霍頓房屋 (DHI) 2006 Q1 法說會逐字稿

Good morning.

My name is Kimberly and I will be your conference operator for today.

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

Horton, Inc., America's Builder, the largest homebuilder in America, first quarter earnings release conference call.

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

After the speaker's remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

I would now like to introduce Don Tomnitz, President and CEO.

Mr. Tomnitz, you may begin your conference.

Thank you and good morning.

This morning we have Sam Fuller, our 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 believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.

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

Horton on the date of this conference call and we do not undertake any obligation to publicly update or revise any forward-looking statements.

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

Horton's annual report on Form 10-K, which is filed with the Securities and Exchange Commission.

Don?

Thank you.

First, we would like to thank all of our employees for another great quarter.

Specifically, we wish to express appreciation for our sales people for a fantastic quarter of sells relative to our competition.

Your 19.2% first quarter sales increase is the leader in the clubhouse.

D.R.

Horton, America's Builder, the largest homebuilder in America for the fourth consecutive year, continues to distance itself from the competition.

Our first quarter of fiscal 2006 was another record quarter as we once again generated double-digit increases in new sales orders, revenues, net income, and EPS, while continuing to expand our operating margins and growing our bottomline faster than the topline.

We were pleased to announce the following results.

Our first quarter sales increased 19% to $3.2 billion on 11,463 homes sold, up from $2.7 billion on 9,901 homes sold in the year-ago quarter.

All of our operating regions reported increases in both sales dollars and units this quarter.

Our first quarter sales increase reflects a 16% increase in homes sold combined with a 3% increase in average selling price to $276,300.

We are continuing our efforts to offer products that are affordable to first-time and move-up home buyers, which represents the heart of demand for new homes in the U.S. Stacey?

Our strong double-digit sales increase contributed to a record first quarter backlog of 20,816 homes, with a sales value totaling $6.2 billion, a 30% 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 higher profits in fiscal year 2006.

Our sales dollar changes for the first quarter in our top six home building states were; in California, while our sales dollars were down 6%, our homes solds were up 1% as we adjusted our product offering to move to more affordable pricing.

In Texas, we were up 28%.

In Colorado -- I'm sorry, up 21%;

Arizona, up 34%;

Nevada, up 192%, that was compared to a weak quarter a year ago due to the pricing actions of one of our competitors in the Vegas market; and in Florida, we were up 9%.

Our weaker markets for the quarter were Raleigh, Greensboro and Charlotte in North Carolina;

Minneapolis; and Greenville and Columbia in South Carolina.

Don?

We would also like to mention a few additional markets where we saw significant sales dollar increases in the first quarter.

New Mexico, up 123%;

Myrtle Beach, up 79%;

Portland, up 62%;

Seattle, up 59%;

Chicago, up 45%;

Hilton Head, up 42%;

New Jersey, up 42%; and Atlanta, up 40%.

Stacey?

We now operate in 77 markets in 26 states.

Our asset concentration corresponds with our top six homebuilding sites with the following percentages;

California with 28%, Texas with 12%, Florida with 10%, Arizona with 9%, and Nevada and Colorado with 8% each.

We are also proud to announce the entry into the following new markets during the quarter;

Pensacola, Florida; in Sullivan County, New York, which is our entry into the state of New York; and Imperial Valley in California.

Sam?

Our first quarter homebuilding revenues increased 15% to $2.8 billion from $2.5 billion in the year-ago quarter with homes closed increasing 2% to 9,891 homes.

Our average closing price for the quarter was up 11% to $282,000 as a result of continued pricing power in certain markets and as a result of our continued asset investments in markets with higher than average sales prices, such as New Jersey, Seattle, Portland and south Florida.

Our land sales during the quarter predominantly represent sales of commercially zoned properties adjacent to our homebuilding projects in various markets.

Our gross margin on home sales revenues in the first quarter increased 250 basis points to 27.7% from 25.2% a year ago.

Our gross margin improvement has been largely driven by pricing power in many of our markets, our continuing focus on controlling our construction costs and our on-going reallocation of capital to higher margin markets.

Also, interest in cost to sales as a percentage of revenue decreased by approximately 20 basis points compared to the prior year due to our continued leverage improvement and lower cost of capital from our refinancing efforts.

Additionally, the balance of our deferred profits associated with FAS 66 declined by $15 million during the first quarter, contributing 40 basis points to our first quarter home sales gross margin percentage.

Bill?

Homebuilding SG&A expense for the quarter was 11.5% of total homebuilding revenues, compared to 10.4% a year ago.

Our goal for fiscal year 2006 SG&A is the same as in every year, to be below 10% of revenues.

Homebuilding interest expense for the quarter represents the expensing of unamortized issuance cost from our old $1.21 billion dollar revolving credit facility, which we replaced during the quarter.

In December, we entered into a new revolving credit facility with our banks that lowered our borrowing costs and increased our committed borrowing capacity to $2.15 billion with an uncommitted accordion feature that allows the facility to increase to $2.9 billion.

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

Sam?

Financial services revenue for the quarter increased 33% to $61.3 million from $46 million in the year-ago quarter.

Financial services pre-tax income for the quarter increased 14% to $20 million from $17.6 million last year.

93% of our mortgage company revenue was captive during the quarter, reflecting our continued commitment to focus on profitably supporting our homebuilder's businesses.

Our company-wide capture rate improved to approximately 64% from 62% a year ago.

Our average FICO score was 717 this quarter, consistent with our average scores of 717 in fiscal 2005 and 716 in fiscal 2004.

Our income tax rate for the quarter was 38%, down from 38.5% last year, reflecting the tax benefits we expect to realize from the American Jobs Creation Act of 2004.

Bill?

For the quarter, our consolidated net income increased 29% to $310 million from $241 million in the year-ago quarter.

Diluted earnings per share for the quarter also increased 29% to $0.98 from $0.76 in the year-ago quarter.

Our lot and land position is approximately 359,000 lots owned and controlled, which represents approximately a four year supply of land. 49% of these lots are owned and 51% are optioned.

