霍頓房屋 (DHI) 2008 Q1 法說會逐字稿

Good morning.

My name is Cynthia, and I will be your conference operator today.

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

Horton, Incorporated, America's Builder, the largest homebuilder in the United States, 2008 first quarter 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) I will now like to turn the call over to Don Tomnitz, President and CEO.

Sir, you may begin your conference.

Thank you, Cynthia.

Thank you, and good morning.

Joining me this morning are Sam Fuller, Senior Executive Vice President of Finance; Bill Wheat, Executive Vice President and CFO; and Stacey Dwyer, Executive Vice President and Treasurer.

Before we get started, we always get started with 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's no assurance that actual outcomes will not be materially different.

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

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

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

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

Horton's Annual Report on Form 10-K which is filed with the Securities and Exchange Commission.

Don?

Net sales orders for the first quarter were 4,245 homes, $900 million, compared to 8,771 homes, $2.3 billion, in the year ago quarter.

This lower net sales rate was due in part to our 44% cancellation rate during the first quarter compared to 33% in the same quarter of the prior year.

Our average sales price on net sales orders in the quarter decreased approximately 17% from a year ago to $218,200.

Stacey?

Homebuilding revenue totaled $1.7 billion in the first quarter which included $21.2 million related to the reversal of a portion of our FAS 66 deferred revenue balance.

In prior quarters, we were required to defer revenue equal to the gross profit dollars associated with homes closed for which the buyers financed their home purchases through our mortgage company with certain loans with a low down payment and the loans were still held for delivery.

This quarter, the balance of those loans held for sale decreased and we are recognizing $21.2 million of revenue related to homes that closed in prior quarters.

Excluding the FAS 66 reversal, our average closing price on 6,549 homes closed to this quarter was approximately $242,100 compared, down 10%, compared to $269,000 in the year ago quarter reflecting the softer pricing environment over the past year.

Sam?

Our gross profit margin on home sales revenues in the first quarter, before inventory impairments and land option write-offs, was 14.3%.

This was a 170-basis-point sequential decline from our fourth quarter gross profit margin of 16% and a 430-basis-point decline from our home sales margin of 18.6% in the year ago period.

Approximately 170 basis points of the margin decline from the year ago quarter was due to an increase in the amortization of capitalized interest as a percentage of home sales revenues, which was partially offset by an improvement in margin of 70 basis points related to the FAS 66 reversal previously mentioned.

The remaining margin declines were due primarily to core margin deterioration resulting from an increased use of sales incentives relative to last year and a lack of pricing power as reflected in our 10% decrease in average closing price.

Bill?

During our first quarter impairment analysis, we reviewed all projects in the Company and determined the projects with the combined carrying value of $2.9 billion had indicators of potential impairment.

We evaluated these projects and determined the projects with the pre-impairment carrying value of $749 million were impaired.

We recorded inventory impairments of $243.5 million as a charge to cost of sales to reduce the carrying value of these impaired projects.

Approximately 60% of these impairment charges were recorded to residential land and lots and land held for development, and approximately 40% were recorded to residential construction in progress in finished homes and inventory.

Approximately 54% of the $243.5 million in impairment charges related to projects in our California region.

Of the remaining $2.1 billion of evaluated projects which were not impaired, the majority are located in California, Florida, and Arizona.

During the first quarter, we also recorded $2 million in write-offs of earnest money deposits and pre-acquisition costs related to land option contracts that we do not intend to pursue.

Don?

Homebuilding SG&A expense for the quarter was 12.5% of total homebuilding revenues compared to 10.5% a year ago.

We've continued to react quickly to the market to manage our SG&A levels relative to our number of home closings.

In the first quarter, we reduced total SG&A expenses by approximately $82 million compared to the same period in the prior year on 36% fewer closings.

Our ongoing goal for each fiscal year is to be at or below 10% of homebuilding revenues, although this goal will be more difficult to achieve in fiscal 2008.

We'll continue to focus on being the low cost operator in the industry which remains one of our distinct competitive advantages.

Stacey?

Our Financial Services operations remain profitable as we've proactively adjusted expense levels to lower volumes and adjusted product offerings to the current restrictive mortgage environment.

Financial Services' pre-tax income for the quarter was $6.9 million compared to $27.1 million in the year ago quarter.

94% of our mortgage company business was captive during the quarter reflecting our continued focus on supporting our homebuilders business.

In the first quarter, our Company-wide capture rate was approximately 59%.

Our average FICO score was 710 and our cumulative loan-to-value was 90%.

Our product mix during the first quarter was 94% conforming, 4% agency eligible Alt-A, and 2% jumbo.

Sam?

Our reported net loss for the quarter was $128.8 million, or $0.41per share.

Our core operations before impairment charges, land option costs, write-offs, and the effect of the change in profit deferred under FAS 66 generated pre-tax profits of approximately $21.4 million.

We continue to focus on managing the core business by controlling our costs and adjusting quickly to changing market conditions.

Don?

Our overall inventory decreased by over $500 million, excluding impairments during the quarter.

We reduced our total number of homes and inventory to approximately 17,300 homes, down 57% from 40,000 homes at our peak in June 2006 and down 13% from 19,900 homes at September 2007.

We also reduced the absolute number of speculative homes in inventory by 8% this quarter to approximately 9,800 compared to approximately 10,600 at September 2007.

