霍頓房屋 (DHI) 2005 Q4 法說會逐字稿

Good morning.

My name is Ailene 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 fourth 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 session. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Tomnitz, you may begin your conference.

Thank you and thank you for joining our call this morning.

With me is Sam Fuller Senior Executive VP 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's believes any 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 under take 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 the D.R.

Horton's report on Form 10(K) and the most recent Form 10(Q), both of which were filed with the Securities and Exchange Commission.

We will also discuss some nonGAAP measures, reconciliations to do nearest GAAP measures can be found on the Investor Relations page of our Web site under the presentations tab at www.drhorton.com.

Don?

Thank you, Stacey.

D.R.

Horton, America's Builder, accomplished what no other builder has ever accomplished, closing more than 50,000 homes in a single fiscal year.

In fact we closed 51,172 homes.

We also made history by generating more net income in a single quarter, over $500 million, and more net income in a fiscal year, $1.5 billion.

Both of these numbers are more than has ever been recorded in home building history.

We dedicate this conference call to our 9,000 employees, our subcontractors and vendor who's accomplished this under dire circumstances.

We pride ourselves on never giving our shareholder as weather report but this industry record was accomplished despite numerous natural disasters in three of our most important states.

Hurricanes in Texas, where we are the number one builder.

Hurricanes in Florida, where we are the number two builder.

Fires in California, where we are the number one builder.

These occurrences forced our people to react like never before, react in the absolute heat of battle, and in our most -- and in our most important quarter and even down to the most important month of the quarter and the fiscal year Their are heroes in construction continuing to convert the highest percentage of backlog in the industry.

But their are also heroes in our mortgage and title operations where people were required to move offices and IP equipment due to the fires and hurricanes and extend closing hours late into the night to close a record number of mortgages.

Further our IT department was forced to secure alternative sources of communication due to major switching stations being threatened in New Orleans.

Our Houston division was evacuated four days to avoid the hurricane.

Then they continued the closing process to hit their numbers with only five days left in the fiscal year.

The bottom line is everyone performed in a superior manner in a very difficult period.

We applaud each one of you.

You are clearly the leaders in the home building industry.

We have always told investors that the reason we outperform our peers is one reason and one reason only, our people.

You are clearly the best.

Thank you.

D.R.

Horton, America's Builder completed it's 28th consecutive year of growth in increased profitability.

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

D.R.

Horton America's Builder continues to distance ourselves from the competition as we are the first builder to sell and close more than 50,000 homes in a fiscal year.

In 2005 we achieved fiscal year records of new sales orders, sales backlog, revenues, homes delivered, net income and earnings per share while continuing to grow the bottom line significantly faster than the top line.

Key accomplishments for fiscal year 2005 include home building pretax income increased 51% to $2.3 billion.

Net income increased 51% to $1.5 billion, the highest annual earnings in home building history.

Stacey?

Diluted earnings per share increased 50% to $4.62.

Shareholders equity increased 35% to $5.4 billion.

Don.

Sales backlog, our future revenue increased 28% to a year end record $5.8 billion, consisting of 19,244 homes.

Consolidated revenues increased 28% to $13.9 billion.

Gross margin on home building revenue improved 250 basis points to 25.6%.

Stacey.

Our home building debt to total capitalization net of cash improved 670 basis points to a record low of 32.2%.

Return on average shareholders equity increased 370 basis points to 31.6%.

Don.

EBITDA coverage ratio increased to 9.1 times from 7.8 times, return on net capital increased 180 basis points to a record 20.2%.

Our fourth quarter highlights include net income increasing 61% to an all time Company record, $563.8 million, the highest quarterly earnings in home building history, diluted earnings per share increased 59% to $1.77.

Stacey.

Net sales orders increased 33% to $3.8 million on 13,950 homes and our consolidated revenues increased 45% to $5.1 billion.

Don.

Homes delivered increased 38% to 18,622 homes closed.

Gross profit margin on home sales revenue improved 160 basis points to 25.2%.

Our fourth quarter sales increased 33% to $3.8 billion on 13,950 homes sold, up from $2.8 billion on 11,105 homes sold in the year ago quarter.

All of our regions reported double-digit increases in sales dollars and units this quarter.

We are a double-digit company.

Net sales orders for the year increased 28% to $14.6 billion on 53,232 homes, up from $11.4 billion on 45,263 homes in 2004.

Our strong sales contributed to a fiscal year end record backlog, 19,244 homes, with a sales value totaling $5.8 billion, a 28% increase over last year.

We are focused on delivering this backlog while continuing our strong sales performance to ensure our 29th consecutive year of higher revenues and profits in fiscal year 2006.

And as an additional point, we enter fiscal year 2006 like we have each of the past ten fiscal years with over 50% of our projected closings in fiscal year '06 either sold and or started; right in line with our history.

Stacey.

Our asset concentration corresponds with our top six home buildings states, percentage of our assets in those states are as follows;

California with 28%, Texas, 12%, Arizona, Florida and Nevada was 9%, and Colorado with 8%.

Our sales dollars increases for the fourth quarter in our top six home building states are;

California was up 4%, Texas was up 50%, Colorado, up 23%, Arizona, up 20 -- 55%, Nevada, up 78%, and in Florida, sales dollars were up 55%.

Don.

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

New Mexico, up 125%.

Charlotte, up 91%.

Hawaii, up 65%.

New Jersey, up 55%.

Birmingham, up 51%.

The Washington D.C. area, up 51%.

No other report from this market.

Stacey.

We now operate in 74 markets in 25 states.

We're proud to announce our entry into the following new markets during the quarter: Olympia, in Washington State;

Delaware Valley, adding the state of Delaware; and Baton Rouge, Louisiana, a new market and new state for us.

Don, I'm sorry, Sam.

Thank you, Stacey.

Our fourth quarter home building revenues increased 45% to $5 billion from $3.5 billion in the year ago quarter, with homes closed increasing 38% to 18,622 homes.

Our average closing price for the quarter was up 5% to $265,500 as a result of continued pricing power in many of our markets and as a result of our continued asset investments in markets with higher than average sales price such as Washington D.C., Hawaii, Seattle and Portland.

For the 2005 fiscal year total home building revenues increased 28% to $13.6 billion from $10.7 billion in fiscal year 2004.

This reflects a 17% increase in homes delivered to 51,172 homes and a 9% increase in our average closing price to $261,400.

Bill?

Our gross margin on home sales revenues in the fourth quarter increased 160 basis points to 25.2% from 23.6% a year ago.

For fiscal year 2005 our home sales gross margin improved 260 basis points to 25.4%, from 22.8% in fiscal 2004.

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

In addition interest and cost of sales decreased by approximately 70 basis points in the fiscal year 2005 compared to the prior year, reflecting our continued leverage improvement and refinancing efforts over the past two years.

Sam.

Home building SG&A expense for the fourth quarter was a record low 8% of total home building revenues compared to 8.1% a year ago.

For the year our home building SG&A expense was 9% of revenues consistent with the prior year.

We continue to focus on being the low cost operator in the industry and our goal is to continue to maintain our SG&A expenses in the low 9% range.

Other income for the quarter and for the year is primarily related to the change in the fair market value of our interest rate swaps.

In June we announced the call of our nine and three eighths notes due 2009.

These notes were redeemed on July 15 and we incurred $4.4 million of interest expense in the fourth quarter related to the call.

Bill.

Our EBITDA margin improved 190 basis points in fiscal year 2005 to 19.3%.

Our EBITDA coverage ratio in fiscal 2005 improved to 9.1 times from 7.8 times in fiscal 2004.

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

Return on net capital this year was 20.2%, a 180 basis point improvement over the 18.4% fiscal 2004.

Financial Services revenue for the quarter increased 54% to $78.6 million from $51.1 million in the year ago quarter.

For the year Financial Services revenue increased 29% to $235.1 million from $182.8 million in fiscal 2004.

Financial Services pretax income for the September quarter increased 127% to $41.3 million from 18.2 million last year, with a margin improvement to 52.5% from 35.6% last year, an outstanding performance.

The margin improvement was driven primarily by leveraging our SG&A with the quarters origination volume.

For the year Financial Services pretax income increased 41% to $105.6 million from $74.7 million last year.

We are extremely proud of this financial performance as well as the superior support that our Financial Services operation continues to provide our home builder.

They are clearly a cut above the rest. 93% of our fiscal 2005 Mortgage Company revenue is captive reflecting our continued commitment to focus on profitably supporting our homebuilders business.

Our Company-wide capture rate improved to approximately 63% from 61% a year ago.

And our average FICO score was 719 this quarter, and 717 for the year, compared to 716 in fiscal 2004.

Sam.

For the quarter our consolidated net income increased 61% to $563.8 million, from $349.6 million in the year ago quarter.

In fiscal 2005 net income increased 51% to $1.5 billion from $975.1 million last year.

Diluted earnings per share for the quarter increased 59% to $1.77 from $1.11 in the year ago quarter.

In fiscal year 2005 diluted earnings per share increased 50% to $4.62 per share from $3.09 per share in the prior year.