Our homebuilding leverage ratio, net of unrestricted cash, improved 110 basis points to 42.3% from 43.4% a year ago.

Our goal for fiscal year 2006 is to maintain our year-end net homebuilding debt to cap ratio in the low 40s.

Also during the quarter, we repurchased 1 million shares of our common stock at a total cost of $36.8 million.

As of December 31, 2005, we have $463.2 million remaining on our common stock repurchase authorization.

Stacey?

For the second quarter of fiscal year 2006, we are issuing guidance of $1.05 to $1.10 per share on approximately 319 million shares, which will be a 14 to 20% increase over the $0.92 reported in the second quarter of fiscal year '05.

This guidance is based on the lower end of our historical second quarter backlog conversion rate, which has been in the range of 56 to 62%.

We have $200 million of 9 3/8% senior sub notes that become callable on March 15.

While we haven't announced plans to call the notes, to be conservative, our guidance incorporates approximately $10.5 million of interest expense related to the call premium and unamortized issuance cost.

The Company is raising its diluted earnings per share guidance for the year ended September 30, 2006 to be in the range of $5.25 to $5.35, based on approximately 320 million diluted shares.

This increased guidance reflects the strength of our operations and our record backlog.

And continues to be based on approximately 58,000 homes closed in more than $15.5 billion in consolidated revenue.

We have also assumed a flat pricing environment for the year.

Don?

Now to let you know what to expect from D.R.

Horton, America's Builder.

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

Our operating margins continue to be the highest of the top five builders, as we continue to leverage our scale and focus on controlling and reducing our costs in all areas of our business.

We have high financial transparency.

No unconsolidated JV's; our balance sheet is, what you see is what you get.

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

Our specific goals include, for the third consecutive year; continuing to grow the topline 10 to 15% annually; continuing to grow the bottom line 15 to 20% annually, this assumes no acquisitions; in fiscal 2006, closing 58,000 homes and generating revenues of more than $15.5 billion; continuing to maintain our discipline growth approach by utilizing regional inventory caps for the fourth consecutive year; and as Bill said, maintaining our debt to cap at investment-grade levels; nd most importantly, continuing to be the low-cost operator in the industry.

Finally, D.R.

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

We are now focused on our goal of being the first builder to close 100,000 units, which we plan to accomplish in fiscal year 2010; all the while continuing to focus on our financial metrics at all levels.

This concludes our presentation.

We will entertain any questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Michael Rehaut of J.P. Morgan.

Hi, good morning.

Just a question -- if you could talk about where you ended the quarter with your lot position and owned versus --- I don't know if I missed that before, owned versus optioned.

And more broadly, past those numbers, if you could talk about what you are seeing with prices for land in different markets.

And perhaps, which markets are -- you feel are getting more aggressive in what the land sellers are looking to get?

And which markets may be, versus the last couple of years -- land purchasing is becoming a little bit more rational.

We ended the year with almost 360,000 lots, 49% were owned and 51% were optioned.

As we've mentioned before, even though pricing power may be moderating in certain parts of the country, land prices continued to be sticky in most of those markets -- were certainly based upon our 23 -- my 23 years with Horton and our being in business for 28 years; the land prices have a tendency to be sticky for at least a year to two years post the moderation of housing prices.

So other than a market like Denver, we've seen a little bit of price moderation in the land.

But other than that, we've not seen a lot of that across the country and certainly in markets like Florida and the coastal Carolinas, those -- Las Vegas, Phoenix and those markets, we are seeing little, if any price moderation in land prices.

When I say moderation, in part -- I'm not necessarily saying land prices going down but just the price increases slowing, so to speak, as we might have seen other markets like a D.C. or a Phoenix moderate over the last few months.

Are you seeing a similar moderation in price increases in land?

Well, it's difficult to answer -- it's difficult to answer your question.

What we are really look at, Mike, is we are looking at a specific piece of land and then our ability to entitle that piece of land with new product and price offerings on it.

So to the extent that land prices -- as an example, in California, the median price of a single-family home has increased double-digit in the last -- each of the last five years in California and land prices have increased double digit each year for the last five years, while our average sales prices have increased only 2 to 3% out there.

Notwithstanding the fact that land prices continue to increase in most parts of the market, we don't necessarily look upon that as a negative, because we're contracting to buy a piece of land and before we close it, we are getting an entitle based upon what we want to use the land for.

So land prices can do what they want to do.

We are basically reconfiguring our product, and I think you see that with our ASPs going down.

We're continuing to focus on bringing to market product and price offerings, in spite of higher and increasing land prices.

Not sure that's a real significant factor in our business.

Right.

Lastly, you just gave the lot position for the end of fiscal '05, I wondering if you give it as of the end of the first quarter?

That's actually the lot position as of December.

Okay.

Thank you.

Our next question comes from Joel Locker with Carlin Financial.

Good morning.

Mr. Locker, your line is open.

Please proceed with your question.

His question has been withdrawn.

Your next question comes from Stephen Kim with Citigroup.

Thanks, guys.

Good morning, good quarter.

I wanted to chat with you about what you are seeing on the SG&A line, a little bit more.

I think I heard you say in your prepared remarks that your goal is, as always, to have your SG&A ratio below 10%, and I believe that was of total revenues, right?

Homebuilding revenues.

Good, of homebuilding revenues.

I was going to say -- that would be even worse.

But you have been doing much better than that, of course as of late.

And I guess I'm wondering -- in fact, there was a brief period of time when you were a little bit above ten a few years back and I remember your goal being to get it lower -- and I thought we settled out at a range in the mid to low nines.

From your commentary, it made it sound like it might trend back up to closer -- to very close to ten.

Should we be reading that into your comments?

Or will there be any reason to assume that SG&A would increase at the percentage of revenues to be significantly higher than where it was last year?

To answer your question directly, no.

And as our Dallas/Fort Worth West Division President [Todd Gordon] says, no good deed shall go unpunished.

We closed about $300 million more in revenue in the fourth quarter of last fiscal year.

And basically, I call it the law of big numbers and law of little numbers.