We plan to further reduce both our total number of homes in inventory and our number of speculative homes in the coming quarters in line with current demand.

Bill?

Our land and lot acquisition spending remains limited.

We continue to challenge our land development spending in light of our current be absorptions.

We expect our fiscal 2008 land and lot acquisition and land development expenditures to total between $500 million and $1 billion for the entire fiscal year.

For comparison, our land acquisition and land development expenditures were $2.5 billion in fiscal 2007 and $5.2 billion in fiscal 2006.

We continue to develop smaller phases and pace our development of new phases based on current demand in individual communities.

Sam?

Our supply of land and lots at December 31, 2007 was approximately 197,000 lots owned and controlled, down 50% from our peak of 396,000 lots at March 31, 2006, 73% of these lots are owned, and 27% are optioned.

Our 197,000 lots now represent a 5.2-year supply based on trailing 12-months closings.

We continue to actively work to reduce our own land and lot supply through building and closing homes as well as through opportunistic land and lot sales.

Our net earnest money deposit balance at December 31 was approximately $62 million or 6% of the remaining purchase price.

This low earnest money deposit percentage reflects our conservative approach to land and lot options.

We have no unconsolidated joint ventures and we rarely use land bank arrangements, so our deposits are typically a low percentage of the purchase price.

Bill?

Our reduction in number of homes and lots in inventory combined with a decrease in mortgage loans held for sale helped us generate $558 million in operating cash flow in the quarter.

The two main sources of cash from operating activities were a reduction in inventories of $467 million and a decrease in mortgage loans held for sale of $278 million.

The main use of cash in operating activities was to reduce accounts payable, accrued expenses and other liabilities by $296 million.

In financing activities, cash was used to reduce the balance on our homebuilding revolving credit facility from $150 million to zero, to repay our $215 million senior notes which matured in December 2007, and reduce financial services debt by $282 million, for a total of $647 million of debt reductions during the quarter.

We've generated positive cash flow in each of our past six consecutive quarters for a total of $2.8 billion of operating cash flow over the last 18 months.

Our continued goal for fiscal 2008 is to generate more than $1 billion of operating cash flow.

Stacey?

Our homebuilding leverage ratio net of unrestricted cash was 39.5%, an improvement of 170 basis points from a year ago.

As previously announced, the Company completed an amendment to its senior unsecured revolving credit facility maturing in December 2011.

Although we currently had ample room under the existing covenants, we proactively modified certain financial covenants to gain additional operating flexibility.

We also reduced the facility size from $2.5 billion to $2.25 billion with an uncommitted accordion feature which can increase the facility size to $2.6 billion.

No cash borrowings were outstanding on our revolver at quarter end.

Under our borrowing base calculation, additional borrowing capacity from any source would have been limited to $1.9 billion at December 31.

We were in compliance with our five revolver covenants in effect at December 31, 2007.

Our revised tangible net worth covenant is $3.5 billion and as of December 31 we had a cushion of approximately $1.6 billion.

Our leverage was 41% at December 31, 2007 compared to a revised maximum allowable leverage of 55%.

Our trailing 12-month interest coverage ratio was 3.2 times and our recent amendment eliminated our previous 2 times coverage covenant.

Our ratio of unsold homes to homes closed on a trailing 12-month basis was 26% compared to our covenant maximum of 40%, and our ratio of residential land and lots to tangible net worth was 108% compared to our covenant maximum of 150%.

Don?

We are focused on increasing our sales pace and we will continue to adjust the product that we are offering, negotiate better pricing on our input costs, and reduce sales prices or increase incentives as necessary to meet our sales goals.

Our sales people have been empowered to clear any excess inventory in each of our communities to bring our inventory in line with current demand.

This approach, combined with home affordability that is at it's best that it has been in many years given mortgage rates and current home pricing, gives us confidence that our inventory will continue to decline in the months ahead and that we can continue to meet our inventory reduction goals.

As I've said before to our people, we cannot outperform our markets but we can, must, and have consistently adjusted our business model to adjust to our markets.

We have reduced our inventory, reduced our staffing, and reduced our costs in order to offer the most competitively priced product in our markets.

We will continue to do all of these on a going forward basis.

The bright points to me in Q1 include we continued to remain operationally profitable; we continued to have the lowest SG&A in the industry; we continued to reduce our debt outstanding and strengthen our balance sheet; we continued to reduce our inventory; we continued to generate substantial free cash flow, a total of $2.8 billion in the past six quarters, and a total of $550 million in Q1 relative to our fiscal year '08 goal of $1 billion.

As importantly, we restructured our revolving credit facility and it's now the largest and best structured in the industry.

We thank our banks for their cooperation.

In conclusion, I wish to thank all of our DHI teammates for their accomplishments in Q1.

We look forward to completing fiscal year '08, putting it behind us and participating in the future recovery of the U.S.

homebuilding industry.

DHI, America's Builder, has been the leading builder in the industry for the past six years and DHI will be the leading builder in the future.

Thank you, and we'll entertain any questions you may have.

(OPERATOR INSTRUCTIONS) Your first question comes from Michael Rehaut of JPMorgan.

Hi, good morning.

Good morning.

First question just on orders and pricing.