Our home building leverage ratio net of unrestricted cash improved 670 basis points to 32.2%, an all time record low for us, from 38.9% a year ago.

Our goal for fiscal year 2006 is to maintain our year end home building debt to cap ratio in the low 40s or lower.

We are very appreciative of Moody's finally recognizing our investment grade balance sheet.

Our lot and land position at year end is approximately 346,000 lots owned and controlled which represents approximately a four-year supply of land. 45% of these lots are owned and 55% are optioned.

Stacey.

The Company is raising the diluted earnings per share guidance for the year ended September 30, 2006, to be in the range of $5.22 to $5.32, based on approximately 321 million diluted shares.

This increased guidance reflects the strength of our operations and our record backlog and is based on approximately 58,000 homes closed in more than $15.5 billion dollars in consolidate revenue.

For the past two years we have stated that our goals are to grow revenues 10 to 15% through our earnings per share of 15 to 20% and to improve our operating margin 10 basis points per year.

Therefore for fiscal year 2006 our preliminary guidance is to increase revenues 12% to more than $15.5 billion increase earnings per share of 15% to approximately 5.22 to 5.32.

Returning our guidance for the year based on approximately 58,000 homes closed and we are also assumed a flat pricing environment.

While those assumptions may seem conservative today, we are 12 months away from the end of fiscal year '06 and we've historically increased our guidance throughout year as we have more clarity on volume and operating margins.

For Q1 of fiscal year '06 we are reiterating our diluted earnings per share guidance of $0.90 to $0.95 per share on approximately 319.5 million shares, which will be an 18 to 25% increase over the $0.76 reported in Q1 of fiscal year 2005.

This guidance is based on a historical first quarter backlog conversion rate which has been in the range of 54 to 59%.

We expect to be at the lower end of this range for the first quarter after our record backlog conversion rate in the fourth quarter of fiscal year 2005.

We expect to earn approximately 35 to 40% of our estimated fiscal year 2006 earnings per share in the first half of the year with the second quarter slightly higher than the first quarter.

Don.

Notwithstanding these superior numbers for 2005, not only for D.R.

Horton but for the industry as well we want to share with you some of our plans for the future, D.R.

Horton, America's Builder.

We plan to continue to focus on the basics of the home building business and distance ourselves from our competitors.

By capitalizing on our industry leading home building machine.

Our 51,172 homes closed in fiscal year '05 on on a trailing twelve-month basis was 18% more than the number two builder and 71% more than the number five builder.

Our SG&A was again the lowest in the industry.

We plan to keep it there.

Our operating margins were again the highest of the top five builders.

We plan to keep it there.

Our pretax income of fiscal year '05 on a trailing twelve-month basis was 13% more than the number two billed builder and 118% more than the number five builder.

Our trailing twelve-months backlog conversion rate was the highest of the top five builds.

We plan to keep it there.

We have high and the highest financial transparency in the industry.

We have no unconsolidated JVs.

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

Our earnings are consistently driven by our core home building business with only a small but important impact from Financial Services and land sales.

We have a unique product niche with our customization of production homes representing approximately 50% of our revenue resulting in less exposure to increasing -- increasing interest rates should they continue to increase, and also most importantly, given our buyers exactly what they want.

We have expanded our geographic and product diversification.

Our speci -- specific goals include three years ago we started giving I was five-year forward look.

This is the third year we are going to give you a five-year forward look.

During the next five years on an annual basis we plan on growing the top line 10 to 15% annually, continuing to grow the bottom line 15 to 20% annually, and fiscal year 2006, closing more than 58,000 homes and generating revenues of more than $15.5 billion.

We continue to maintain our disciplined growth approach by implementing reasonable operating inventory caps for the fourth consecutive year.

We maintain our commitment to keep our debt to cap at investment grade levels and we maintain our commitment to continue to have the lowest SG&A in the industry.

Finally D.R.

Horton, America's Builder had the goal of being the first builder to 50,000 units which we accomplished in fiscal year '05.

We now have the goal of being the first builder to 100,000 units which we will accomplish in fiscal year 2010 while continuing to improve our financial metrics at all levels.

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

Clearly D.R.

Horton's 28 year decentralized approach to the home building business with centralized controls has proven to be the superior home building business model in America.

This concludes our presentation.

If you have any questions we will entertain them at this time.

[OPERATOR INSTRUCTIONS] Ray, JPMorgan

Hi, this is Ray [holding on] for Mike.

Wanted to hear you comment a little bit more on your regional order trends, more specifically Phoenix, Florida, the East and the West Coast, and if you can comment on October order trends as well?

Well, first of all our -- our -- both the East Coast and West Coast orders continue to be strong.

As we indicated tower a double-digit company and continue to drive double-digit sales increases in those areas.

Phoenix continues to be a strong market for us and Florida a stronger market for us.

As I said in New York a couple of weeks ago when I was there, we are not seeing a lot of the weaknesses that some of our competitors are seeing.

We see our markets continuing to be strong.

As I said many times before, each of the last five years, I've said I'm not sure we are going to have as much pricing power in the next fiscal year as we've had in the past fiscal year.

I've been wrong for the last five years and I also believe we won't have as much pricing power in '06 as we had in '05.

I could be wrong, I could be right.

But never the less our numbers infer that we'll have a great year in '06.

Okay.

Also if you can comment on the impact of raw materials on your operating margin and what kind of measures you are going to use to offset that in the coming year?

Our raw materials as I like to say, we have prices going up on a daily basis and we have prices going down on a daily basis.

One of great thing we have going for the Company today is, is we can prove to our vendors and our suppliers that we have, on a historical basis, grown our business and given them more business each and every year.

Clearly with our goal to go to 60,000 -- 58,000 units in '06 and 100,000 in 2010 we believe we can still squeeze additional economies of scale out of the business, achieve those.

If you look at lumber prices as -- as a specific example, post hurricane Rita, the number of prices sky rocketed, wasn't related to demand at all, it was just totally speculation, and the bottom line is they've come back down significantly since then.

So what our commitment is to you that on an annual basis that we will increase our operating margins 10 basis points a year and we believe we can do that by just achieving greater economies of scale from our existing contracts with our existing vendors.

So do you expect your SG&A to go down a little bit over the next couple of years as well?

One thing on our SG&A next year this will be the first year we are expensing stock options and we actually expect about a 10 basis point impact on our SG&A in fiscal year 2006 compared to fiscal year 2005.

Okay.

Thank you, 2005.

Margaret Whelan, UBS

Good morning, folks.

Tough quarter and congratulations on the year and on reaching your goals.

Trying to ask a bigger pigger -- picture question really which is have you thought about levering up your balance sheet and buying in some stock?

As David Oldmeyer, as you know, in Orlando says, you just got a lot of Margaret.

You are telling us how super you are, the Street is not recognizing it.

Let me say clearly what I said to your conference a couple of weeks ago.

One, when our stock was trading at $28 a share that was obviously a very compelling buy.

Clearly I would say to you that where our debt to cap is at 32% and our dry powder that we have present we are in a stronger position to buy back our stack -- stock than we've ever been in the -- in the future and our thinking on it as I told you has changed dramatically which means that there's a strong possibility that we could be start -- we could start buying back stock once we get out of this blackout.

Okay.

The last question I have is just on your gross margin.

Have you thought and -- I know you just answered the question, but what was the biggest drag on the margin relative to your expectations for the quarter?

Bill?

If you look at the third quarter versus the fourth quarter margin, our home sales gross margin declined by 110 basis points.

It was 25.2% in the fourth quarter versus 26.3 in the third quarter.

And this sequential decline in margins is due solely to a $92 million deferral of home sales revenue that was required to -- for to us record by FAS 66 and FAS 66 prescribes very specific guidance for profit recognitional on sales of single-family residential property.

This revenue deferral represents gross profit dollars associated with homes closed during September in which the buyers finance their home purchases through D. H. I. Mortgage and they used loans that required less than 5% down payment and D. H. I. Mortgage was still holding those loans for delivery to committed investors as of September 30.

This deferred home building profit will be recognized as D. H. I. Mortgage delivers these loans over the course of fiscal 2006.

The exact timing of the reversal of this will depend on our closings volume at the end of each quarter and how quickly we package and sell D. H. I. Mortgages loans to our committed investors.

This deferral had a 140 basis point impact on gross margin, on home sales gross margin in the fourth quarter.

So excluding the FAS 66 deferral our home sales gross margins were 26.6% in the fourth quarter which would have been up 30 basis points from the third quarter.

It's still flat sequentially though despite near two billion of the incremental revenue?

Right, at our revenue base without that deferral we would have been 30 basis points up for the quarter.

Sequentially?

Sequentially, yes.

It was 26.6 on the home sales line versus 26.3% in the third quarter.

Thank you.

Greg Gieber, A.G.

Edwards

I would say great quarter but I think the one person probably outperformed you was Stacey and I just want to publicly congratulate her for what she has done, I hope mother and child are doing superbly.

Turning to your business, first can we talk about your closing ratio which was as you said a record high.

Was there anything in particular that drove that?

Well, we had a lot -- we had, as [Horton] said we had the homes sold and we were in a pr -- we're in a position to deliver them and our people simply delivered what we had sold.