The bottomline is our revenues were less this quarter and as a result, our SG&A was larger as a percentage of those revenues.

I can tell you this Company has been built on one thing and that's keeping our SG&A the lowest in the industry.

And as Bill indicated to you, at the end of fiscal year '06, we will be 10% or below.

Right.

So not a substantial increase, it doesn't sound like, over last year.

In terms of your gross margin, you articulated 40 basis points from reduced FAS 66 and 20 basis points from lower interest expense, is that right?

That's right.

Okay.

That still leaves you with a pretty -- not that those two factors are not meaningful because I get the sense that they carry forward to some degree here.

Could you give us a sense for where you think the gross margin in the second quarter might be relative to where it was in the first quarter?

In other words, you given us some things that have sort of helped the margin this quarter but don't sound like they will go away any time real soon.

Was there anything else that maybe was a little bit more temporary or temporal in nature in the first quarter that helped you that might go away in the second quarter and third quarters of this year?

No, we see nothing.

And as we mentioned, our annual goal is to increase our operating margins ten basis points a year and we are still comfortable that we can continue to do that.

Great.

Lastly -- share where you were at the end of the quarter?

I don't know I have the ending share count -- the average share count was 317.6.

Right.

The ending share count is about -- issued, is about 312.2, I believe, Steve.

312.2?

Yes.

Is that a diluted number?

No, no.

That's the share count.

Got it.

Right.

Great, thanks a lot.

Thank you, Steve.

Our next question comes from Margaret Whelan with UBS.

It's actually Dave Goldberg on for Margaret.

How are you?

Question was on speculative inventory and how much speculative inventory you guys have now?

Where it is in terms of -- is it started unsold, is it completed unsold?

Could you give me a break down of that and markets where you might have more than others?

Basically our total housing inventory under construction at the end of the quarter was right at about 30,000 units.

And our speculative percentage of that number was much consistent with where they were last year.

And as we've always mentioned, there are certain markets across the country where we maintain a slightly higher spec count because there are higher relocation markets than others and that's been pretty consistent this year versus last year.

We maintain a slightly higher spec count in Atlanta as percentage of our overall revenues.

In Austin and most of our markets in Texas and [inaudible] that really is the large component of where our specs are.

The other number we really focus on, basically, is our specs that have been completed for more than a year.

And of those 30,000 homes we have in inventory we only have 66 homes that has been committed for more than a year.

And unsold.

And unsold, exactly.

We don't have a per spec [inaudible] to be conservative.

Can I get a second question in about cancellation rates and where you see cancellation rates this quarter?

And if you seen any trend up in any market?

We're staying in our historical range of 17 to 19%.

And we're pretty much in the mid-pack of that range today.

To answer your question that perhaps you're not asking -- we are not seeing any sort of huge cancellation rates in the Washington, D.C., market, as a matter of fact, they are running right within our Company range of 17 to 19% and same thing in Phoenix.

We aren't experiencing any significant cancellation rates above our company average in any of our markets.

Okay.

Thank you very much.

Good quarter.

Your next question comes from Timothy Jones of Wasserman.

Good morning, guys.

Good morning.

First of all, you would very quickly buy that 110 increase in the SG&A in the first quarter.

You said something about the revenues being somewhat disappointing.

Can you go into that a little bit more?

Let me be clear about one thing.

I didn't say anything about our revenues in the first quarter being disappointing.

I thought you said that to Steve -- Why were they up 110 basis points?

Well, simply because we -- overall, our SG&A -- we have the machine built in our divisions to generate a double-digit revenue growth this year, double-digit closings growth this year and that is our goal and that's what our people are focused on.

When we deliver the double-digit growth, then our SG&A will be down in the 9%s.

Is this related to the fact that you had such -- that part of these people are paid on orders also and they were very strong compared to other builders?

No.

Our people are paid a commission, based upon when the home closes.

It's all on the home closing?

Some pay part of it on the orders.

No, sir.

We pay it -- and our division Presidents are paid as a percentage of PTIs.

And how about your advertising costs?

In the historical range.

The second -- three of your five regions were down low single digits.

Those were your higher priced markets.

Was that done on purpose or was that market conditions?

And what effect did it have on revenues?

I mean on margins.

You are talking about the ASPs, right?

Right.

Right, average sales on prices in your three high regions.

We are doing exactly what we told you we would always do and that is that we want to be had a provider of new homes to -- largely to the first and second time home buyer.

As we have done in California over the last three years, even though the median price of the home in California has increased double-digit, our average sales prices in California has small single digits.

What you see there is a reflection of this Company maintaining its commitment to that entry level first time home buyer and working our average sales price down so that, as Stacey says, we can can appeal to the largest percentage of the U.S. home buyer.

So then, you say you've done this by buying cheaper land and building smaller homes and supposedly it hasn't had an effect on your margins.

Not necessarily the cheaper land but our people out there, Tim, are doing a much better job of entitling our land.

Further -- and getting higher densities in a number of areas and that's why you see our podium projects and our mid-rise buildings, where we are building up to seven stories.

But it also reflects in California, as I mentioned before, we were the number one builder in San Diego county for the last five years and we will probably be number five this year because we've migrated out east into the Indios and the Coachellas so that we could offer an affordable single family home to people if California, which is not available in San Diego county.

Basically, we continue to chase that first and second time home buyer by repositioning ourselves and our product and price offerings in every market.

Thank you.

You're welcome.

Your next question comes from Lorraine Maikis of Merrill Lynch.

Thank you.Good morning.

I wanted to follow-up with one more question on pricing.

You expect that average selling price for your deliveries to decline sequentially through the year?

Yes.

We are looking at Stacey because she is the one who does all of our guidance.

So she is shaking her head yes.

I think if you look at the average sales price in the quarter, Lorraine, that it did go down in three of our regions, I think that's something we were continuing to try to bring new product on and that will continue to flow through in third and fourth quarter, in particular -- maybe not so much in the second quarter.

Our guidance does assumes that pricing is essentially flat with last year, which would indicate a bit lower average sales price in the sequential quarters to get back down to last year's average.