You had a bit of a falloff, down 52% from 39, down 39 in the fourth quarter, and your order ASPs up about 6% sequentially.

I was wondering if this is a shift in strategy?

You had been more aggressive in price in the previous two quarters and how do you see that playing out as we go into 2008?

Well, we continue, Mike, to try to find market in each one of our subdivisions in each one of our cities in each one of our markets.

We did not achieve the sales that we had as an internal goal in Q1.

As we move forward, as I said in my conclusion, our sales people have been empowered specifically vis-a-vis pricing and incentives to clear any excess inventory that we deem as excess in various markets.

Our goal is to increase our sales on a going forward basis.

What do you have as a goal for reducing spec?

You've continued to reduce it in 1Q but you have a goal over the next couple quarters to get it to a level?

Yes we are.

As I said before, our specs are too high.

We've done a good job in the field of reducing our specs each of the last several quarters.

The spec count is still too high as our inventory is too high.

We have a specific control here at the corporate office, and with each one of our regional presidents on specifically start specs, and only an executive officer and the corporate office, and usually that's me, can approve a spec start in a subdivision.

So as we continue to control our new specs and continue to incentivize the sale of our existing specs -- you see that our spec inventory has come down and our inventory has come down -- and that will continue to be the case in the quarters ahead.

Great.

Thanks.

One more question on the cash flow, which congratulates you did a great job there.

My question is if you can give us some insight into how you see it progressing throughout the year?

It would seem that with the success you had in the first quarter you're well on your way to exceeding $1 billion.

As you go through the year, there's some seasonality expected that you might have a negative quarter or two or, what's your -- how do you see the year playing out?

Well, as my good buddy, Todd Horton, who is one of division presidents in Dallas/Fort Worth West says no good deed should go unpunished.

We did generate a substantial portion of our goal for free cash flow in the fiscal year in the first quarter.

We do not anticipate any negatives in the quarter and clearly as was the case last year, our fourth quarter should be our largest free cash flow quarter, although relative to Q1, that's going to be tough to achieve.

Our goal is to continue to achieve that $1 billion of free cash flow.

We're comfortable we can get there.

To the extent we exceed it, you and all of us are going to be extraordinarily happy.

Thank you.

Your next question comes from Dan Oppenheim with Banc of America Securities.

Dan, your line is open.

Your next question comes from Ken Zener with Merrill Lynch.

Good morning.

Good morning, Ken.

Congratulations on the cash, as well as paying down the debt, but I have a bit broader question about the leverage of the Company.

If you were to maintain a 40% leverage through the year or year end.

I'm interested to think, how does this not put you at a disadvantage to other builders that have a lower net leverage, and who could relever by buying new land?

I understand you guys are throwing off cash, maintaining leverage, not going bankrupt, obviously, but how does it not put you at a disadvantage to other builders that can put new money to work in new land?

Clearly, if I understand accounting like I hope I do to the extent that we continue to generate the cash and we don't pay down the debt then the cash is going to be on our balance sheet.

So whether it's -- whether we are in a position to take advantage of new opportunities, vis-a-vis the cash on our balance sheet or by releveraging the Company, I'd say it's the same.

We're in a wonderful position.

I can't even say the word that you said in the question because certainly that doesn't even enter in our mind up here.

Nevertheless, we're well positioned with a strong cash position, nothing borrowed under our revolving credit and are positioned to take advantage of any opportunities in the marketplace when they come forth.

Okay.

Yes.

I was not at all implying bankruptcy.

I disagree with that.

I knew you weren't, but I wanted to make sure you weren't.

As do I.

(laughter) So the other question is, with orders down 52%, could you give us a little more flavor on how much of that we could attribute to a lower community count?

Given that your [can] rate beginning backlog actually was lower than it was in the fourth quarter, I just want to see how much of that is based upon lower community count?

As you know, we don't provide community count, but I would say to you, not much of that is due to lower community count.

Frankly, it's just the fact that we held our prices in the quarter perhaps a little better than we anticipated.

And we didn't make the sales that we thought we were going to make with that kind of solid pricing.

Right.

I appreciate that.

I guess just the last question is on the balance sheet.

You have increased in the land held for development is now nearly $900 million versus roughly $200 million last year?

Can you discuss if there's any accounting change there, and why?

Thank you.

No, Ken, there's no accounting change.

What that really reflects is our decisions on a community-by-community basis to slow down our plans for development of property.

It doesn't represent any additional new properties.

It's simply a reclassification of properties that previously were classified as land under development which would include things that would start in as relatively short a period of time.

As we slow things down and the land sits unimproved for a little but longer then it moves into that category.

Are those in California?

They're all over the country.

Thank you.

Your next question comes from Nishu Sood with Deutsche Bank.

Thanks.

Good morning, everyone.

Good morning.

Good morning.

I wanted to ask about your owned land position.

I wanted to get a sense of the kind of state of development of it.

So I guess two ways of looking at that would be how many of your owned lots are fully developed and a second way of looking at it would be the dollar amount that it would take to bring your owned lot portfolio to a fully developed state?

Nishu, I don't have either of those numbers in front of me at the moment, but what I can tell you, clearly, is we have sufficient developed lots in front of us in 2008 to deliver the homes that we're planning to deliver in 2008 such that we don't have to spend more than $500 million to $1 billion in both land acquisition and land development to meet our delivery goals.