When you look at what you are selling has the percentage of homes you sell before construction starts versus the sales you make once you start a construction changed any and could you just tell us what that ratio is to begin with?

Yes, we generally target to keep it between 25 and 35% fixed.

That has not changed for us as a Company.

That's something we monitor very closely and we are not really interested in having that change for us as a Company.

So that's been a consistent part of our business plan.

As we said many times before the one thing that you have to understand about our specs is 90% of our specs on a historical basis are sold before they are completed and that continues to be the way it is today.

The other thing we do a little differently than some other builders is as soon as we pull a permit we count that house as a spec.

So we may not have any other dollars invested other than the lot itself and the building permit.

Some builders wait until they get to the foundation stage or even to the framing stage.

Understood.

Just how much are [quote] these spec houses under construction up from a year ago?

Well as a percentage of our inventory they are not up at all.

I'm just saying -- no absolute number, just trying to get a sense of your growth intentions.

Our overall inventory is up 30 percent, up in the 30% range.

And by the way we age our inventory every month and as Shannon just pointed out to me we have less than 100 homes that have been completed and unsold for a period greater than a year and virtually all of those are models simply because by the definition our models are open greater than a period of a year.

We get ready to sell the model we turn it back into inventory and it's been in existence for larger than -- longer than a year.

So we have less than 100 homes, most of those are models, completed and unsold, for a period greater than a period of one year.

And finally, can you talk about your use of promotions, I know they are ongoing constant in this industry, but a year ago I got the impression they were well below normal.

How would you describe your promotional activity now and how it's maybe changed since the summer?

I don't see any significant change in our promotional activity and as I've said many years ago and I'll continue to state when one of the analysts kept asking us about incentives, somewhere in D.R.

Horton land 24/7, 365, we are offering a gold -- a buyer an incentive.

The only thing we know for sure is when we look at our gross margins those incentives are a positive to our gross margins and many times those incentives are built into the cost of the home and many times -- most of the time those incentives don't cost us dollar for dollar what we are providing the buyer.

For instance, we may give someone a $2,000 credit to go to one of our decorating centers and may only cost us $800 when we actually pay for the cost of that incentive.

Understood.

Again, gentlemen, and Stacey, very well done.

Daniel Oppenheim, Banc of America Securities

Thanks very much.

Wondering if you can talk about your five-year plan and how you would think about adjusting that plan in response to any changing market conditions if you would see those or if you wouldn't adjust the plan?

Well, clearly we are a bottom line driven builder.

One of our Horton-isms is we don't build homes for practice.

We have adjusted, as you know, our growth plans over the last three years and the next five years simply because we had a 32% EPS cager over the last 10 years and we had a five or six multiple, not that we are hung up on our multiple, but we are.

But the clear -- the clear indication was, was that the market wasn't paying us for that kind of growth and that's why we ratcheted our growth down to 10 to 15% on the top line and 15 to 20% on the bottom line.

Further I have said many times that if you want our definition of good growth to look at the growth rate on our net income and our EPS line which is typically almost two times what our revenue growth is and that's good growth.

That's our definition of good growth.

Should those two lines start coming closer and closer together then we would start to slow our growth even more.

However I do believe that we can still continue to be a double-digit company in terms of sales, revenue increases and net income increases and EPS increases even in a down housing market.

And I was listening to someone this morning on one of the talk shows, talked about how if even in a downturn, the large public home builders have, on a historical basis, continued to profitably aggregate market share, and that's our game plan.

Great.

Thanks.

Wondering if you can give us a little more guidance in terms of closings over the course of fiscal '06 given the strong backlog conversion in the fourth quarter of this past year, just how you are thinking about the percentage of closings of the 58,000 as we move through the four quarters of '06,.

Right, basically Dan what we are looking to do is realize about 35 to 40% of the closings and our -- our pretax income -- I'm sorry, our net income in the first half of the year.

Again, we will be delivering more of our home in the summer and the fall as we get past the spring selling season.

Thanks.

Is that what you were looking for?

Wondering if there was anything more on a quarterly basis other than that just for the first half and the second half.

Really when we look at the first quarter our historical backlog conversion rate, so if you apply that to our backlog it's been 54 to 59%.

And we do expect to be at the lower end of that range.

Don mentioned at the end of last quarter that we were delivering a lot of homes in Q4 and our troops would be tired.

So basically we delivered even more homes than we have projected in Q4 and so our closings are going to be consistent with what we expected because we had great sales in Q4 but we are probably not going to see our backlog conversion rate at the higher end of that range.

But the one thing that I'd like to point out, because I think we are getting a little bit of, as my 19 years old says, a little dissing today, disrespect for our Q1 number.

But if you look at our Q1 guidance that Stacey has given you, and we've [reinerated] it today, that's still 17 to 25% above our Q1 of '04 and I'm just -- we're just not going to apologize for that number because that's a great performance.

Great.

Thanks very much.

Lorraine Maikis, Merrill Lynch

Thank you.

Good morning.

We were, by the way, probably to be politically incorrect, but we were reading your piece this morning, Lorraine -- this is Lorraine?

Yes.

We can only say I think you got it.

Well, thank you.

Coming off such a high year for -- for deliveries, can you just talk about how you are expecting to grow from this high level next year?

Are you looking for further penetration of existing markets?

Is a lot of this coming from new satellites, higher absorption per community?

Can you talk a little bit about what your expectations are for those metrics?

Well, as Stacey likes to say and Shannon just mentioned to me there's always a bottoms up approach.

The bottom line is, is that we've given our -- our operating areas, our operating region zones, our divisions, Lorraine, the inventory growth over the last three years to produce the type of growth that we are projecting that we are going to have in fiscal year '06.

To answer your question more specifically, most of our growth is going to come from continuing to penetrate our existing markets deeper as well as the fact that we are going in to -- continuing our satellite expansion.

We brought to your attention three years ago our satellite plans.

Bill Wheat's done some calculations.

This year our satellite's represented about 5% of our fiscal year '05 closings and we anticipate that to expand on a going forward basis as we plan on also, as Stacey mentioned to you, entering into more satellite areas.

The other thing is, even though we don't have to do it, we've always said we don't have to color any of our blue states red.

The red states are where we are and the blue states are where we are not, but we have some real opportunities there.

As Stacey mentioned to you, we went into Olympia, Washington and then we've opened up two new states, Delaware and Louisiana.

So as we find our economies of scale continuing to improve and our operating margins continuing to be superior in the industry, we finds many opportunities in markets we didn't see three and five years ago to profitably aggregate other markets as well as existing markets.

And then, just in terms of satellite markets we were intrigued by the Baton Rouge comment.

Can you talk about -- was that decision a post hurricane decision or was that something you were planning on doing prior to that?

It was really a post hurricane decision.

We thought there might be a good opportunity over there or one of our Regional Presidents, Rick Horton, has spent several months over there post hurricane coming through New Orleans as -- and he and his people have identified several key subdivisions over there and we look upon that as a good future demand.

It's interesting, in Texas, back in the 1900s when there was, I wasn't alive, thank God, but back -- Sam was but I wasn't -- but back in the 1900s when the hurricane hit Galveston, that point in time Galveston, Texas was a larger city than Houston.

And post the hurricane, devastating Galveston then Houston became the growth area.

We truly believe that a lot of the growth, a lot of the existing people in New Orleans are moving to Texas -- are moving to Texas, Georgia, and they're also going to be moving to northern Louisiana.

So we look at Baton Rouge, perhaps, as a city which could benefit as Houston did post the Galveston hurricane.

The other thing I find really interesting is we only count and market at the point we are vertical with construction so we actually have homes under construction.

So that shows you how quickly we can move assets into a new market and take advantage of market conditions.

And you've been able to secure land in that region?

Absolutely.

Thank you very much.

Timothy Jones, Wasserman & Associates

Good morning, everybody.

Congratulations, Stacey.

Thank you, Tim.

[Going to ] aggravate me, she had a great deliver but we had 51,000 homes to deliver, too.

I hope your Baton Rouge experience is better than your Andrew experience. [laughter] You're not going to open that anyway, so.

I have no idea what you're talking about.

Oh, I know you don't.

I know you don't.

Remember the mobile home?

Never mind.

The -- a couple questions, first of all you lowered your -- your deliveries by 200 -- 2,000 units.

Is that simply because you basically beat your estimate for this year by roughly 2,000?

Must be clear let's be clear about one thing, please, sir.

We've always said that we are going to do between 58,000 and 60,000 and as recently as a quarter or two quarters ago we identified that number as 58,000.

We had talked about goals of 60,000 but the first time we had actually issued guidance we were at 58,000.

Good.

Well I'm glad you are at least raising the margins to more realistic levels.

So, secondly I -- I am perplexed on how well that you did in your finance.

I see that you had about $7 billion swing in other income.

Is that sale of mortgages or what was that?

Mostly it was profit on our interest rate swaps, as you know.

Thank goodness we are finally getting credit for it since we had to eat it during the time period that we were negative on the swaps.

Okay but most -- even if you pull that out, you had a very nice increase in the mortgage activities and you really only had 2% increase more on a capture rate.