We noticed a lot of your backlog growth is coming from the southwest and it looks like you have been able to keep your average selling price down very nicely there.

Can you talk about what type of product you are offering to your buyers there and how you are able to keep that pricing down?

One of things we have done -- ten years ago our attached product, as you may recall, was 0% of our closings and last year it was almost 16% of our closings.

And we developed a product in California that -- about ten years ago called a triplex and we've exported that out to over 50% of our markets.

So we are focusing on,how do we provide affordable attached product, particularly in closed-gate or guarded-gate communities, and appeal to a totally different buyer in the marketplace.

So it's a function of a triplex, which is a two story building and we're also, in South Florida are doing three-story condos.

We were even doing three-story homes in some of our markets like Chicago and Maryland and New Jersey.

The bottomline is, we were constantly trying to figure out how we can offer new product and price offerings in each one of our markets.

Okay.

And finally on asset allocations, you've talked about Florida as your first priority and D.C., northern Virginia as your second.

After what we seen in that D.C. market, is that still the case?

Yes.

And I was going to go through some calculations.

And if you want to look at our projected closings for the Maryland and Virginia market, which we were right on target, based upon our first quarter, we expect to have double-digit closings in Maryland and Virginia '06, over '05.

And certainly the same is in Florida.

We are seeing strong pricing in those markets and all of our markets in Florida.

And we aren't seeing any increased cancellation rates in either one of those markets.

We feel our investment and our increased investment in those markets is still based upon good sound financial metrics.

Thank you.

Your next question comes from Greg Gieber of AG Edwards.

Morning, everybody.

Most of my questions have been answered already.

Sounds like there is not a lot different.

Just continuing to grow.

I want to ask you about your sales velocity -- if you look at your sales velocity for given communities, have you seen any change today compared to a year ago?

I think across the country, about the only place that I'm aware that our sales velocity per community is slower is in the state of California.

Okay.

So a lot slower than a year ago -- back in [inaudible] I think they were -- you were still doing lotteries.

Yes.

I don't know if you parched your date this way, but I was wondering how much of your sales increase came from what you would call satellite markets?

And could you give us some update of what's going on there and some expectation of what to look for the rest of the year?

Well, one thing that we did for last fiscal year was calculate that 5% of our closings came out of our satellite markets.

We are tracking our sales but not releasing our sales data on our satellite markets but we continue to expand into our satellite markets as each one of our divisions deem it to be prudent.

As an example, we have gone out of Seattle and we're now into Olympia, Washington; and are in several other markets that we've expanded into.

But that's dictated based upon the market conditions in each one of those markets and whether or not we deem we can go into satellite market and continue to maintain our gross margins.

We announced our new divisions, just recently.

We are into Pensacola, which started off as a satellite market, that we've now created a division.

And we've moved into the Imperial Valley, which basically started off as a satellite and now we've created it into a separate division.

And then we just opened a [Greenfield] in Hurleyville,New York.

I just wondering if we could -- expectations for what that 5% last year might be for this year?

We don't necessarily have a specific goal for that.

Again, that's decided by our individual markets.

But it is definitely going to increase over the 5% as we continue to add new markets and as the markets we have entered mature and we get our projects online.

When the satellite market matures and when you look at the volume you have to have to go into a satellite market, what's the minimum size that you think about this market smaller than this or we can't sell any more homes in this, it's not worthwhile?

And what is the average size of your satellite markets, in terms of sales or closings?

200 is the minimum number that we would want to go into.

If we couldn't sell and close more than 200 homes, a couple two or three years out, we wouldn't want to do it.

I would say today our average is probably somewhere around 300, we believe in markets like I just came out of, Huntsville, Alabama.

And we believe that in four years -- or three or four years we could be anywhere from 500 to 750 units in that market.

Each market is different.

I was going to say that's an average target for satellites that we have been in for a year or greater.

That's not necessarily all the satellite markets that we are in would be generating at least 300 right now.

They aren't generating that now but that's what we think they can do.

And then the ones you have been in for at least a year are sold.

How do their margins compare with that in the individual regions they are part of?

Equal to or greater.

We aren't interested in building homes for practice [inaudible] and so the bottomline -- in San Antonio, as we've moved into the Laredo market we are -- the margins in Laredo are equivalent to or better than what they are in San Antonio.

I would assume that since you are moving to areas with no competition from any other public builders, you might get even better margins.

Don't forget those satellite markets are characterized by pick-up truck builders who work for significantly less margin than we.

If it weren't for our low SG&A and our low cost to goods purchased and our higher than normal operating margins our cost to capital, we wouldn't be able to compete with those guys at all.

I would assume they're not going to be able to compete with you as you build marketshare.

Nice quarter and keep doing what you are doing.

Thank you, sir.

Your next question comes from Ivy Zelman from Credit Suisse First Boston.

Good morning.

Actually it's [Dennis] on for Ivy.

Just an operational question -- if you were to look at your closings last year, how many would have been on land that was still under option contract at the beginning of the year?

No idea.

Don't track that.

No, don't track it.

How soon after you take down an option do you build on it on average?

Start turning dirt day one if we are developing it.

If we are going to build a home on a finished lot that we're buying through option, we are starting to build the home the next day, essentially as quick as possible.

So it does move quickly.

How many are then -- do you take down in a finished state versus still in development?

Out of our overall lots under option it's about half and half of our option lots are finished lots contracts.

So there would be homes that you would close within a year after taking it down but you aren't sure what that mix would be?

Absolutely.

The majority would be within a year.

In the markets where you have more options on finished lot contracts -- so through the south, where that's more predominant, certainly that's entirely possible.

Okay.

And then my second question just has to do with -- I think you guys are close to 80 markets now.

How many would you say are above Company average with respect to margin?

And then the same question with respect to return of capital?

Going to be about half and half.

Going to be half of your markets are above Company average?

Right.

And half will be below.

The bunching will be around the average and then we've got a few outliers on the upside and a few outliers on the down side.

Almost by definition, the average will be around the middle.

Pick the trough, you aren't seeing a wide variety?