Right.

Of that $500 million to $1 billion that you mentioned, that's very helpful disclosure.

How much of that is going to be incremental lot takedowns and how much of that is going to be finishing out the development?

The greatest percentage will be finishing out the development.

There would be a small portion that would be lot takedowns, but clearly the biggest portion would be development.

Frankly, what we're focusing on at the Company is building houses on lots that we already own as opposed to taking down lots under option contracts that we don't own.

Okay, and the second question I had was on deferred taxes.

I wanted to ask if there's going to be any positive cash flow benefit as we've seen from some of the other builders from recovery of deferred tax assets this year?

Clearly, as we sell assets that had previously been impaired, we will realize the tax benefits from any loss that is incurred.

That cash would come into play whenever we file our tax returns or make potential estimated payments throughout the year.

Given our current situation, I wouldn't expect that cash from taxes to come in in the next few quarters, though.

We continued to pay tax throughout fiscal 2007 because we still generated pre-impairment profits.

In terms of a year end filing that's going to generate taxes from our fiscal year '07, that's not something we will be realizing.

Got it.

The decision not to, or I guess the decision not to take any valuation allowance into your deferred tax assets, I guess the way people are going to interpret that is you're forecasting still a three-year window of profitability, perhaps a more optimistic outlook than we've seen from a lot of the other builders.

Is that an appropriate way to look at that?

That is one factor that goes into our valuation.

Frankly, an issue, the most significant factor in our evaluation of this quarter in which we didn't take an allowance is the significant amount of profit, taxable profit that we had in 2006 and 2007.

That provides us with significant carryback periods for tax losses that we incur both in fiscal 2008 and in fiscal 2009.

Because of that significant available carryback, that allows us certainly some time to move assets, generate losses and realize those tax benefits.

Okay.

Thanks a lot.

Your next question comes from [Steven Kim,] private investor.

Hi, guys.

Good morning.

Good morning, Steve.

Good quarter here in terms of disclosure.

I just wanted to zero in a little bit if I could on the work in process portion of your inventory.

I heard you say, Don, that basically your intent was that you wanted to lower that and presumably that's going to be what allows you to be cash flow positive in each and every one of the quarters of this year.

By my calculation, and I always look at the finished homes in construction in progress as a percentage of your backlog value, it looks to me like your figure was about double in dollars what it would have been or should have been if you had been running at what you might consider a more normal WIP to backlog value ratio.

That implies about, gosh, almost a $1.4 billion.

I wanted to see if you could give us some sense of, roughly, how much more than you would have liked or you had hoped your WIP came in this quarter?

Is it a billion dollars too high or is it something considerably less than that?

Steve, I'll take that.

We look at it -- we look at our homes in inventory and our total inventory relative to where we expect our sales and closings to be in the coming quarters.

Typically, we use a benchmark of trying to keep our homes in inventory at about half the amount of closings that we expect in the next 12 months.

That would relate somewhat to backlog.

But clearly, when you look at where our homes are, where our sales have been, what that would annualize to be, we have more homes in inventory than we need.

We would expect to continue to be able to reduce the homes in inventory to match our most recent sales pace and our expectations.

That will generate some additional consistent cash flow in the coming quarters.

Trying to nail it down to a specific dollar amount that would be a moving target based on how sales go in the next quarter or two.

So we'll adjust based on how we see our sales each quarter.

But your comment about how you felt that the balance was too high today was a function of what you're anticipating you might sell going forward or to the degree to which you're prepared for that.

So I'm just trying to figure, is $1 billion even in the ballpark, or is that considerably too high?

$1 billion of additional?

I'm not going to get nailed down to an individual number there, Steve, because it's still going to ultimately come down to where our sales pace is.

If our sales pace is better than expectations then we will adjust to that direction as well.

Okay, and then If I could.

I had a couple of housekeeping items.

I think I needed the capitalized interest that you had in the quarter, the incurred and the capitalized amounts?

Are you looking for what was amortized through cost of sales, Steve, or are you looking for the balance in inventory?

Well, you can give me both.

I'm really looking for the amount incurred and the amount that was amortized.

All right.

Interest incurred is $62.8 million.

Interest amortized to cost of sales was $58 million.

And --

That's consolidated.

Say that again?

Those are consolidated numbers.

Got it.

The balance in inventory, Steve, was about $328 million at the end of the quarter.

Okay.

Great.

Thanks.

And then, Sam, you had given some lot data and I wasn't quick enough to write it down.

Can you just reiterate what you said in terms of your lot count at the end of the period, as well as your comment about the option deposits and the percent of purchase price and all that?

That was data that I couldn't get all down.

Sure, Steve.

We had 197,000 lots owned and controlled; 73% were owned, 27% are optioned.

Our deposits, earnest money deposits were approximately $62 million, or about 6% of the remaining purchase price of the land and lots that are under option.

That $62 million, is that inclusive of letters of credit?

Yes.

Yes.

Cash and letters of credit.

Great.

That's great, that's what I needed.

Thanks very much, guys.

Your next question comes from David Goldberg with UBS.

Thanks.

Good morning.

Good morning.

Trying to get an idea, a little more color on the cancellations, maybe if they were concentrated in certain buyer segments or geographically?