A lot of builders are having down income in mortgages.

I dont know, what are you doing different?

Well one thing we are doing is managing our costs very carefully.

Our finance services operation is there to support our builder and they -- they're -- they know exactly what the builders plans are so they are managing their costs very carefully.

We also manage our interest rate risk there and that certainly helps offset -- offset any risk there and does contribute to the margins.

But you do have the narrowing spread in -- in -- between short term and long-term rates and so forth, it has to be affecting you like everybody else.

Absolutely but we do hedge our whole pipeline once we lock in interest rates and so -- so that helps mitigate any -- any effect of that.

I tell you though, Tim, we have always operated our Mortgage Company as a competitive part of our business.

We've never subsidized that Mortgage Company.

As a result they're out there competing for the business so they have to get leaner and meaner as the mortgage industry gets greater capacity because of lower demand.

So it's just a function of us operating as a true profit center and also their bonuses, by the way, are based upon their profitability which is the same for all the other Division President's in our Company.

One thing we've learned in this Company, you pay them to do it, they will do it and that's exactly what's happening in Financial Services.

Okay.

That's good enough.

I will get back in the queue, thanks a lot, guys.

Ivy Zelman, Credit Suisse First Boston

Good morning, guys.

Congratulations to you, Stacey, and, of course, to your 51,000, Don.

I have to knowledge that.

Great job.

I refer to it as a immaculate delivery because known thought she was pregnant.

I've heard that, Stacey.

It's a good job.

I don't think I was able to put that one off. [laughter] If you guys could just tell us, single-family versus attached, roughly what that mix is and what you think it will be over the next few years?

At the end of last year it was 16% of our deliveries and that was compared to 0% 10 years ago.

And we believe on a going forward basis over the next five years that that could increase to be about 25% of our business.

Okay.

And that would include of course the mid-rise and some of the flats that you are doing?

Yes, and just to be clear, our mid-rise is basically -- are tallest are seven stories right now with three to four underground parking.

Our current plans are to key that at 10 stories or less.

And just for housecleaning purposes for the Mortgage Company, can you give us the [IOs] and arms and break down on that, you gave us the FICO score, as 719 you said.

Yes, Stacey.

We have the adjustable rate information, in Q4 of fiscal year 2005, that was down to 29% from fourth quarter last year which was 37%.

And I don't believe we have interest only on the sheet I am looking at, Ivy, I will have to do a follow up with you on that one.

Okay.

And also looking at another item, incentive, I'm trying to understand how the accounting works.

If -- are you guys running incentives when you normally do them through SG&A or is it hitting costs of goods sold?

It would -- it would hit either costs of goods sold if it's something would that we are providing to the buyer for actually reducing the sales price it would be reflect in the revenue.

That does not flow through SG&A.

Okay so a reduction in revenue for price cuts and then like upgrades on cabinets and counter tops would go in where?

In cost of sales.

Does anything show up for any reason in SG&A on incentives?

The only thing that would show up in SG&A would be direct advertising costs.

And those direct advertising costs wouldn't include the give-aways and closing costs and freebies, those kind of things.

It would not.

That would be print advertising, media advertising.

And in realizing we see incentives more typically at the year end from builders as they close the year, do those orders that receive the incentives, do they show up in the same quarter or when those homes are delivered?

When the homes are delivered.

Okay.

Unless they are specked and they are closing that period, correct?

Right.

And Don, this is a question for you.

Two years ago, I think, you were correct in forecasting very strong continued growth in your Company and you've done a tremendous job in achieving that.

You also indicated you never thought, unless there was something reminiscent of the great depression, that your Company could ever experience flat earnings.

Realizing it's a few years later do you still hold to that comment?

And do you still expect the Company can not undergo anything but growth and nothing but clean -- clear sailing ahead?

Yes I do.

The only caveat, as I've said before, is that as we continue to grow the bottom line as a -- at a much faster pace as the revenue line we're very cognizant that we don't want growth for growth's sake and that's one of the things that Horton has imbedded in our brain for years.

So to the extent that our bottom line starts to slow, in terms of outpacing the revenue line, we would slow the growth some.

But I still am absolutely convinced, Ivy, that given our scale and economies of scale that even in a down market for the U.S. industry, that the large builders like Horton will continue to profitably aggregate market share and I'm also confident that we are one thing, we are a double-digit company and we can continue to have double-digit increases in the top and bottom line even in a poor market.

I guess realizing that you guys in the industry have done such a great job in consolidating the industry and you've taken the industry to almost a third today as represented by the publics, but in some of your bigger markets the market share as at the publics are much greater.

In Denver we understand it's as much as 75% public.

So how do you gain share in a market when all your competitors are pretty much public as well that have the same capital access, et cetera, and doesn't it make it very difficult in those more consolidated markets to sustain the growth?

I would say, to answer your question, it's a competitive day out there every day.

So, yes, and as the markets get more concentrated they get more competitive.

However, a couple of things about that.

I look at San Antonio as a great example.

The two largest builders there have almost 50% of the market. 1998 we had 8% of the market.

Now we have about 23% of the market.

And the one thing that we've consistently seen as we penetrate the markets deeper is, is we are able to achieve greater economies of scale and our margins, as an example, in San Antonio were 16.3%, today they are over 23%.

But, having that concentration we, because of our higher operating margins and our leaner SG&A and our economies of scale, now three years ago we started our -- our satellite markets so now we can go down into, as an example, Laredo and Brownsville, Texas, and take only two thirds of our overhead.

We have back office sales in construction.

So we leave all of our back office in San Antonio and we send only sales and construction down to Laredo.

And we can then compete more effectively with those pickup truck builders than anyone else in the industry.

My comparison is one and one only.

When I was in high school my Aunt and Uncle had a retail drugstore; population 12,000;

Mexico, Missouri; four drug stores in town; very profitable business for 20 years.

A small retailer came to down -- town, rented some old dilapidated warehouse space and opened up a store, two years later, my Aunt sold her drugstore.

That was Wal-Mart.

We believe that we can take our superior product, our cost structure and our operating SG&A and go to the smaller markets more effectively than anyone else in the industry and continue to profitably aggregate the biggest portion of the U.S. home building market.

Okay.

Well, thank you very much, Don.

Thank you.

William Knobler, Atlanta Sosnoff

Bill?

There is no response.

I will resume with the next question.

Stephen Kim, Citigroup.

Hello, guys, congratulations.

To all.

My question -- my question relates to, I guess, some commentary you've made here on -- on margins and the distribution of earnings across the year.

First on the margin side, I think, Bill, you indicated that FAS 66 created a significant drag in the fourth quarter.

I want to be perfectly clear on that.

This is going to be something that was a one time drag, it's not going to be an ongoing drag, or will it have an ongoing effect in future quarters?

There will be a reversal effect that will be over the course of 2006.

The timing is a little bit difficult to predict because it will -- it will depend on the timing of -- of what have our closing volumes are at the end of each quarter and the status of our -- of our loan pipeline.

So it would -- we do not expect it to be a drag on '06, though.

Okay.

But in no -- but in future periods you are not going to have incremental deliveries associated or subject to the FAS 66 revi -- ruling, right?

We don't expect it to be a material impact.

This was really directly related with the unprecedented volume that we had in the month of September which caused this to be a material item.

Whereas in the past it has not been a material item for us.

Right, okay yes, I don't think I had ever seen it before.

So -- so that basically means that for all [inaudible] purposes on an ongoing basis we should be looking at your 4Q margin of like you said 26.6 which is a pretty phenomenal figure.

Therefore I guess going forward into the first part of next year it shouldn't be terribly surprising to see gross margins in the -- in the neighborhood of a 26% type figure, right?

Well, let's be very clear about our business model that backs up our guidance that we gave you for the year.

We believe that we can still increase gross margins 10 basis points a year but we are going to make certain that that becomes clear to us in Q3 and Q4.

So at the beginning of the fiscal year our assumptions are maybe not so grandiose as that, but we feel comfortable, by the end of the year, that they will be there.

Not so grandiose as my 26 or not so grandiose is to think that you will beat the year by 10basis points?

We are comfortable with the 10 basis points, Steve.

Okay.

So is it -- let me put -- let me ask you [inaudible] this way, is there anything in particular that you see in terms of unusual mix shift or some unusual items that might depress the first quarter or second quarter somewhat temporarily on the margin front such as you shouldn't be able to sea something as close -- something close to a 26% gross margin?

We all know where you are going with this question.

We are comfortable with our guidance.

It obviously implies a gross margin that may be different than where you are going today but as we've -- as we have begun every fiscal year at this Company we have always have an assumption that we are going to be conservative until we get a clearer picture on our business in Q3 and Q4.

I guess where -- where I am really trying to go with it is, you've given guidance on EPS, I think, 90 to $0.95 right?

Wasn't unchanged.

And and assuming a not unreasonable closing price and not much difference in your share count, I'm getting to a $0.94 type number but that is with an operating margin that's up about 100 basis points year-over-year.