There is certainly significant differences in margins between various markets and you will typically see higher margin in a land constrained market and lower margin in those markets where the land is not as constrained.

You feel your markets are evenly distributed between what are land constrained and not?

Well, we do talk about our top six home building states and the inventory invested there -- about three-quarters of our inventory of our companies in the top six states.

California is a land constrained market, Nevada is a land constrained market, Texas and Florida are less constrained than those two markets.

But it goes down to market by market.

And it comes down to the fact that we monitor those sorts of things continuously and that's part of our asset allocation job is to shift resources from those that are weaker to those that are stronger.

That's what I would think that the markets that are land constrained and have a higher margin would be fewer than those in the other end of the spectrum.

But my last question on a separate note, in a market like Sacramento that's been publicized as being a little bit weaker lately, I think you guys do somewhere around 1,000 units there.

How do you react to a market that sees a significant drop in absorption rates and sales pace and incentives picking up?

Is it a market that you would still pursue volumes and try to use the scale to still push margins there?

How do you react in a market that's more competitive like that?

Well -- let me answer you a question couple ways.

One, Sacramento, we are up double-digit in terms -- of the first quarter in terms of sales, both in units and dollars, significantly.

And secondly, our Sacramento division President has turned in a budget that he will close "X" number of units and generate "X" number of dollars in PTI and we expect him to hit it.

He has the wherewithal to, as I have told Ivy many times before, 24/7 365 on D.R.

Horton, we are offering incentives someplace.

And in those kinds of markets, we will probably be offering slightly higher incentives and nevertheless, he has the job out there in Sacramento to hit his budget.

Thank you very much.

Next question comes from William Mack of Standard and Poor.

Good morning.

I just want to get some idea of the land sales -- you had a big jump year-over-year and I think last year 2Q you had another big revenue and profitability from land sales.

How can we model that this year?

We told you we will have, I believe, about $200 million in land sales in fiscal year '06.

The way I would model that is pretty much $50 million a quarter and is reflected this quarter.

And those land sales, typically the vast majority of them, are pieces of land that are zoned for higher uses such as the land -- the majority of our land sale this quarter was commercially zoned land and we don't build commercial projects.

Okay.

Second question, I see that inventory jumped close to 20 -- about 18% just sequentially since your last fiscal year-end.

Pretty similar to past rises.

Last year about this time, you were forecasting an inventory jump of about 20%.

Correct me if I'm wrong.

Can you give a forecast for this year's increase in inventories?

You're right, the growth in December is similar to last year and previous years, as well.

We do see a seasonal growth in our inventory from September to December as we bring land on and as we start building homes.

The increase in our inventory, we are expecting to be very similar to what we seen the last couple of years.

At the end of the year.

At the end of the year, at fiscal '06.

Thank you.

Your next question is from Larry Horan of Janney Montgomery Scott.

Hello, fellows.

I just want to recap something to make sure I understand this.

In terms of your comments on your gross margin during the quarter, which was a big sequential as well as year-over-year increase, you are saying that was largely driven by increased pricing power and the reallocation of capital to your higher margin markets -- or higher return markets.

That's correct.

And cost control.

Okay, so then we could -- and cost control.

That's always there, right?

It just gets better and better.

So then we can assume that we will be around the 27% area, obviously give and take geographic mix changes and stuff like that, for the bulk of this year?

What we said is that we would increase our operating margins ten basis points over what they were at the end of last year.

The other thing I would say, Larry, is we are still just one quarter into this fiscal year and before we give that guidance for the entire year, we want to get into the heart of the selling season, which actually starts after Super Bowl Sunday.

Beginning in February is when strong sales start coming in and that's when we will get a better read on what our margins for the year will look like.

The reason I ask that is that you've got seven six in backlog of what you're going to deliver over the next six months which will then mean -- at least know what your backlog is and what you did in the first quarter, which will be three-quarters of the year.

I agree with you that, obviously that one-seventh plus the last quarter you still have to sell and build and deliver -- but you should have, I would think, a pretty good handle on what your gross margin is going to be.

It's more like -- is it more likely in the 27% area than 25.5%, like what it averaged last year?

I mean, we were looking at $6.2 in backlog and $2.8 revenue so far and that puts us at $9 billion in revenue and our number is $15.5.

We are a little over halfway there as far as what we have in backlog.

But again, the largest volume of sales is coming up in the coming months.

And so we really just -- we wait and see until we see those sales.

Okay.

Fair enough.

That's all I had.

Thanks.

Thank you.

Our next question is from Carl Reichardt of Wachovia Securities.

Good morning, guys.

How are you.

Doing great.

Yourself, Carl?

I'm well.

I think after 40 questions, I wouldn't have any.

Just for next quarter, Stacey, on the FAS 66 -- it hurt margins in Q4 and helped them a little this quarter.

That's going to continual, I think, but do you have a sense what the basis point impact will look like in the next quarter or two, as we model it out?

It's hard to give an exact number because it's based on the closing volume of certain types of loans right at quarter-end and we don't have an opportunity to package and sell and move off of our balance sheet.

Since we don't know the exact amount and timing of those loans, it's hard to give you an exact read.

We do expect to see some continued margin improvement from that next quarter but I can't give you, even a range of basis points.

Right.Just in line with that, we would expect some improvement over the next quarter or two and then we do expect it to level out and not see a significant impact quarter-to-quarter after that.

But it's difficult to nail it down.

The sense being that closings ought to be stabler month to month within a quarter than they were in Q4, is that basically what I ought to be thinking about?

In other words, you won't have the big back-end, end-of-month load problem that you had in Q4?

Is that basically right?

I would say it all depends.

Helpful.

And then --

Some quarters are back-end loaded, too.

One last thing, at the end of quarter, your attached/detached mix -- actually just closings for Q1, what percent were attached and what were detached?

We are still right around the average that we showed last year, right around the 17% range.

And then finally, one little broader question -- returning to the topic of acquisitions, which we haven't talked about in a long time.

The P is run relative to the group.

And it's getting tougher out there.

I'm guessing some are struggling more than they have been.