Pretty much across the board, clearly, I think, the states where we have a slightly bigger percentage continues to be California, continues to be Las Vegas, continues to be Arizona, as well as Florida.

Is there a most common cited reason or maybe some concentration in buyer segment or something like that?

It's largely a function of us culling our backlog, if the mortgage instruments are not available, or we don't believe they are going to be available on a going forward basis, we bust those people out or cancel them.

Also that we do not want anything on our backlog that we don't think has a high probability of closing, so we are requesting our regional presidents and division presidents to flush that backlog just as soon as it becomes doubtful that a unit's going to close.

So you're pretty comfortable that what's in backlog now, at least based on the latest evaluation, is pretty solid in terms of cancellations?

It should be (inaudible)

Based upon the facts that exist in the mortgage market today, yes, that could change tomorrow.

Mm-hmm.

I guess the follow-up question would really be about the cumulative loan-to-values and the fact that those haven't declined through the downturn despite tighter lending standards.

I would think anymore your clients would be using FHA loans.

Have you seen that pick up?

FHA loans have certainly increased.

If we look at government loans overall as a total of our portfolio it was 35% in this first quarter versus 11% last quarter.

The lower down payments on those types of loans are being offset, though, by tighter lending standards across the board on other products.

A lot of the Alt-A products require lesser down payment, whereas a 30-year mortgage right now is going to require a certain level of down payment.

So there are some offsets to the increase that we've seen in the government loans.

Got it.

Maybe I can sneak one more in on the SG&A.

Can you give us an idea of what's variable versus fixed in that and how you see it trending on a per house basis or per delivery basis over the year?

Really, the best way to answer the fixed versus variable is to talk about our people costs.

That's generally running somewhere between about 55% and 60% of our total SG&A.

Those are the costs that are most easiest for us to adjust in relation to our volume.

There are other costs that would be considered variable as well, our office leases, our communication costs, and if we're consolidating divisions or back offices in some of our regions.

But really, the 55% to 60% is probably going to be the best guess we can give you on our variable costs.

Okay.

Great.

Thanks.

Your next question comes from Timothy Jones with Wasserman and Associates.

Good morning.

Good morning.

Three quick questions.

Your cancellation rate went up to 44% and 33, which is completely different than most builders.

Their cancellation rates have been coming down and, of course, you had over 50% decline in orders.

I mean, you alluded to the fact you were trying to hold prices.

Remember you did this about a year ago in California and paid a heavy price for that.

Are you trying to do the same thing now?

Let me correct you.

I don't think we paid a heavy price in California for trying to hold our prices.

You got taken down quite dramatically the following two quarters.

Yes, we did.

We definitely did.

I don't think there's ever an error over a quarter's basis, Tim, where we're trying to hold our prices.

From a personal perspective, as to the industry, if there's one thing that's going turn this industry around is when we all get some stabilized pricing and we can begin to raise our prices so much.

I encourage all of our other brothers and sisters out there to try to stabilize prices, also.

I don't think they're listening to you.

Well, you know what, if they're not, we're going to take ours right on down to hit the sales pace we need to hit, too.

I congratulate you to try to hold the -- to be one of the 300, but that's okay.

The orders, do you have the order flow, the percentages year-to-year on a monthly basis?

Did it deteriorate, stay the same?

What happened?

It was relatively consistent throughout the quarter.

And just one other clarification, Tim.

Sequentially, we did see an improvement in our cancellation rate.

We improved about 400 basis points in that.

The year-over-year did show an increase, but we improved that from our September quarter.

Good.

I'm glad about that.

Last, that land held for, that $900 million of land held for development, is that basically properties that you are mothballing?

Mothball properties are included in that number, yes.

What percentage would be mothballed as opposed -- what else would be in there?

It's not properties held for sale, so what else would be there other than mothball properties?

Mothball might include that you're never going to touch it again.

Some of these, as of right now, our plan is not to move forward.

Potentially, some of those could be sold.

Potentially, we may see an improvement in a market and we may choose to pull it back out sooner.

But right now, based on our intentions at 12/31, we're not going to develop them any time soon.

Okay.

But the big difference is that you just hold them until things get better, as of today?

Yes.

Right.

Thanks.

Yes, sir.

Your next question comes from Alex Baron with Agency Trading Group.

Good morning, guys.

Good morning.

I guess I wanted to ask you just kind of more conceptually, and I guess you partially answered it.

Other builders kind of were generating more sales than you guys this quarter.

I'm just trying to understand how you guys are thinking about improving the sales pace versus maintaining your profitability, kind of what drives you there?

It's a difficult balance from subdivision to subdivision, really house by house basis.

Clearly, I said at the conclusion, Alex, that we're desirous of increasing our sales in Q2 over Q1 and we've empowered our sales people to move the excess inventory in our subdivisions to the extent there is excess inventory.

So I would be positive in terms of Q2 sales being better than Q1 sales.

Okay.

I guess my second question is, a lot of other guys have been selling land at significant losses and talking about the tax refund that they're getting.

Wondering how you guys are thinking about that yourselves and if that makes any as sense to you, or is that's something you guys are planning on doing also?

We're looking at land sales and we've made land sales as you can see.

In this quarter, I think, we had somewhere right around $100 million in land sales.

Two of the sales primarily were out of Arizona and one of them was out of Florida.