So I guess the only thing I can think of is that you're act -- if you are actually thinking that the margin, the gross margin, or let's say the operating margin is going to be only up 10basis points year-over-year you must be expecting some massive land sale or some other huge jump in that profit in some other area of your business and I just want to make clear that that's not what you are seeing or is that what you are seeing in the first quarter?

I want to make sure that -- that we're -- we're communicating the true goal.

When we look at our 10 basis point improvement, we are talking over the prior fiscal year.

So our fiscal year results are much stronger than what we are seeing in Q1 last year.

So we may still be looking at ten basis point improvement over the fiscal year which may still equate to the 100 basis point improvement in the quarter.

To answer your question further, we are not anticipating any land sales greater than what we've historically had and our lands sales have pretty characteristically between -- been between 100 million and $200 million a year and largely that's just as a function of us over entitling land in certain markets and thus succeeding our years inventory that we like to keep in those specific markets.

Now that 100 million was not a profit number, was that a -- was that a revenue number or profit number.

That's been an historic revenue number.

Right.

Okay.

All right.

Well, sounds like you guys are leaving ample room to -- to do better than your guidance which is fine, I have no problem with that.

Let me ask you a question with respect to the distribution of your earning over the course of the year.

You had said, I think Stacey, that you expect your closings to be about 35 -- 35% of them to be in the first half of the year, 35% of your closing as well as your net income.

Was that correct?

35 to 40%, yes.

Oh, to 40%, okay, great, because I couldn't get within spitting distance of 35% no matter what I did.

So okay.

And you had also indicated I guess there -- even that presumes that you are going to have a similar kind of distribution of what you had this year where your conversion ratio is expected to be very, very large in the fourth quarter here relative to the other quarters.

Is that in fact what you expect?

Absolutely.

Our conversion rate historically has been higher in the third and fourth quarter's.

Not as dramatically as it was this year.

I'm looking at all your years going back.

That's correct.

Are you expecting in '06 something closer to what you saw in '05?

That is correct.

Okay.

And is there any sort of change in the compensation or is there any sort of longer term change which would result in your Company being more fourth quarter weighted than it had in the prior six years or seven years?

As a matter of fact we are underway with plans where in '07 that we are going to have a more even flow.

We are still going to have more closings in the second half of the year than in the first half of the year.

But our goal is to get to the level where we are consistently deliver 40% plus of our -- of our numbers in the first half and then the rest in the second half.

The 35% is a number that we frankly want to improve on.

Sure.

Okay.

I don't want to over stay my welcome here so last question is about, when you gave your regional breakdown it sounded like you gave some special emphasis to the order growth in Washington D.C.

It sounded like maybe there was more you wanted to say about that market?

I'm giving you your chance.

Well, as you know we are not a top 10 builder there and as you know we -- I moved George Seeger to that market about three years ago and we are -- we've increased our investment in that market.

And we are become -- we're the beneficiaries of that increase.

We still see where we are a good demand in that marketplace contrary to some of the softness of some of the other people, are -- are reflecting.

So I think in general we have good expectations for that market and we're trying to counter some of the negatives that we hear from the other builders.

When I was at one of your competitors conference calls a couple of weeks ago, as I said, I had to call my psychologist because everyone was so despondent up there and we just aren't despondent .

Well maybe people were waiting for D.R.

Horton to open up a community near them so they could buy your product.

Well you know what, that's entirely possible.

Great quarter, guys.

Alex Baron, JMP Securities

Great thank you, great job.

I'm still trying to figure out how you guys closed so many more homes than we had modeled this quarter so I'm hoping you can help me -- help me with that a little bit.

Particularly like in the southwest region you guys had about 8500 homes in backlog and did 7200.

So can you just kind of help me understand some of how you are able deliver that many more homes?

We are getting paid to deliver them and you are not. [laughter] On a serious note we had the -- we had the opportunities on a number of our southwest markets to sell more units than what we had anticipated and they were in definitely until a position to deliver them.

Our construction people did a superior job bringing those homes along at a faster pace than we had anticipated and I truly believe that was the thing that contributed most significantly to that increase in the southwest.

Okay.

Yes, just -- just amazing.

Any way moving on to -- to your pricing expectations as you kind of roll-out communities here going forward, can you help me at least understand directionally where you think your -- your order prices are going assuming flat pricing environment just in terms of mix by region, directionally where you think your pricing would be going?

I guess I would like to answer that in a general way.

If you look at our pricing power across the U.S. over our 28 year history there is one thing that happens, is -- is our pricing power moves around the country largely based upon where the job growth is.

So the markets that have the most pricing power last year or in the previous three or four years more than likely won't have that consistent kind of job growth and it will move someplace else.

The greatest example we can give you is in Colorado.

Over four, five and six years ago Colorado generated some of the top pretax income for the Company, and we had over 11% of our assets in the state of Colorado.

At the same time Florida produced some of the least amount of pretax income for the Company, four, five and six years ago.

As we've moved -- as we've moved our money from Colorado we've reduced our inventory in Colorado from 11% to 8% and Stacey we have increased our inventory in Florida from?

From about 6% up to 9% now.

So the bottom line is we are seeing much more job growth in the state of Florida.

Colorado last year had 8,000 new jobs created.

Florida is significantly more than that.

So the answer to your question where we see strength -- we see strength, as Shannon has said, basically along the coast and in the sunbelt states and that's really where 78% of the single-family permits continue to be pulled and those markets will be the best markets for us.

And you guys aren't seeing any sort of investor demand pulling back in Florida that is affecting you guys?

No.

And as a matter of fact if you look at our central Florida division we've had investor demands since we entered that market in 1988.

We have always had a high percentage of British buyers, German buyers coming to central Florida, buying retirement or second homes.

We've always -- we've always limited that to 10 -- 10% of our business in the central Florida market when it could have been 50 or 60% of the market.

So to the extent that that percentage of the business in the overall state decreases we are not adversely affected because we have never taken advantage of that as much as we could have or should have.

We always wanted to make certain that the people to whom we are selling homes, real home buyers, as opposed to investors, because they had a need for a home as opposed to a want for a home.

Okay and in terms of share buy-back what's your current authorization at this point and where do you guys think you could take that to?

We have $176 million authorized right now and as we look at our plans going forward and if we idea pending on how much we decide to repurchase going forward we will look at upping that if necessary.

Several people have asked us that question.

It's not a difficult transaction for us to go to the board and ask for an increase in that and based upon our commitment, our -- our desire to look at it much more seriously in the months ahead I'm sure we will be thinking about that.

Alright.

Looking forward to it.

Thanks.

Thank you.

Jeremy Pinchot, Monness, Crespi & Hardt

Good morning, and well done guys.

Congratulations, Stacey.

Just a quick question, have you guys seen any improvement in pricing trends in Texas, Colorado or Carolina?

Yes, yes, yes.

Can you go into detail?

Very definitely, if you look at the Dallas, Fort Worth market, we've seen stronger job growth in the Dallas Fort Worth market and see much better opportunities even though we've been very profitable in the Dallas Fort Worth area since its inception we look at the next two, three years as greater profits coming out of the -- out of this market.

San Antonio consists -- continues to be a very, very strong market for us and it continues to improve as well -- as well as Austin does.

So really all of our markets in Texas contrary to many of our competitors continue to be strong markets and they are improving and our margins continue to be very good in the market.

And you really saw that in our sales dollars in Q4.

Texas is up 50% for the quarter.

You go over to the, I think you mentioned the Carolinas, if you look at Charlotte and Raleigh and those markets which have been weaker markets for us in the past, Charlotte was up 91% the coastal Carolinas have always been stronger markets but inner Carolinas are beginning to show strength due to job growth so we feel comfortable about that also.

Great a nd how about Denver?

Denver is improving, albeit slowly.

We don't -- I still believe with 8,000 new jobs created in Denver in the past year that there's not going to be significant upward pricing power in that marketplace.

I really think our pricing in that market will be pretty much flat as it has been in the past two or three years.

The state is a great state if you've ever been to Denver, as most people have, it's a great corporate city, but at the same time they haven't been able to replenish the jobs they lost after the great telecommunications layoffs three and four years ago.

Sure, well thanks a lot.

I appreciate it.

That's helpful and good luck and good job.

Tony Campbell, Knott Partners

Go ahead, I don't have anything to say.

I just want to thank you and congratulate you and hopefully you guys will buy back some stock.

You know, Tony, I didn't know I would hear that from you today.

We hear you.

Steven Fockens, Lehman Brothers

Hi, good morning.

Two quick questions.

First if you look at the lot count, and Stacey or Don, correct me if I'm wrong, but it looks like about 40% growth year-over-year in the owned component of the -- of your lot position.

Given that you have almost a three and a half year supply at the 100,000 build rate how should we think about growth in the lot count over the next three or four years?

We've said that we are trying to keep our -- we are keeping our lot inventory, random lot inventory between three and four years.

A lot of that owned is really a function of some deals closing at the end of the quarter on the owned side, that basically we have gotten our entitlements a little early or a little late and basically they happen to have fallen on to the fourth quarter.

We believe still, maintaining a three to four-year of supply on land and lots is the right number for us.