Is your philosophy about acquisitions, either private or even public, changed at all in the last six months as you watched the market level off a little bit?

Or do you still focus -- will you continue to focus on internal growth?

I would say to you that our focus has really not changed at all in the number of years that we have been a public company.

And that is, that other than the last four or five years when we said we don't need to do any acquisitions to achieve our double-digit growth, but I will tell you we are always looking at acquisitions and have been always looking at acquisitions for the whole time that we've been public since 1992 and we continue to look at them.

And if there is an opportunistic deal out there, we will certainly be looking at it.

So the broken record, I get it.

Thanks a lot.

Appreciate it.

Bye.

I won't say that.

Go ahead, Don.

Say it.

[laughter - inaudible]

Oh, Lord.

See you.

Your next question comes from Barbara Allen of Avondale Partners.

Hi, good morning.This is Jay McCanless on for Barbara.

Got two or three questions.

The first one I was going to ask is, as you reallocate capital away from California, what do you think are going to be you all's higher growth margin you will target for the balance of '06 and on into '07?

Currently, we aren't allocating capital away from California as we continue -- one of the things we do at Horton is that we have three U.S. operational areas, western U.S.

Ops, Central U.S.

Ops and Eastern U.S.

Ops, and one of the things that we do is allocate the same inventory growth for all of those three areas.

And then within those three areas they allocate their capital differently.

But currently we've got, as we mentioned, 28% of our assets in the state of California.

And that's been pretty consistent over the last two or three years, down from 2001 when we closed the Schuler acquisition and then it was over 30%, so we basically have kept our investment in California somewhere around 27 to 29%.

We've increased our inventory growth in California but at a slightly decreasing rate, in order to get it a smaller percentage of our overall assets.

We look upon California as still a good market where we have been redirecting capital for the last two or three years.

Clearly, as been the state of Florida.

We continue to believe the state of Florida will receive additional capital.

It's a great operation down there.

A great market.

We're still moving market into Maryland and Virginia.

We aren't even a top ten builder in that market.

And their percentage of sales in our Company will be less than 1%, so we look upon that as a great growth opportunity.

We still are moving a lot of money into the Portland, the Seattle, the Hawaii market because those markets have a lot of good job growth finance.

That's where we are moving our money.

Great.

I was going to ask -- in the markets that you all are targeting as growth markets, what are some of the characteristics of the competitive environment there?

The market that we are in -- one of my peers said one time that he wasn't really competing with the other top five home builders -- I don't know what market he is not competing with us in, but we are competing with all of the top ten home builders -- the largest top ten home builders.

And we are competing with all of the small, medium sized pick-up truck builders out there.

I look upon every market as highly competitive and I don't see any markets where they are just give-me markets.

We are having to earn every dollar that we make in every one of our markets.

I look at the competitive landscape and the way we believe we can continue to be more competitive than our peers as we continue to keep our SG&A down, keep our costs down, and also increase our pricing powers as much as we can and generate, as we continue to do the highest operating margins in the industry.

As you move into these higher growth markets, are you going to keep going down the price point or try and -- ?

Follow what you were talking about earlier, where you are going to try to make it easier for the first and second time buyers to afford a D.R.

Horton home.

To answer your question, our division Presidents clearly are working their way down the price curve.

And we will build everything that we can build and make profit on it.

Except, we do not like the high-end of the business, simply because we think that's the softest and most discretionary buyer out there, so our focus clearly is working our way down the price curve and focusing on the first and second time home buyer.

Okay, great.

Thank you.

Your next question comes from [William Nobler] of [inaudible].

Thank you very much.

Congratulations on another good quarter.

On the [stocky] board, the million shares -- did I hear your average price was a little over $36?

That's correct.

You know, I'm a little surprised.

A, in terms of -- I would have expected, and to be honest hoped, that you would have purchased more shares when the stock got down to the $30 area back in only October, November.

What happened?

If you recall, October we would have been in a blackout period after our year-end but before we released earnings.

So we clearly could not repurchase any shares until after our blackout.

Also tell you, Bill, that Don Horton has a philosophy we are not as smart as Wall Street.

And it's difficult to time the market.

So in essence, on our stock repurchasing, we are there on a consistent basis and that's where we are going to operate the program.

Yes, I'm not so concerned about the prices much as I would have thought you would have purchased more shares.

Second question, on the SG&A, if I understand what you suggested -- in the first quarter your SG&A was 11.5 versus 10.4 and your goal and hope is to be below 10.

And I think what you said was -- in the way I read what you said, is that because the closings were only up 2% that's one reason why the SG&A went up 140 BPS.

Exactly right and part of the issue is, as Bill mentioned, is that we are staffed both on the homebuilding side as well as the financial services side, to close 58,000 units this year.

And as Stacey has mentioned before, we will close 35 to 40% of those in the first half of the year and the remainder in the second half of the year.

And it's not something that we can get day laborers to come in and do our work.

We were staffed up to hit that 58,000 target, so we're telling you at the end of the year when we close 58,000 units, our SG&A will be 10% or less.

All right, so the focus therefore, is to convert -- as you said, as much of that backlog into closings to bring the SG&A down.

And since you have it in your pockets, so to speak hopefully, then it's good reason to believe it will come down.

One thing for sure, our Division Presidents have done what they said were going to do each year for every year that we've been public.

What we are really focused on is, as opposed to driving down the SG&A, we are focusing on hitting the EPS and when you hit the EPS, the SG&A will take care of itself.

Right.

One new market you mentioned was New York, Sullivan County.

Is your plan -- I mean typical Horton business model would be, stick a toe in and expand from there.

Is your plan to build that New York market and is there land available?

Well, to answer your question, that is our philosophy, to stick our toe in.

We researched the market through George Seagraves who is our Eastern U.S.

Ops COO, and we believe two things; that we can make money in that market and we believe we can also acquire land.

We aren't saying it's going to be a huge segment of our operation.

But one thing that I know about the northeast market that we love -- and we've learned this in New Jersey, it's a very land constrained market that takes many, many years -- eight to ten years for us to entitle a piece of land.