We're focusing on moving those pieces of property in areas where we don't think we're going to be using that land in two or three years out.

At the same time, our focus is to get our land and lot inventory down to a more reasonable level.

I think right now, as Sam said, it's 5.2 years.

We'd rather see that somewhere between three and four years.

We also clearly have identified in our last operating committee meeting with our regional presidents those projects with the highest deferred tax credit that we can return to the Company and we're focusing on moving those pieces of property.

Were those $100 million land sales, were those previously impaired?

No, sir, they were not and both of them were profitable as a matter of fact.

Okay.

Thanks a lot.

Yes.

Your next question comes from Stephen East with Pali Capital.

Good morning, everyone.

Good morning, Stephen.

Just one quick question here.

If we look at California, if we look at prior year's December quarters, you're down more than 75% on orders.

What's your strategy there and why is your performance where it is versus the broader market, et cetera?

First of all, I think, in California that we're performing as well if not better, Stephen, than anyone else in the marketplace.

Clearly, California is in a very, very difficult position in terms of affordability and most importantly, mortgage instruments.

I think the affordability index has improved dramatically as we have lowered our prices and taken impairments out there as an industry and specifically as a Company.

As I was talking with Chris Chambers, our regional president for California, he said the one good thing about where we are in California today is most of our sales prices on our product out there is conforming.

So as a result, we believe that by lowering prices and taking impairments out there, we've made the product more affordable.

I don't think anybody should forget, though, and we've done an in-house calculation about where we are in California, vis-a-vis, the last seven years in terms of the pre-tax income that we generated in California less the impairments that we've taken.

Just to give you inside information, right now, we're setting $2 billion to the positive.

If you calculate all of our profits, any of our losses and all of our impairments and all of our earnest money and due diligence write-offs that we've incurred since inception out there, we're still $2 billion to the good.

Okay, and when you look at your current footprint in California and you look out, say, over the next to two to four years or so, do you see a continued shrinkage or do you see it growing?

How do you view that?

Let me be very clear when I say this.

We have closed and merged a number of divisions in California.

Currently, we have three divisions in Southern California, one in San Diego, one in the Desert and the Inland Empire, and we also have our Ventura County area, and then we have the San Francisco Bay area and we have the Sacramento area.

Those divisions have consolidated a lot of back offices and we believe that we are very close to being properly structured out there, although we continue to downsize California as to the demand for our homes.

Where we are structurally, specifically, we believe what we've got out there today with those three divisions even though they are very sparsely staffed and the three in Northern California we believe we've got the core operators to take us into the recovery in California.

Unfortunately in California, I don't see a recovery in California in the next 12 months.

Okay, thanks.

Your next question comes from Jim Wilson with JMP Securities.

Thanks.

Good morning, guys.

Good morning, Jim.

Let's see, I guess, two questions then just to follow-up on California and, obviously, you had the at least the -- your worst comparison year-over-year in new orders there.

What do you -- what is your pricing strategy, I know you want to step up?

What are you looking at as pricing strategy here near term to try to get the volume to improve in California?

We have got two sales that are coming up.

The third and fourth or second and third.

I guess it's the third and fourth weekends and I think it's the second and third weekends in February that are already being set up and structured.

We have identified units in specific communities where we believe we've got excess inventory and we're going to turn that inventory at the market price.

The great thing about turning that inventory, Jim, is that may be inventory that is built on a cost structure that's higher than we can currently build it.

Turning that inventory lets us do a couple of things.

It lets us challenge the product that we're building and also lets us drop our cost basis in the product so we can adjust our sales prices and still remain profitable out there.

You're in California, and you've seen several of these downturns as we've seen several downturns in California, and to get back to Stephen's question of when do we see this coming around, I have -- every one of the past downturns in California basically are three to five years years in length.

I think we're in December of 2005 was really when California began to get soft for us.

So I think we're just clearly a couple years into this.

I think we've got at least 12 to 18 more months before we see any firming in pricing in California.

Then I guess the other one is can you give a little color of the cancellation rates by regions or markets, how they might have differed just through your experience?

I think the way I answered the question earlier was, and probably the most color we're going to provide, is that our can rates are primarily in areas, our higher can rates are primarily in California, Las Vegas, Phoenix, Tucson area and Florida.

That's where most of our cans it seems like are coming.

Okay.

All right.

Thanks.

Your next question comes from Jay McCanless with FTN Midwest.

Hi, good morning.

Good morning.

Two questions, if I could.

The first one, if you look at the neighborhoods you have open right now and the neighborhoods you plan to open during 2008, what percentage of those would you estimate would fit under either conforming or FHA rules for their specific area?

I can tell you we're not interested in opening anything that's not within conforming.

To the extent it can't be confirming, it's going to be mothballed.

Okay.

And then my second question.

On the last call, you all discussed that there were certain specific MSAs, I believe, where you were able to raise prices or at least hold prices firm.

Has that continued through to this quarter and has that number of areas where you can hold the line on pricing, has that expanded?

It has not, and I think as a matter of fact we've seen more pricing weakness in the quarter than we anticipated, and I think that truly was reflected in our sales which were slightly lower than what we internally had budgeted.

So, therefore, on a going forward basis, that's why I mentioned that our sales people are empowered to move the inventory, if it's excess in our communities, at the market price.