We are a little above that today but if you look at our percentage of option lots they continue to increase fiscal year over fiscal year and as I've said before, if I -- I would option the whole world for three to 5% ernest money and as our Division President's continue to focus on the option portion of their land and lot position I figure that to the extent that we exceed four years, that's fine as long we are increasing the option portion of those land and lot positions.

So over the next few years you would -- you would expect to, hey, maybe the lot count goes up but it should go up more in general on the option is side than the owned side.

That's correct, and to be frank with you we believe we are clearly prepared now.

We have all of our lot position for '06 and most for '07 and are already buying into '08 and '09 right now.

Great thanks and just one last question.

We have been hearing a little bit that in Austin, San Antonio there has been some pick up in the investment buying side.

Do you guys try to limit investment buying across all markets equally or do you view individual markets differently?

Actually we differentiate between speculators and investors.

What we in our contracts do is preclude inve -- speculators from buying our housing by virtue having a clause in most of all of our contracts which says they have to [discourage] at least half of the profits if they sell the home within the first year.

To the extent we have investors, typically it's a market by market and we limit the number people who are buying homes as investments in our subdivisions on a percentage by percentage basis relative to the market.

They -- we don't view investors as a negative to our business because by definition it is someone that's going to be holding the home for a period of greater than a year and not really putting that home back on the market and competing with our current sales as a speculator does.

So the people were we are trying to [cull] clearly, I think we as well as our competitors are doing a great job in culling those speculators.

Great.

Thank you very much.

Wayne Cooperman, Cobalt Capital

Hey guys.

Congratulations again.

Could you just -- I don't want to beat up on this issue of the share buy-back but basically you are a double-digit company.

Your growth is slowing.

Your ROE is higher than your growth and your debt to cap is down a lot lower than it's been.

So clearly you ought to be able to grow and generate a lot of free cash flow if you stay in that 15 to 20% range.

Could you give us some parameters and just sort of, do you have a target debt to cap ratio?

Do you have a multiple?

It seems that six times earnings, it's a joke, and that you should be buying back gobs and gobs of stock.

I just want to see how you guys look at the share repurchase and how we can kind of think that you think about it.

Clearly one statement I will make it very clear to you.

Our debt -- our commitment to ourselves and to our investors and to the rating agencies is to maintain our debt to cap in the low 40s at the investment grade level.

To the extent that our debt to cap is less than that, and obviously we have opportunities.

You are way less than that now.

We are very aware of that but at the same time let me say clearly to you what we've done over the past three years.

We've slowed our growth to get more in line with expectations vis-a-vis our P. E. So this year we finally are at a stage where, one, we have our investment grade rating.

Two, we have the highest amount of dry powder in the history of the Company.

And, three, we are the most delevered than we've ever been.

Makes a lot of sense except it didn't work because your P. E. went down, not up.

I understand.

You can take care of that because we can just keep manufacturing earnings growth by growing our operating earnings 15% to 20% and buying back five or 10% of the years every year if we really wanted to.

And that latter now puts news a position where we are -- we have the balance sheet to do what you are saying.

In the previous years our debt to cap was not necessarily where we wanted it nor did we have as much dry powder.

And the one thing we wanted to do if we were to go forthwith buying back stock we wanted to be in a strong position so that we could do it on a consistent basis and that's where we are today.

And if you think -- if you can really grow 15 to 20% a year, I know there's up cycles and ups and downs, but obviously the multiple doesn't make any sense and the only thing we can do about it is just buy back stock and keep putting up the numbers like you guys have done a phenomenal job of.

We -- we are on both of those targets currently.

Okay.

Thanks a lot.

Susan Berliner, Bear, Stearns

Hi.

Good morning.

A little bit stance from my side, two questions, one is focusing on your sizeable cash position, if you can tells us if that was a timing thing or if you have plans for the cash?

And number two, from the bond side with all the talk about share repurchase I just want to make sure you've clearly talked to S.&P. about your plans.

Absolutely.

Our cash position, certainly at year end we always have our highest cash position, but with our extraordinary closings volumes in the fourth quarter that has certainly increased to it a record level for us.

It was expected once we had a clear view of where our closings are going to be and we are actively reinvesting as we -- as we move into fiscal 2006.

With regard to using a portion of our capital for share buybacks, we have certainly had conversations with all of the rating agencies regarding what our -- our ongoing plans are for capital reinvestment and stock buybacks is part of that.

Part and parcel with that conversation is we talk about our target leverage ratios and they all should clearly understand that our target leverage is to stay in the low 40s.

Please, please, I think, Susan, without a doubt, Moody's would not have upgraded us unless we had painted a very clear picture to them about where our future debt to cap would be relative to to stock buybacks.

And specifically with S.&P. we have had that conversation in the last week.

Okay.

Appreciate it very much.

One last question, are there any weak markets out there that you guys are worried about?

We are not worried about them.

For the fourth consecutive year which I failed to mention in our -- in our script, we have, all of our profit centers was profit centers.

We've had profit centers in the past that were struggling to get to be profit centers.

So we are not worried about any markets.

We are always constantly trying to improve our markets.

The markets that we are trying to improve which have the lower returns are: Salt Lake City where we have $19 million relative to our $9 billion balance sheet -- or $9 billion inventory level and Greenville and Columbia, South Carolina, where we've switched out Division President's in the last year, and we believe those two markets will come on stronger next year.

But those if you had to identify three slower markets for us those are in Greenville and Columbia, South Caroline we have combined less than $40 million of inventory.

So in those three slower markets we have $60 million relative to a $9 billion inventory on our balance sheet.

Great.

Thanks very much.

You're welcome.

Glen Cutler, ING Clarion.

Good morning, guys.

Great quarter.

Just for the record we are fixed income investors so we do not want you to buy back stock.

Maybe a tender for your bonds at T plus 50 or something.

One of the great thing about this job is the balancing of everyone's expectations.

Sure.

Okay.

My question concerns your mortgages available for sale.

It's up year-over-year as a percentage of trailing revenue suggesting that you are holding them on your balance sheet longer.

Would you care to comment on that?

Is it getting more difficult to -- to sell them, I guess, for securitization?

No, there has really been no change in the amount of time that we are holding our loans.

We still are basically the time between origination and delivery is still in the 20 to forty-day range.

And at that point we already have committed investors.

There has really been no -- no difficulty in finding investors for our loans.

What you see at fiscal year end is really a direct reflection of the significant volume we had in the homebuilders side in the month of September.

And we are in that 20 to 40 day window in which the mortgage company is preparing the documents to package the loans to actually deliver -- deliver them to the committed investors.

Okay, thank you.

Stuart [Freel], Hunter Global.

Don, your -- your current debt -- getting a lot of questions on this but the current debt to cap is in the low 30s.

I mean to get to the low 40s, if I grow your equity base by the earnings you are giving us, you guys need to buy back about $1 billion worth of stock.

Is something wrong with my calculator or is that -- is that right?

I don't know what kind of calculator you are using.

I don't have a calculator in front of me but, Bill?

One think Stuart, if you look, certainly historically at our quarterly debt to caps you will see it be higher at the end of our first, second and third quarters and then lower at the end of the fourth.

So when we're -- we're talking about operating in the low 40s, certainly, to be in the low 40s in our first, second and third quarter we would probably still finish a year below 40.

So to simply look from September to September you have to kind of consider our cash flow and our working capital seasonality patterns.

So you do not expect to be able -- [inaudible] so you are not going to be below 40 debt to cap next September?

I would expect that our fiscal year ends to be at the low ends of our debt to cap range and so if we are going to operate in the low 40s or below, first, second and third quarters would be a bit above 40, fourth quarter typically will probably be a bit below 40.

Your equity base is going to be about almost $7 billion if you put up the earnings you are talking about.

We will.

All right.

And you have 2.5 billion of net debt right now, 2.5 on 7 billion of equity, 35% debt to cap.

Right.

Okay.

Are you asking us?

I am asking you, are you going to be at 35% next September?

That would be in our target range.

That's up from this year.

Okay.

Should we expect the land position to grow much slower next year?

No, I think our inventory growth, our -- our -- our three operating areas is the same for '06 as it has been for the last two or three years.

They are going to grow their inventories about 30%.

Why is the inventory position growing 30% if the unit deliveries are growing 10 to 15%?

Well, because land prices are escalating and when we close the house and replace the land underneath that lot it's going to cost us more than what they did when we bought that piece of land.

In addition, too, Stuart we are replacing one lot today, and probably two and three years out as we are looking at reinvesting the dollars and with the 15% growth we have to buy more than one lot to replace the one lot that's closing.

The other thing that's tied into our inventory growth isn't just our absolute unit target.

Our dollar inventory -- or I'm sorry, our dollar sales backlog at the end of the year is up 28%.

So we are actually growing the residential side as well as the land side to be able to deliver that backlog.

Okay.

When -- when is the blackout period over?

Friday.

Friday.

Okay.

Thank you.

Stephen East, SIG

Good morning, everybody, I'm not sure I was even on the call here.

A couple of just quick questions.

Pricing in the southeast was really strong.

Could you characterize that between mix and pricing and what you would expect moving forward in that region?

