霍頓房屋 (DHI) 2008 Q2 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 like to welcome everyone to the D.R.

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

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

After the speakers' remarks, there will be thanks question-and-answer session.

(OPERATOR INSTRUCTIONS).

As a reminder, ladies and gentlemen, to allow everyone the opportunity to ask a question, please limit yourself to one question and one follow-up question.

I would 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, our Senior Executive Vice President of Finance; Bill Wheat, Executive Vice President and CFO; and Stacey Dwyer, Executive Vice President and Treasurer.

Before we get started, Stacey?

Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Although D.R.

Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.

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

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

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

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

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

Don?

Thank you.

Net sales orders for the second quarter were 7,528 homes, $1.7 billion, compared to 9,983 homes, $2.6 billion in the year ago quarter.

Our average sales price on net sales orders in the quarter decreased approximately 15% from a year ago to $220,800.

Our second quarter home building revenues were $1.6 billion, compared to $2.6 billion in the year-ago quarter.

Our average closing price for the quarter was down 8% to $237,800, compared to $257,500 on the year-ago quarter reflecting the softer pricing environment compared to the prior year.

Sam?

Our gross profit margin on home sales revenues in the second quarter before inventory impairments and land-option write-offs was 9.4%.

This was an 830-basis-point decline from our home sales margin of 17.7% in the year-ago period.

570 basis points of the margin decline was due to core margin deterioration resulting from an increased use of sales incentives relative to last year, and the lack of pricing power as reflected in our 8% decrease in average closing price.

The majority of the remaining margin decline from the year-ago quarter was due to an increase in the amortization of capitalized interest and property taxes as a percentage of home sales revenues.

Bill?

During our second quarter impairment analysis, we reviewed all projects in the Company and determined that projects with a combined carrying value of $3.7 billion had indicators of potential impairment.

We evaluated these projects and determined that projects with a pre-impairment carrying value of $2 billion were impaired.

We recorded inventory impairments of $817.1 million as charge to cost of sales to reduce the carrying value of these impaired projects.

Over 80% of these charges related to projects in our California, Southeast and West regions.

Of the remaining $1.7 billion of evaluated projects which were not impaired, the majority are located in Arizona, California, and Florida.

During the second quarter, we also recorded $17 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?

Home building SG&A expense for the quarter was 12.8% of total home building revenues, compared to 11.3% a year ago.

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

In the second quarter, we reduced total SG&A expenses by approximately $88 million or 30% compared to the same period in the prior year on 31% fewer closings.

We are making adjustments today to position the Company to return our long-term goal of keeping SG&A at 10% of home building revenues each fiscal year.

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

Sam?

We recorded approximately $11.2 million in interest expense during the quarter.

Since we have continued to reduce both our residential inventory and our development activity, our active inventory did not exceed our home-building debt levels this quarter, so we expensed a portion of our home-building interest incurred.

Stacey?

Our Financial Services remain profitable as we have 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 $11.9 million, compared to $7.3 million in the year-ago quarter.

92% of our mortgage company's business was captive during the quarter, reflecting our continued focus on supporting the home builder's business.

In the second quarter, our Company-wide capture rate was 63%, our average FICO score was 708, and our average cumulative loan-to-value was 91%.

Our product mix in the first quarter was 95% conforming, 3% agency eligible Alt-A, and 2% jumbo.

Bill?

During the quarter, we recorded a valuation allowance of $714.3 million against our deferred tax assets.

$385 million relates to the deferred tax assets that existed at the beginning of the year, and the remainder represents valuation allowance for deferred tax assets created during the first six months of fiscal 2008.

The net remaining deferred tax assets of $545.5 million at March 31 are expected to be realized in fiscal 2008 and 2009 through net operating loss carrybacks to tax years 2006 and 2007, including subsequent reversals of existing taxable temporary differences.

The full effect of the deferred tax valuation allowance is reflected in our income tax expense of $421 million during the quarter, and $347 million during the six months ended March 31, 2008.

Sam?

Our reported net loss for the quarter was $1.3 billion, or $4.14 per share.

For the six months ended March 31, 2008, we reported a net loss totaling $1.4 billion, or $4.55 per share.

Don?

Our overall inventory decreased by approximately $700 million, excluding impairments during the quarter.

We reduced our total number of homes in inventory to approximately 15,100, down 62% from 40,000 homes at our peak in June 2006, and down 13% from 17,300 homes in December 2007.