Okay.

Thank you.

Yes, sir.

Your next question comes from Carl Reichardt with Wachovia.

Actually, thanks.

I'm actually good now after all these other questions.

I appreciate it.

Thanks, Carl.

Your next question comes from Wayne Cooperman with Cobalt Capital.

Same.

Mine were answered, thanks.

Thank you.

Your next question comes from Ethan Auerbach with Marathon Asset Management.

Hi.

Of your $1 billion cash flow estimates from operating cash flow, how much of that is expected to be from mortgages being sold?

How much is expected to be from tax refunds and how much is from direct land sales?

We'll start at the bottom.

We're really not including much in the way of land sales since those are so unpredictable.

Secondly, as we mentioned a little bit earlier, we don't expect a tremendous amount in tax refunds this year.

We expect really more of our cash from our tax refunds to come after the end of fiscal 2008.

Then definitely a greater percentage we expect to come from inventory reductions and a lesser percentage from mortgage loans held for sale.

The mortgage loans held for sale will really be driven by our level of sales, and then, therefore, the mortgages that we originate throughout the year.

To nail it down to specific number is a little difficult, but we do expect more from inventory than from mortgages.

And clearly our focus has been where we have development dollars in the ground we're focusing on building houses on those lots as opposed to taking down lots from third party developers simply because we want to extract those development dollars out of the ground.

Sure.

And just conceptually, if I look at your numbers and what, I don't know, if you assume revenues are down like 30% or 40% this year in your construction costs are around 55% of revenues, then you plug in somewhere around $500 million to $1 billion land spending, you basically get to, I guess, about $700 million, $800 million of cash flow that you generate after taking into account something like $1 billion in SG&A.

Basically, without dramatically changing your inventory position, basically just by operating without replacing a lot of the land that you're using.

Is that kind of how you envision the year going, or are you looking to much more aggressively reduce things?

Well, we're clearly focused on aggressively reducing our inventory both in our WIP as well as our land and lots that are developed.

Our focus is to clearly reduce our inventory of homes under construction which we perceive as probably 4,000 or 5,000 too high for us relative to where we see our sales currently and rolling those forward for a 12-month basis.

Secondly, we've got 399 homes out there that have been completed and unsold for greater than a period of a year.

We're planning on putting a homeowner in those in this quarter.

Are you finding that you're able to sell things like that close to where they're marked on your books right now?

[Sell,] you mean talk about the houses?

Yes.

Things that you have complete that have been aged for a couple months, are you selling them close to your cost basis or are you selling above or below that?

That's going to vary subdivision by subdivision.

Frankly, we're selling them at whatever the market is.

Some of those projects have been impaired.

Some of them haven't been impaired.

When we get finished with this quarter, some of them will be impaired.

But to answer you specifically, yes, most of the times it is at or better than our costs on our books.

Okay, and then final question is, what, without having a breakout of the finished sites versus, with unfinished it's hard to get this number, but can you just estimate what the cost basis is per finished lot in your inventory right now?

The finished lot costs on our homes that closed is generally somewhere between $65,000 and $70,000.

Okay.

But that is a percentage of our sales basis remain pretty conservative because it's been somewhere between 20% and 25% of the revenue associated with the house.

Right.

Right, and so that's consistent with what's actually in your inventory as well as what you're actually selling right now?

Yes.

Okay, great.

Final question will just be approximately what percentage of the sites in your inventory are finished right now?

The vast majority of the land that we have on our books is finished.

Okay.

Great.

We don't hold a lot -- we never have held a lot of land for future development.

Now, as someone had mentioned, we've added to that simply because we've mothballed some projects that we thought we were going to put into development more quickly than what we have.

So, therefore, that segment of our balance sheet has increased slightly.

I'm still a little bit confused about that then.

It looks like you have a much lower cost basis on your books, so you've got, I guess, the residential land and lots plus land held for development is about $5.6 billion, and you just said that you've got about, let's see what was it, 143,000 or 144,000 sites in your inventory, which --

196,000 is how many lots we own.

Ethan, how about if Jessica and I give you a call back after the call so we can actually sit down and go through the numbers with you?

Okay.

That's fine.

Thank you.

our next question comes from Joel Locker with FBN Securities.

Hi, guys.

I apologize if you guys have already stated this, but what was your impairment reversals in the first quarter from previous quarters that benefited gross margins?

Yes.

We had about $44 million that came back through from previous impairments during the quarter.

$44 million.

So what's that, about 270 basis points or something like that?

Roughly, yes.

Right.

And just, I was curious on your percentage deposit as a percentage of the home price, what that's running currently on orders, or in backlog?

It's going to range from very little to, if it's a bill job today, which there are not many of those being written today, it could be as much as 5%.

Typically, on a lot of these houses that we are closing today the deposits are $1,000, $2,000.

Right.

So do you have a number, I mean, the backlog's $2.01 billion.

Do you have a dollar amount of deposits against that backlog?

That is definitely something we track.

I don't have the number in front of me right at this moment.

Right.

I'll just catch up after the call.

Thanks.

Okay.

Your next question comes from Susan Berliner with Bear Stearns.

I hope I didn't miss this, so I apologize in advance.

Finish specs, did you give out that number?

We did not, Sue.