Well when you look at our southeast markets from an operating perspective I know that [inaudible] southeast those are which markets from a financial perspective?

It's going to be your Florida and Georgia and Alabama markets.

We continue to see in Florida pricing power in that market.

And we have three Division President's -- actually four down there now because we entered northwest Florida as a division.

So as a result we feel very good about the continued growth in that market.

And pricing power in that market.

And frankly Atlanta has been a real sterling gem for us over the last three years.

As Scott Stone has come back to the Company and increased our operating margins in Atlanta by 500 basis points over the last three years.

So we expect more growth out of that market also.

So we believe we are also going to have good pricing power in the Georgia market.

Okay.

And then we've talked in the past, your land position in Las Vegas, it's much lower on a year's basis than the rest of your Company.

Where do you stand right now on that and are you comfortable with your current land position out there?

We have right out about two years land inventory in Las Vegas and we are very comfortable with that number.

Okay then my last question, I know you don't give community growth that, type of thing but in your assumptions for next year, are you looking for stronger absorption per community or just a bigger footprint across the U.S.?

It's a combination of both.

We are going to have a bigger footprint.

Our divisions are also opening obviously new subdivisions in addition to the ones that they have.

So the ones they're closing out they're replacing them.

Each one of our Division President's has paid to get a 20% revenue growth which basically translates back down into about a 10 to 15% unit growth.

So the bottom line is each of those Division President's are bringing on additional subdivisions such that they can meter their bonus target of 15 or 20% revenue growth.

Okay.

I appreciate it.

Great quarter.

Thanks.

Thank you.

Greg Gieber, A.G.

Edwards

Don, I wanted to go back to a comment you made during your prepared remarks on -- you talked about continuing to have continued inventory caps on your Regional President's.

Can you give us a little more color on that?

And have those caps are -- how have you changed them this year versus what you gave them a year ago or, say, two, three years ago?

The percentage increase in all eight regions and three operating areas of the country is the same.

They really haven't increased or decreased significantly over the last three years, percentage growth wise.

The real difference is compared to four, five and six years ago, Greg, as we were growing the Company at a faster pace as we've always told people when we ran out of money we simply went to Wall Street and borrowed additional funds to support the land deals.

Where we are today is basically we are saying, here is the growth level we want as a Company, here's the growth level we want out of your regions.

Bill Wheat and Sam Fuller back into our debt to cap as they want us to be at the end of the fiscal year and that's how we base our inventory growth.

So it's a very consistent approach and it's -- and Don Horton insists that we allocate the same percentage increase in each one of our operating eight regions and three U.S. operation area so that we have consistent growth across the U.S.

You had to put now increase constraints are -- on the total amount there?

No, sir.

Okay, now a totally different question.

You do give a goal of 100,000 closings by 2010.

That's fairly aggressive and I think the market would probably reward you were you to actually only grow half this much to 75,000 units or 80 because it's far more than your multiple would indicate the markets is expecting out of you.

But my question would be to get to 100,000 unit level, how many more markets do you think would you have to be in or what would you have to do to expands your product offering, sort of just what you need to get there?

Well, first of all one of the things we failed to mention is those growth targets that we've given you for the next five years are 100% organic.

We have to do no acquisitions to deliver on those numbers.

And as a result I have said for many years we have the lowest risk business model in the history of D.R. Horton.

We are delevered and all we have to do is allocate additional capital to proven profit center managers.

We don't have to color any blue states red.

We -- we are expanding our -- our -- our satellite operations.

And the real emphasis is just organic growth going forward.

How -- what percent should that sort of growth will come from satellite markets?

You have in 74 markets now.

In a decade how many do you think you will be in?

Well don't know how many we are going to be in because those opportunities surface from time to time and we make a decision as to where we think the market is viable.

As we mentioned earlier Bill Wheat indicates to us that satellites comp -- comprise about 5% of our '05 deliveries and I think over the next five years that could grow as high as 10%.

Thank you.

Yes, sir.

[Derrick Cribbs, Glenview Capital]

Hey guys.

Good morning.

First question, is there any buyback included in your guidance for the first quarter and for fiscal year 2006.

No, our guidance will say no buybacks and we will adjust that throughout the year as we need to.

Secondly, first of all, thank you for recognizing that the market is not paying you to grow at 30 plus percent and we will certainly take 10 to 15 on the top line and 15 to 20 on the bottom line.

And if you get there, if you grow at that rate which is much slower than in the past will you be free cash flow positive?

The whole function of how much our inventories do grow but certainly we would, if we are operating in the 10 to 15% range we should be either slightly positive, slightly negative.

It won't be a significant negative as you might have seen in some previous years.

So in 2006 we should expect it will be somewhere around break even free cash flow?

I don't -- I don't know that we are ready to commit to that yet.

We are getting closer.

Okay.

And then lastly there's been some confusion on the Texas market about whether the -- about whether the firming of the market is just a unit thing or pricing thing.

Is -- are unit sales just getting better or are we actually seeing pricing power in Texas?

I look at Texas as four different sub-markets and I can tell you Dallas, Fort Worth, we're seeing both the unit as well as the margins improve.

In the past year in Austin we have seen the units improve and we are seen firming in our margins in Austin relative to what it was two and three years -- two and three years ago when we had the dot-com technology layoffs.

And in San Antonio, which is basically a lot of telecommunications and tourist business we've seen nothing but improving units and margins in San Antonio over the last five years.

Houston, we've seen increasing units but we haven't seen increasing margins in that market and as a matter of fact I would characterize the Houston market as rather flat margins relative to the last two and three years ago.

So assuming that pricing is getting better in Dallas when was the last time that happened?

Oh, gosh, five, six, seven years ago.

We've been in a pretty flat market in -- in -- in terms of pricing power in Dallas.

We've been in Dallas, Fort Worth, we've been pretty much flat pricing market here for about three -- three years.

Are total units in '06 that will be delivered in Texas as a percentage of the total approximately?

Percentage in Texas of the units?

In '06.

Don't have that number but we can get back to you.

We don't have that off the top of our head.

What was it in '05?

Don't have that -- we don't have that either.

Thanks for the hard work.

Stephen Kim, Citigroup.

Thanks.

Most of my questions have been answered but I guess my question is, what per --- can you give us a dollar value that you have associated with options, land options, you know, deposits?

I believe -- let me pull the exact number here, Steve. 5.9 billion at September 30.

That's -- that's how much of the option contracts have [inaudible].

I'm sorry, earnest money is $287 million so right at -- right at 5%.

And has that percentage changed much over the years?

Recent years, no, it's been about 5% for about the last three years.

Okay.

Since inception since Horton and I first started doing this many years ago, we went to Phoenix and put down $50,000 we used a note in order to secure our land position but it has characteristically been between three and 5%.

That doesn't seem to be a terribly large number here relative to your significant shareholders equity.

I guess I just, the comment you made, Don, brought something to my mind and I just wanted to clarify it.

Basically, when you said if you could you would option every piece of land in America, I know you were obviously joking a bit, but one of the things that I heard from some people is that options don't really make them feel any better because that simply means you have 100% of your equity tied up into options and so theoretically if you were to put all your equity into options as opposed to owning the land outright then you would be 100% exposed to the decline in the market value as opposed to, whatever, a 20% decline.

But it doesn't appear that you have a very significant portion of your equity invested in options in terms of dollar values, so even if that portion went to zero who cares really it's a diminimus figure.

And so is that -- is that pretty much the way you look at it?

Is there anything that I'm missing with respect to walking through that, that logic?

No, I think you are absolutely right, Steve.

The greatest thing at options is what is at risk for the Company is truly just the ernest money.

It's not the 5.9 billion purchase price but not specific performance contracts so if the market conditions change we can either renegotiate those to a lower purchase price or we can simply walk the contract and leave our ernest money.

We try not to do that.

Our first choice is always to renegotiate.

And if you look at what we've done over the years is we started with 1998 when we did the merger with Continental Homes.

They owned almost [100%] of their land and our owned portion of our lot inventory was 65% plus.

We didn't like that metric and that's why we dropped it down and our goal is to try to get to 50/50 and we've been better than our goal basically, we are about 45% owned and about 55% option.

I think that's a -- that's a great number.

Yes, you're right, as I look back in 1998 it looks like your land relative to your equity was 115% and obviously it's back down to below 100.

And it sounds like you intend to keep it there.

Your -- you made a commentary about how a number of deals, land deals had closed in the fourth quarter and that was partly why your land inventory, owned inventory shot up.

I think you answered Steve's question on that.

And at the same time in response to another persons question about your use of the cash, there was some commentary about how seasonally and all there was this increase and amount of money you have to put into work to get the operations going.

It seems that those two things might be somewhat contradictory.

I guess I'm wondering if in fact you did actually get those deals to close in the fourth quarter, some of them earlier than you expected, wouldn't that sort of take a little bit of the strain off of your cash needs for 1Q and therefore maybe enable you to do something else with it?

You know, Steve, there's -- it's always an ongoing investment of capital and there's some -- some give and take between quarters but we're -- we're still investing in inventory in this quarter because we still see significant opportunities.