We also reduced the absolute number of speculative homes in inventory by 28% this quarter to approximately 7,100 homes compared to approximately 9,800 homes at December 2007.

We had 3,200 completed unsold homes in inventory at the end of the quarter, down 40% from 5,300 at December 2007.

We plan to continue to adjust both our total number of homes in inventory and our number of speculative homes in the coming quarters to match our current demand.

Bill?

Our land and lot acquisition spending remains limited and we continue to restructure our land development spending in light of our current absorptions.

We still 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.

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

Sam?

Our supply of land and lots at March 31, 2008, was approximately 181,000 lots owned and controlled, down 49,000 lots from the beginning of the fiscal year.

78% of these lots are owned and 22% are optioned.

Our 181,000 lots now represent a 5.2-year supply based on trailing 12-months closings.

We continued to actively work to reduce our owned 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 March 31 was approximately $59 million on a remaining purchase price of $900 million.

Our low earnest money deposit balance 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.

Stacey?

Our reduction in number of homes and lots in inventory helped us generate $452 million in operating cash flows in the quarter, resulting in a $560.9 million cash balance at March 31.

We have generated positive cash flow in each of the past seven consecutive quarters for a total of $3.2 billion in operating cash flows over the last 21 months.

Our goal for the remainder of 2008 is to continue to generate additional positive operating cash flow.

Bill?

As we announced in our press release today, we have declared a quarterly dividend of $0.075 per share.

While we remain confident in our ability to continue to generate cash flow from operations, and our long-term ability to generate profits, we continue to prioritize balance sheet strength and preservation of capital in the current challenging environment.

We anticipate that our quarterly dividend payment will remain at this amount for the following three quarters.

Stacey?

Our home-building leverage ratio, net of unrestricted cash was 42.9%, within our target operating range of less than 45%.

We had no cash borrowings outstanding on our home building revolver at quarter end.

During the quarter, through an unsolicited transaction, we repurchased $36.5 million of our 9.75% senior subordinated notes due 2010 for a purchase price of $36 million plus accrued interest.

The gain of $500,000 is included in home building other income for the six and three-months period ended March 31, 2008.

Don?

The bright points of our second quarter include Stacey getting through that last paragraph.

So let's -- (laughter).

The bright points of our second quarter include cash flow from operations in the first half of fiscal year '08 exceeded $1 billion versus our goal of $1 billion for the whole fiscal year.

Cash flow for the last seven quarters exceeded $3.2 billion.

Our cash balance, which is approximately $560 million, up from $129 million at the end of the first quarter.

Our reduction in inventory.

Our homes were down 13%, our specs down 28%, completed specs down 40%, land and lot supply down 21% in the first six months of the fiscal year.

Net homes sold increased 77% from our December quarter to 7,528.

Our cancellation rate improved for the first time in many months and quarters to 33% from 44% in our December quarter.

Homes in backlog increased 10% from December 31, 2007, to 8,947.

Our SG&A decreased 30% year-over-year on a 31% decrease in homes closed.

Our leverage remains in our target range of less than 45%.

We had the highest equity in the industry, currently at $4.1 billion.

And as Stacey said we repurchased $36.5 million of high coupon debt in the 9.75% debt and booked a $500,000 gain.

In conclusion, we continue to operate in a very challenging environment.

Our people continue to outperform the competition, although this requires day-to-day adjustments to meet the market in every city, in every community, and on every home sale.

We continue to adjust our SG&A to right size our Company relative to ever changing demand.

D.R.

Horton just completed its sixth consecutive year as the largest home builder in America with the best operating model in the industry.

Our goal is to continue to improve our operating metrics and to lead the industry as we strive to reach the other side of this current housing market.

Many thanks to all of the outstanding D.R.

Horton people who make this possible.

On another note, and before we move on to questions, Sam Fuller, our Senior Executive Vice President of Finance plans to retire at the end of May.

I have no idea why he would be leaving the industry at this point in time, but he has decided to.

(laughter) Sam has been with us since 1991 when his first job was to consolidate information for the D.R.

Horton family-controlled companies in preparation for the D.R.

Horton IPO in 1992.

He has served as our Controller, our CFO and Treasurer, and now our Senior Executive VP of Finance.

We sincerely appreciate the contributions that Sam has made to ur Company over the last 17 years and we hope he finds enjoyment trying to improve his golf game, finds pleasure in his new motor home, and he survives drinking his way through his wine collection.

