quarter.

How much, if any of that, includes contracts that you guys have canceled for whatever reason, but including because they may not have sat -- the buyers -- may not have satisfied some of the new clauses you put in?

There's probably some portion of that that is a cancellation that we would initiate.

But the majority of those are not.

They're going to be cancellations in the first 30 days of the contract, and they're generally qualifications for financing cancellations.

Okay, thank you.

And one follow up on -- you may have mentioned it earlier, but of the -- I think it was 120 million-ish in land sales, how much of that was that one project?

That commercial land project?

We didn't give a specific number for the revenues, but traditionally what we run per quarter is about 25 to 30 million.

So if you take the differential there, you're pretty close to the size of that one land sale.

Okay.

Thank you.

Alex Barone from JMP Securities.

Related to your guidance for either next quarter or for the rest of the year, what are you guys assuming in terms of your SG&A?

Is that going to sort of stay at similar levels to last year or maybe just for the year?

I mean can you guide us directionally there?

Yes, for the year on SG&A, we want to keep it in the low 9% range.

And we're pretty much right on target with where we were last year through the first six months.

Okay.

But it wouldn't necessarily be right at 9% or I'm saying below.

It could be slightly higher or it could be slightly less.

There are no further questions at this time.

Mr. Tomnitz, do you have any closing remarks?

Thank you for joining the DHI Q2 conference call and we appreciate your assistance.

Good bye.

This concludes today's conference call.

You may now disconnect.