Our finished specs at the end of December were about 5,300.

And as Don mentioned earlier, we have 399 that are greater than one year old.

Okay.

Then can you just comment on, I guess, the comfort with keeping your dividend where it is?

Yes, I can.

First of all, our directors review that dividend on a quarterly basis and approve it on a quarterly basis.

If you look at our cash flow, we are currently running about 10 times what our dividend is, and I feel that when we're running 10 times our dividend in terms of free cash flow, we're comfortable at that level.

Perfect.

Thanks very much.

Your next question comes from Eric Landry with Morningstar.

Good morning.

Thanks for taking my call.

You're welcome.

I just want to make sure your tax year is the same as your fiscal year, correct?

Yes it is.

Okay.

Great.

Thanks for the color on the finished lots.

Let me make sure have I this straight.

Are you saying that your finished lot cost right now is roughly $65,000 to $70,000, sitting in inventory?

The finished lot costs of the homes that are closing is about $65,000 to $70,000.

But didn't you also make a comment that that's roughly the same as what's sitting in inventory right now?

For lots that would be finished, that's very similar to what's in inventory now.

Okay.

Would you happen to know is that vintage 2004 or '03 or do you know that off the top of your head?

I don't know the blend off the top of my head.

It's going to be across the board, though.

The lot cost that I'm giving you would be our net lot cost.

So those if there have been impairments those impairments would be netted against that $65,000 to $70,000.

Theoretically, the vintage isn't going to help you a lot there.

Okay.

Finally, are you going to be able to capitalize all of your interest incurred this year?

You're going to be north of $250 million interest incurred if my numbers are right here.

And with $500 million in development spending or less than that if you count the acquisitions in there, or somewhere around that number.

Is it possible that we're going to see an interest expense line show up here sometime throughout the year, or how does that work?

Yes, that is possible in the coming quarters.

As of the end of December, we were still in position -- our inventory relative to our debt where we capitalize 100% of our interest.

But as our inventory continues to come down it is possible that we will expense some of our interest directly in a coming quarter.

Okay.

Would you gather to guess some sort of a proportion of it, or is that not computable right now?

Difficult to put a guess on that.

It would really depend on the level of inventory that is reduced in a particular quarter.

Okay.

Thank you.

In interest of one our competitors having their conference call at 9:00 here and giving all of you time to sign on with them, we'll take one more question, please.

Your final question comes from Bob Thompson with Advantus.

Hi, guys.

I just want to go over a couple, on the numbers.

If the market continues like Q1 and you end up with delivered homes in the 20,000 to 24,000, would your goal be to bring down the 17,300 inventory down to maybe the 12,000 range?

That's correct.

Okay.

And then overall specs, were overall specs were 9,800?

Yes.

So would the level to bring that down be in the 6,000 to 7,000 range?

That's probably realistic, not where we'd like to be but that's probably realistically where it would be.

Where would the goal be on that?

We have always tried to keep our specs somewhere between 30% and 40% of our finished inventory, and clearly we have not been running that.

So that would be the goal.

Okay.

What are the new covenants on the bank line?

There are no new covenants necessarily.

What has changed is our leverage maximum has been reduced from 60 to 55.

Our tangible net worth was lowered down to $3.5 billion.

Our interest coverage covenant is no longer a covenant that could create an event of default at a two times coverage.

Our pricing changes, if we drop below two times we might have to maintain a certain level liquidity.

If it drops down below 1.5, but then a couple of items have, covenants have stepped in now that we are not investment grade with two agencies.

So we have a limitation on our specs, must be at 40% of trailing 12 months closings, and then our land and lots on our balance sheet are limited to 150% of our tangible net worth.

Okay.

I'd just like to say that we want to thank our banks, again, for working with us on restructuring what is the largest and the best structured revolving credit facility in the industry.

We had a 90% "yes" vote on it.

I think that says a lot for where we are and where the banks are.

Okay.

And last question.

In terms of just the cancellations, are the reasons for the cancellations changing at all versus what they were a couple quarters or is it kind of the same old story with the cancellations?

I think it's the same old story.

I think one of the things is still mortgages are changing, down payments are changing, qualifications are changing.

The pricing in the marketplace continues to change.

You may contract to buy a house today at $250,000 and the same house being sold or similar house sold by a competitor could be $230,000 tomorrow.

I still think the marketplace is in disarray from the home buyer's perspective in terms of what is a good deal out there.

So largely it's a lot of people getting cold feet.

Really, the third large factor in that is people who have an existing home that they need to sell are still competing with a lot of the existing home inventory out there right now.

Sure.

Thank you.

Good cash flow.

Thank you.

Thank you.

I would now like to turn the call back over to Mr.

Tomnitz for closing remarks.

Thank you for joining our Q1 fiscal year '08 conference call.

In conclusion, I'd lake to thank all of the DHI teammates out there.

You performed admirably in the first quarter.

It was a tough quarter.

But we achieved a lot of our goals and in our humble opinion you outperformed your competitors once again.

We look forward to the end of fiscal year '08, because we hope at the end of fiscal year '08 that things are improving and that we're once again building this Company back up to the size and profitability that it once was.

Thank you very much.

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

Horton, Inc., America's Builder, the largest home builder in the United States, 2008 first quarter conference call.

You may now disconnect.