We'll miss him at our annual wine tasting at the ranch, she has so aptly chaired for many years and perhaps if we can entice him out of the pleasure of his motor home, we can get him back to chair our wine-tasting events at the ranch in the future.

So Sam, we'll miss you.

Thank you.

Now we'll entertain any questions you may have.

(OPERATOR INSTRUCTIONS).

Your first question comes from Michael Rehaut of JPMorgan.

Hi, good morning, everyone.

Good morning.

The first question was just on the gross margins.

I was wondering if you could give us some color in terms of how much of that might have been impacted by the aggressive spec reduction in terms of the year-over-year decline, and how much of that is maybe the -- more of just where the market is today, and also perhaps, how much did the gross margin benefit from prior impairments?

Before Bill Wheat gives you the specifics, Mike, frankly a lot of the margin run-off in the second quarter was directly attributable to, as we said at the end of our first quarter, that we were going to increase sales, and we had empowered our salespeople to sell our aged inventory.

So a lot of that margin run-off has been directly related to our desire to clean our inventory, and start with a clean slate in the beginning of the third quarter.

A little bit of specifics to that, Mike, about 40% of the homes that we closed this quarter were completed, unsold homes at the start of the quarter.

Clearly, a large portion of our closings this quarter were homes that we were aggressively looking to move.

Okay.

So would you think that that would have given you -- like -- that those spec homes closed would have been like -- do you have a sense for if it was like thanks 200, 300-basis-point impact?

And also can you give us a sense for the benefit of homes sold in the quarter that were previously impaired?

In terms of the margin differential on the closings of those completed homes, the margin differential between those homes and the other homes that we closed during the quarter was certainly greater than 300 basis points during the quarter.

And in terms of the impact of previous impairments during the quarter, about 22% of our closings during Q2 were in communities that had been previously impaired.

So that should give you a sense of the impact there.

Okay.

Second question was just going to be on the cancellation rate.

We noticed that it picked up a bit as a percentage of backlog, and I was wondering if you could comment on perhaps the drivers of that, and the -- if that also gives you any type of concern in terms of spec being an issue or remaining an issue or a challenge over the next couple of quarters?

Really, Mike, the way that we have consistently measured our cancellation rate has been as a percentage of our net sales.

And as a percentage of our net sales that did drop from 44% last quarter down to 33% this quarter.

Our backlog actually increased this quarter, so we're optimistic that even if you look at it as a percentage of our backlog going forward, you should see some stabilization in that cancellation rate as well.

And, you know, in terms of the quality of buyers coming in, do you feel that they have a more difficult time getting approved?

If you could just comment on how you are seeing the buyer walk in the door, and what the current challenges are, and if those challenges, if they have changed over the last three or four months?

The challenges are pretty much the same, mortgage lending has become more restrictive.

But with the recent changes in the FHA and the changed limits we have in different communities across the U.S., we're actually seeing people able to use FHA financing at higher price points, and that's making the process a little bit easier for people in price points that would previously only qualified for jumbo loans.

Your next question comes from Stephen East with Pali Capital.

Good morning.

Good morning.

I guess, Don, if you look at your land supply and where you are now, you brought it down quite a bit.

Are you comfortable with it now -- ignoring the spec issue, which you are making headway on too, but just looking at your total land supply, are you comfortable where it is, or do you need to do some bulk land sale type situations?

To answer your question directly, we believe our current land and lot inventory is a little high, relative to our trailing 12 months closing, which puts our land and lot supply somewhere around 5.2 years supply.

We'd rather see that closer in the 4s and if possible even down to the 3s.

Okay.

As you look at your -- California was awfully weak last quarter.

This quarter you more than made up for it with your [unauction.] Is that thanks process that continues across the Company as you try to reduce specs?

Well, I believe that if you look at where our spec count is today, we're sitting on right at around 48% specs which is right around 7,000 units.

Our inventory is about 15,000 units; that our specs could come down more slight -- some more in to the 40%, which would be even more desirable from our perspective, maybe even to the high 30%.

But the beautiful thing about where our specs are today we're sitting on only 3,200 completed specs, and we have less than 400 units that have been completed and unsold for a period greater than than a year, so I think our specs are in the best position they have been in three or four quarters.

Okay.

Last question, your cash flow generation, as Stacey said, you expected to generate positive cash flow the rest of the year.

Do you all have any revised expectations since you have already hit your full year target?

We're going to stick at $1 billion and try to improve on that, which we will, but we're not going to revise anything at this point, Stephen.