Once we finally get it entitled, we have significant pricing power and great margins on those markets.

So it may not be a lot of volume but very good profitability and that's what we are focusing on New York right now.

Just so you know, Bill, we don't count the market until we actually got houses under construction.

So we have already purchased land and have construction going in New York.

Thanks very much.

Talk to you soon.

Thank you.

Your next question comes from Jim Wilson of JMP Securities.

Hi, guys.

Thanks.

Not much left to ask.

But I was going to -- we talked a lot about growth in units.

I was wondering if you could talk about, Don, with your size and exposure in California and obviously where you've shifted focus of production and development -- how returns or margins in general are -- have changed or might change in the future in California?

And alternatively, as you are investing more and you are looking at D.C. and looking at Florida -- how incremental investments there might compare in terms of your outlook for returns on capital in those markets, compared to California?

Clearly, in California, we said this at the end of the fourth quarter, that our pricing power -- we believe in California in '06 will not be as great as it has been and what it was in '05 or even the previous years.

I think you are out there and you know that the pricing power is moderating in that market.

We believe that if you look at California, that we have strong belief that our California margins will continue to exceed the Company average margins, which makes that a good investment for us.

As we move money into that D.C. market and in the Florida market, those companies have consistently, over the last five years, earned a higher than average Company gross margin.

And so as a result, we believe that as we move money into D.C. and Florida and the northeast that their margins will be every bit as good as we have been experiencing in California over the last four or five years.

So from a mix standpoint, you really don't see any reason for any deterioration in the margins?

And obviously you are expecting good unit growth.

Any real significant deterioration in our margin,s as Stacey mentioned and Bill mentioned, obviously we were waiting to see how the heart of our sale season comes to fruition starting with Super Bowl Sunday.

Right now, we were feeling confident.

But we are going to be conservative as we always been and we will see what our sales people bring in in February, March and April.

Okay.

Very good.

Thanks.

Good job.

Sir, your line is open.

Please proceed with your question.

The question has been withdrawn.

And your next question comes from [Michael Molner] of Goldman Sachs.

Hi, everybody.

How are you?

Good.

Just a quick question, I think you mentioned 35 to 40% of -- was that units, will come in the second half of the year?

In the first half of the year we had about 35 to 40% of our earnings.

Oh, earnings, I'm sorry.

That's the first half.

First half.

When you look at the unit growth, it was up 2% year-over-year.

I wanted to get color on your thinking there.

Was that sort of on par with what you were thinking?

A little disappointing?

Are you seeing unit sales being more pushed toward the back-end this year?

Just some color on that would be great.

I think it was pretty much on par, as I mentioned earlier.

Not that we want to go back in history but in the fourth quarter we closed 51,172 units and our projection was somewhere around 50,000, which translated into about $311 million more in revenue in the fourth quarter than we anticipated.

I don't think there is any question that our Division Presidents took some closings out of Q1 and put them into Q4 because they were able to get them.

As a result, our first quarter units were less than what we had anticipated.

And that's one of the reasons our SG&A was as high a percentage as what it was.

So starting with the second quarter, I think it all balances out.

But basically if you took a look at the fourth quarter, we were up $300 million more in revenues than we anticipated.

And the second quarter we were about $80 million less in revenues than we anticipated.

Okay.

Great.

Thank you.

Next question comes from [Earl Turnitsed], a private investor.

Let's go back to a quarter ago when I asked you about taking this thing private.

I'm looking -- just now the latest trade, $39.44.

Doesn't make difference what you do.

And I mean you are the best.

But so what?

I would say to you, sir --

7.5 times earnings -- this is crazy.

No sense being in the market.

Well, I would say to you, if you had owned our stock, as I have, since 1992 -- as Standard and Poor calculated this morning before we started our conference call, we were up over 2,300% since our IPO and we are up about 300% in the last five years.

I think, outstanding the fact we aren't getting respect, our shareholders are doing well.

Shareholders are doing well if you start from that base.

If you start from today forward -- Georgia-Pacific, $23 billion deal, what's wrong with Horton selling out at about $60 a share?

Well, we believe we can continue to generate the stock appreciation that we have for our shareholders in the next five years like we have in the last 13 years.

Last quarter, and I got -- I hung up before the lightbulb went off.

I thought you said you and Don Horton thought if you went private, you would have to reduce the size of the Company, which doesn't make sense because you keep saying without an acquisition you can build 100,000 homes by the end of the decade.

We did say we could build 100,000 homes without an acquisition.

And that's without an acquisition, correct?

Yes, sir.

You don't have to issue massive -- well you aren't going to issue any more stock in that same assumption.

So why not be private?

Well, sir, at this point in time, as I mentioned to you before, we believe that we have on a historical basis returned a greater return for our shareholders than probably the top 50 companies on Wall Street over the last 12 to 13 years and we believe we can continue to do that for you on a going-forward basis.

But you can't get -- remember your fantasy of about three quarters ago of maybe being a 13 multiple.

All of the top five here are stuck in the eight multiple range.

I would say to you it's not a fantasy of mine.

It's a belief of mine.

And we still have -- I still -- if the Board of Directors is willing to work with us, we have still have another eight years work on this.

But we appreciate your questions.

Your next question is from Stephen East of SIG.

Just about everything has been answered.

But just two questions.

On the absorption rates you mentioned in California that that was really the only region that was down.

Could you just put a little magnitude on what you saw year-over-year on absorption rates in California?

I haven't looked at it on a consolidated state basis.

We get reports, Steve, from -- on a subdivision by subdivision basis.

And just a rough number.

I think our sales in most of our subdivisions are down 15, 20% relative to what they were a year ago.

But that's just at a very small point in time.

Okay.

In Arizona, you're not seeing a decline?

No.

As a matter of fact, one of the things I wanted to point out everybody, and I'm glad you asked that question; and that is in California, based upon what our projections were -- or are for '06, we expect to be up double-digit in our closings in California.

We see nothing at risk there.

And we expect to be up double-digit in closings in Phoenix and in the state of Arizona, including Tucson double-digit, and see nothing that indicates our business plan is at risk.