One thing regarding timing at the end of last fiscal year at the end of fiscal 2004, I believe our -- our own percentage was down to around 42%.

And if you recall in the first quarter of fiscal 2005 we did have a significant purchase that moved from option to owned and so that that's a bit what have Don was referring to as timing at fiscal year end versus last year.

We did have a significant issue last year fiscal year end.

Okay.

And then lastly on the income statement talking about your tax rate, what kind of tax rate should we assume going forward and to what degree are you incorporating any assumptions for the Jobs Creation Act?

For the Jobs Creation Act we've done some preliminary estimates and we expect it will have about a 50 basis point impact on our -- on our tax rate.

So we will be assuming a 38.0% tax rate going forward.

It doesn't have a significant impact though on our bottom line or EPS.

We will take any little bit that you will give us here.

Believe me, actually Horton shed a tear when he found out we paid $1 billion [inaudible] cash. [laughter] I'm not kidding.

I actually lied, I have one more question, and that's on your average price.

You had said that your average price next year would be flat, I think was the word you used.

My question is flat with what?

Your -- your closings price for the year in '05 was 261, I can't imagine you meant flat with that.

Your backlog price has continued to rise to 303.

You know, flat with what?

I will answer that more directly.

We are assuming somewhere between 265 and 270 as an average sales price.

Yet your backlog is 303.

Are you going to just refuse to close some of these homes you have sitting in backlog at higher prices?

Backlog usually tends to be a little bit higher.

If you look at our sales --

Yes, but not this much.

But if you look at our sales price for Q4 actually current demand for what we're selling, the average sales price in those sales were 269.

Yes, I saw that, but it seems to imply to me that maybe there are some units that -- that didn't close in the fourth quarter because maybe the're bigger, or take longer and so you -- you put your resources elsewhere to units that actually could close in the quarter.

I mean I understand the differential between the closing price and the backlog rate but this is pretty whopping.

It is a little bit bigger than normal Steve and one impact, I hate to even have to go back to this, but the impact is on the FAS 66 deferral did have an impact of about $5,000 on our fourth quarter average sales price -- on our closings price.

Oh, interesting, okay.

It was actually the profit was deferred out of the revenue line.

So that -- in other words, the fourth quarter closing price would have been 270.

That's what we are seeing coming through and our sales were 269 so that's right in line with Stacey's estimates going forward.

Your backlog rose which it seems to me that therefore you should incorporate at least in the first or second quarter somewhere north of 270, it has to be like 275 at least, right?

Steve I love you like a brother, I know where you are going with this.

Our guidance for Q1 is pretty much what Stacey says it's going to be.

You mean I am not going to get to you change it hear on this call?

Absolutely not.

Well, all right, in that case.

Next question.

Larry Horan, Janney Montgomery Scott

My questions have all been asked.

Great job.

[Mike Hoffkin, Money Managers Incorporated]

Okay.

Having bought the stock in March of 2000 I really do not understand all of the breast beating and wailing about the stock having performed so terribly.

And all the talk about buybacks.

It seems to me that what you've been, as long as I've known the Company, which goes weigh back before 2000, you've been completely opportunistic.

I applaud you for how you've run the Company and I would simply encourage to you pay less attention to Wall Street, run your business.

I assume that you are maybe going to slow up a bit because rates are rising a bit.

There's maybe bit a bit of speculation in land prices.

And so you are going to slow up a little bit but should that be an ongoing template for the future forever?

I hope not.

Thank you.

I appreciate your comments.

Thank you and I can tell you that as we all work with Don Horton over the last, I've been with him for 23 years, we do listen to the Street, but we run our business the way we think it ought to be run.

And the way we think it ought to be run is to enhance our shareholder value largely because of the fact that 20% of our shares are held by insiders and as I like to get up every day and as we say when we shower and shave and [inaudible] their makeup on around here, we are all shareholders, and Don Horton owns 12% of the Company, he definitely is a shareholder.

So we're focused on running this Company for the best enhancement of our shareholder value and that'll be our focus in the future.

[Inaudible] the multiple maybe 5.5 but, hey, the stock is only going up tenfold or whatever it is in the last five or six years, it's hardly been a catastrophe.

Yes, sir, I agree with you.

[Joel Locker, Carlin Financial]

Hi, guys.

Just wanted to touch base with you on your California market and see if I can get a little in depth color on individual markets out there.

Do you have a specific question or just?

Just what the -- what kind of price appreciation you've been seeing on an apples-to-apples basis say since midsummer, since July or so, in each of your markets like San Diego and Oakland and just various other ones?

I will speak specifically to California.

Generally we've seen less pricing power in the entire state of California over the last six months than we did in the previous six months.

So Q1 and Q2 of '05 stronger, Q3 and Q4 slower, but let me make the point that we are still seeing pricing power there but it's increasing -- it's moderating.

The pricing power increases are moderating.

If had you to say a year-over-year percentage on an apples-to-apples basis what would you say, say this October versus last October?

I think clearly what we can say is that we are consistently having double-digit pricing power increases a year ago and as recently as six months ago and those are definitely is single digits today.

Definitely single digits.

I'm wondering if -- if you were having some kind of, with the affordability ratio at extreme levels or 14, 15% statewide, I was wondering if your buyers, some of your buyers weren't getting cleared because the use of arms weren't really prevalent at a 6% rate versus maybe a 4% rate last year?

I don't believe that has impacted our sales significantly largely because of the fact if you look at the medium price of a home in California each of the last three years the increases have been double digits sometimes as high as 20% plus, while our average sales price in California, because of our product mix, has actually increased only 3% annually over the last three years.

So we, in California, as in every other market across the U.S., are doing one thing and that is we are constantly evolving our product.

So we can hit as I refer to as the sweet spot of the affordability index and have the largest percentage of the people in a given market be able to afford our homes.

I just had a kind of a hypothetical question, just if the nay sayers are wrong and its -- you can actually see a medium home price drop 4% in a year, just the first time in seven years or something like that, could you still increase EPS in 2006 versus 2005?

Yes sir.

Just drastic scenario, yes.

All right.

Thanks a lot.

[Earl Turnipede], Private Investor.

Private is the key word here.

We're all inspiring to get to your position.

Unfortunately my position in my retirement count is at 100% D.R. Horton.

Two or three quarters ago on one of these calls I was sitting here and you thought 14 multiple would be good relative to your peers.

But the reality is the market is not -- is dissing you and that is all there is to it.

Instead of having buybacks which is a spit in the ocean, what have you done to take this Company private?

Get someone to buy it seven times earnings, going forward with your low estimates, this thing should be a private company.

The market -- I mean your competitors, they are all at seven times earnings so why not go private?

Well for a number of reasons and believe me we've talked a lot of scenarios around here and that's certainly one of them that we've run numbers on.

If we -- if we took the Company pri -- private would have though reduce the size of the Company by about a third.

We absolutely believe on a going forward basis as we go from 50,000 units to one-hundred thousand units there are significant economies of scale yet to achieve in the business.

We are absolutely convinced as we continue to distance ourselves from our peers and our competitors, that in the home building industry, as in any other industry, the clear leader in the industry should be accorded a multiple P.E. or higher P. E. and that's the goal that we are moving on.

By the way I would tell you that 70% of my net worth and 70% of Don Horton's net worth is still in this Company also so we feel pretty much [inaudible] with you.

The point is though even if you are better than your peers when you start from seven, it doesn't do you any good, I was just thinking that some guy in Omaha might be thinking about buying you for about a 40% premium here.

Well, I don't know too much about him but I think he's pretty much a bottom fisher and I don't think we are going to sell for even a 30 or 40% premium today because we see a lot of opportunities that are much greater than that in the years ahead.

You have all the praise and you should get it.

I didn't know Stacey was even pregnant.

Neither did I.

So D.R.

Horton has no responsibility.

You have gotten the praise but the market sure is -- is dissing you as your seven -- or 19 year old said, but they are dissing everyone else as well and I just -- I'm stuck with you, I have my 100%, of course I paid cash for it, I didn't have any of you guys options.

So any way, congratulations.

I sure wish the market would recognize that not just you but the other builders, the [multiples] are just too low.

I agree with you notwithstanding the fact that we have a low multiple the great thing about the Company is is that with our ability to continue to earn each year if you look at our stock price even it's appreciated as you may note 2000% over the last ten years and 1000% over the last five years so we are figuring out how to get around the P. E. and once we do get the P. E. then we are going to have a really nice retirement account.

Thanks a lot.

Thank you.

At this time there are no further questions.

I would like to turn the conference back to Mr. Tomnitz for any closing remarks.

Thank you.

And thank you for joining our fourth quarter and our fiscal year end '05 conference call.

We obviously are very proud of what our people have done and they have outperform the industry once again.

In conclusion, the strongest and the most important asset we have is our people and I want to once again thank them for a stellar performance in '05 and as Horton always says he's counted the money in '05 so we look forward to that same kind of performance in '06 from you.

Good luck and we'll be seeing you.

Thank you.

Ladies and gentlemen, this concludes today's D.R.

Horton America's Builder fourth quarter earnings release conference call.

You may now disconnect.