Okay.

Thanks.

Yes, sir.

Your next question comes from Carl Reichardt with Wachovia.

Good morning, guys, how are you?

Good morning, Carl.

Stacey, this is an odd question, but of that 15,100 units you had in unsold inventory at the end of the quarter, do you know what percentage of those had been previously canceled?

Carl, I do not.

Okay.

We can follow up afterwards.

And Don -- I think the other Don said or talked about the footprint that you have, and you and I have talked about whether or not that might shrink.

Can you give us an update on the geographic markets that you have chosen to exit and kind of your philosophy there?

As you know, a number of your peers have started to pull out more significantly the last couple of quarters.

I'd like to get your take on that?

Currently, we're still in 27 states and 82 markets.

I think we have decreased by three or four markets, but frankly very, very small markets.

What we have done, we think is the better answer, is to consolidate where we have duplicate divisions in the same market like we did in San Francisco, where at one time in the Bay Area we had three divisions, and San Diego we had three divisions and so forth.

And what we have actually done is consolidate across the country multiple market divisions into single market divisions, and we believe that we're properly positioned in each one of those markets now, such that we can capitalize on the strength in the homebuilding industry as it comes back.

But really we don't see any markets today, which we believe we would leave because most of the markets still have some sound basics, although not as good as they once were, but we believe as the market begins recovery, they are very sound markets.

Okay.

I appreciate that.

And enjoy your retirement Sam.

Thank you, Carl.

Your next question comes from Jim Wilson with JMP Securities.

Thanks, good morning, guys.

Good morning, Jim.

Couple of questions with the margins you reported in the quarter can you give us any color on what margins might look like in backlog if the big sale in California had an impact that might be steeper or harder than you might see going forward?

Or do margins look pretty similar in backlog?

The way I would answer that question, and Bill you can correct me, but as we go through this impairment process with Mr.

Murray, who is our Controller, and we go each individual project - which we have to give Mr.

Murray credit for all the wonderful impairment models running for us.

But Sam hired me.

(laughter).

The real issue is, as we impair these projects we are typically somewhere 12% to 15% gross margins on a go-forward basis.

Now to the extent that the market continues to deteriorate, obviously, those 12% to 15% gross margins will be impacted, but on a look-forward basis into Q3 and Q4, we believe that we have got better margins ahead than what we reported this quarter.

I certainly concur with that, and certainly one other factor this quarter that definitely hit the margins more sharply than previous quarters was the impact of our spec levels and we have moved those down dramatically, so our expectation, certainly our hope is that we'll see some stabilization in margins in forward quarters.

Okay.

And that kind of leads to maybe a similar tie-in question, can you comment a little bit on what kind of pricing in your major markets or markets you would want to talk about, you have seen in recent order trends, I guess since you completed the big inventory push?

Well, I believe that our across the country are, as I said before -- we have gotten rid of most of our older inventory, and we have very few completed specs that are greater than a period -- been completed for a period of greater than a year.

What I see are margins running north in the low teens to mid-teens and most of our starts that are taking place in the marketplace today.

Okay.

And I just -- anywhere the margins particularly better or worse that you would note, but maybe the worst you have taken care of in the impairment process?

Clearly, our worse markets are where we are taking most of our impairments which happen to be in California, we took some in Arizona and also in Florida, and Las Vegas.

Those are our worst markets.

We still have some -- and the good markets -- probably aren't enough good markets to talk about.

Basically most of the markets are pretty marginal at this point with the markets that I pointed out in Las Vegas, California, Arizona, and Florida being the worst markets in the country right now in terms of margins.

All right.

Fair enough, thanks.

Your next question comes from Megan McGrath with Lehman Brothers.

Hi, good morning.

Just wanted to follow-up quickly on your comments around spec and that you are pretty happy with how you reduced it so far.

Just curious, I know this is a broad question, but what you are kind of telling your sales force these days?

I think at the end of last quarter, you kind of implied you had given a lot of our sales force kind of the green light to move to specs.

What are you telling them now in terms of pricing and sort of what pace you want in the market?

We are telling our salespeople clearly is we want margins in the teens and higher, because basically we have cleared the older inventory, and now we have got newer inventory out there with a new cost structure in it, so combined with the impairments and reduced cost structure, we feel like our salespeople ought to be selling at 15% and greater gross margins.

Okay.

Great.

That's helpful.

And a quick follow-up, Stacey, I think you mentioned in your commentary around tax refunds.