Okay, all right.

And just last thing, your southwest closings -- I know you had a huge fourth quarter, but they were actually below a year ago and your conversion rate was probably worse than I expected.

Anything going on in that market other than just a very strong fourth quarter?

That's exactly what it is, Steve, is a lot of the units that we did deliver in the fourth quarter over our projections did come out of that southwest region and our big states in that region are in Arizona and Texas.

That's where a lot of those units came from.

Okay.

Thanks a lot.

You're welcome.

Our next question is a follow-up from Michael Rehaut of J.P. Morgan.

Michael?

Sir, your line is open, please proceed with your question.

His question has been withdrawn.

The next question is a follow-up from Stephen Kim of Citigroup.

Thanks, guys.

I imagine a lot of people have bolted for the Beazer call.

I had to log back in here because I think -- I have to say at this point, I think you are being less than truthful.

And the reason I say that is that I never heard Don Horton say he thought that Wall Street was smarter than him.

Maybe I was putting words in his mouth.

In fact, I thought he always used to tell me that his job was to make me look good.

I've been counting on that all these years.

I had a follow-up with respect to the average price.

Stacey, I went back here and I know what you are saying about the movement within markets and all to try to appeal to a lower price point -- or try to come in at a lower price point to meet the needs of the buyers and all that.

But I also understand that -- here your average price in your backlog is pretty darn close to $300,000, starting off this year with a $282,000 and you're saying in the next quarter it probably won't be materially off from that.

And then you're still adhering to the comment you will be $261 roughly for the full year.

I mean, that's a massive drop in your average price that you must be looking for in the third and fourth quarters and frankly, it doesn't seem credible to me.

Are you really saying that you think in the third and fourth quarters you will be doing average price in the $250 range?

Flat $250 and maybe even high $240s?

No, I don't think we expect anything in the $250s.

But if you look at our average sales price for the quarter which will be our future deliveries we did --

$276.

$276 compared to our $282 closing price -- so there is definitely a trend and there is product available out there that will be generating lower average sales prices.

Okay.

But you aren't saying -- you aren't going to be flat year on year in average closing price?

Maybe by the fourth quarter you will, relative to the prior fourth quarter, right?

Is that what you meant?

We may not be flat but we certainly aren't going to be at the same increase we saw this first quarter.

The increase will trend down.

I got it.

Okay.

Just checking.

Thanks, guys.

Thank you.

Your next question is a follow-up from Joel Locker of Carlin Financial.

Sorry I dropped off the call there.

Just wanted to touch base and get your feel on the San Diego market.

I don't know if you have already answered that question.

I think San Diego -- clearly, I know San Diego is slower for us this year than last year.

But the reason it is is because for the past five years we been the number one builder in San Diego.

Last couple years we don't -- haven't liked the land prices in San Diego.

This year we will probably be the number five builder in San Diego largely because we moved our assets out into the Indio-Coachella area.

So I think clearly, San Diego is becoming an Orange County.

There is a very limited land supply.

What land is available there is largely in-fill -- high priced.

And that's never been our market.

And I was also wondering, what were your absorption rates in San Diego in the first quarter of '06 versus the first quarter of '05?

Just per community sale?

We don't have that information.

You don't have that information, then?

And what about incentives?

Just been hearing a lot about incentives in San Diego.

What are your biggest discounts that you have been offering on standing inventory?

I can't answer those questions specifically, but I will tell you across the board, as I told many investors for years, that we offer incentives 24/7 365 someplace in D.R.

Horton land.

If you look at our margins in San Diego, they are equal to or better than what they were last year.

To the extent we were offering higher incentives, our margins are not being impacted.

I was hearing things about -- like a 10% discount off price and things like that.

Have you been seeing that much from other builders and whatnot in that area?

We have not, no.

Thanks a lot.

The other thing I wanted to point out, we don't have standing inventory in San Diego.

In terms of offering incentives -- we don't have completed homes in San Diego.

Thanks a lot.

Next question comes from Steve Fockens of Lehman Brothers.

Hey, good morning, guys.

Just one question, as you look at land buys today, to what degree do you scenario model or take into account a risk of a softening market relative to the way you may have in the past?

Or to put it another way, I know in several markets you've raised hurdle rates for land buys because you've been earning much higher hurdle rates in those markets.

Have you spread that philosophy to any other markets?

Absolutely.

Whenever we look at land prices on a particular market.

And especially, as we mentioned to you last year and this will be the second consecutive year we have done this, as opposed to having a single gross margin goal for all of our profits and our managers across the U.S., we've assigned gross margin goals for each one of our markets and our Division Presidents based upon their last year's gross margins on what we think they should do the next year or so.

And in some markets, we've got -- if you are a Division President with us, you may have to hit a 35% gross profit margin and some you may only have to hit a 20%.

We've established that across the Company.

And I think that's one of the things -- clearly, when we did that two years ago, that's been enhancing our gross margins.

Because our Division Presidents do exactly what we pay them to do.

And we have taken that beyond just the gross margins now, really to all the bonus points that our Division Presidents are expected to deliver.

And that is customized by division, based on what we want to accomplish in those markets.

And then you put that to work with inventory caps and really what we are doing is just closing on the best deals that we are finding in the market.

And you put all that together and that would seem to tell me that you are doing your best over the next few years to keep results in line with where you are, not a natural creep down towards what a hurdle rate may have been in the past?

We may have creeped, but as Stacey says, when we have downward creep, the worst thing to happen to us is --

We will be operating above our historical averages.

We are planning to avoid the creep and that's why we have the bonus plans and our business plan in place.

Thanks so much.

You're welcome.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

I will now turn the call back over to Mr. Tomnitz for closing remarks.

We appreciate you joining our first quarter '06 conference call.

Again, I would like to thank all of our employees across the U.S.

We had an exemplary fourth quarter but most importantly our sales people in the first quarter outperformed the industry.

And I would like to say one more time, you ladies and gentlemen who are selling homes for us, you the leader in the clubhouse.

Thank you very much.

This concludes today's conference. [OPERATOR INSTRUCTIONS]