I think you had said last quarter that you weren't expecting to get any kind of refund in this year, has that changed?

No.

We'll get a tax refund at the end of our fiscal year, and so the cash flow from that would actually happen in fiscal year 2009.

Okay.

Thanks, that's helpful.

During this year we would just be paying reduced taxes.

Got it, okay.

Thanks.

Your next question comes from Nishu Sood with Deutsche Bank.

Thanks, good morning, everyone.

Good morning.

Congratulations to Sam, and good luck to you.

Thank you, Nishu.

First thing I wanted to ask was on the timing of the dividend cut -- as Stacey mentioned, I think, seven consecutive quarters of positive cash flow.

You beat your annual target in just two quarters, you have got over $500 million on the balance sheet, so we're well -- we're past two years into this downturn.

You've clearly had great performance in cash flow, why cut the dividend now?

First of all, one, we are a very conservative Company, but perhaps the second and most important factor has to deal specifically with the fact that this was the first quarter that we reported an operating loss.

We reported an operating loss of about $51 million.

And I think from a prudent perspective that as long as we are producing an operating loss, then it doesn't make sense to continue to pay the level of dividend that we were.

Our game plan is one and one only, to get back to reporting an operating profit at which point in time, we will be looking at the dividend in a totally different light.

But clearly, when you are reporting an operating loss from an operating perspective and a management perspective, we can't justify paying the complete dividend.

So I mean, a lot of your peers have begun to kind of look past the downturn here, look ahead to opportunities.

Is there any element of trying to shore up your cash flow to be able to capitalize on future opportunities?

The opportunities we see in the marketplace are continuing to focus on our business, reducing our land and lot position, and continuing to return to operating profitability.

The rest of the operating cash that we're generating we're going to keep on our balance sheet and we'll figure out what we're going to do with it later.

Great.

And second question I wanted to us was follow-up on what Carl was talking about earlier.

Your portfolio of markets is still, I think, 80-something.

The -- you have talked about how you are reducing the number of divisions from which you are managing those regions, which is going to create some distance, and I'm thinking of a market like the Triad market, perhaps which a lot of people have tried to manage out of a Raleigh or Charlotte.

Have you seen any issues or difficulties in managing all of these locations more remotely now that you have consolidated your divisions?

First of all, let me clearly say this to you, we are not leaving a division and a market operating without at least a city manager, which we have always had.

So to the extent we're not going to have to someone in Miami trying to manage Orlando for us, or someone who is in Seattle trying to manage Las vegas for us.

We have a key operator, a profit center manager in each one of our markets managing that particular division.

So we really don't see an issue with that.

We currently have eight regional Presidents overseeing those 82 markets, and we feel like that we have got hands on -- boots on the ground, operating manager, profit center manager in each one of our markets.

What have your division offices done in the past years, number wise?

How many were you two years ago?

How many are you now?

I couldn't really tell you how many division offices we have deleted, I can just go through them mentally in my -- or verbally with you for a few seconds.

But as an example, San Francisco we had three divisions.

We now have one.

In San Diego we had three divisions, we now have one.

In Denver we had four divisions, and now we have one.

We've basically gone across the country and consolidated multiple divisional operations into a single division which has caused us to be able to reduce our people and also to be more prudent in terms of operating in that market.

Your next question comes from David Goldberg with UBS.

Thanks, good morning.

Morning.

Morning.

I'm wondering if you could tell me a little bit, how much you think foreclosures and prices on foreclosures are impacting the prices in your neighborhoods?

I think that's difficult to say at this time.

And if you look across the country, I don't believe foreclosures are a significant part of the market yet in the vast majority of our markets.

I think Las Vegas they are impacting that market considerably.

As to -- and I think it's impacting the Phoenix market considerably just by virtue of the number of existing homes on the marketplace.

But other than that, David, I think that's really difficult to determine, and I also believe that we're positioning the Company as we look forward in to the second half of calendar year '08, and all of calendar year '09, I think foreclosures are definitely going to have a negative impact on the new-home market, and that's the way we are positioning the Company.

Maybe if I can get a follow-up to an earlier question about the new land and the basis on these new lots that you are bringing through, versus what you call the old inventory that you've already sold.

Do you kind of know a percentage difference in terms of raw land or developed land cost between the two?

Let me first of all clarify we're not really bringing on any new land or lot positions.

If you recall, last year we said that we would spend -- we say that we were going to spend somewhere between $500 million and $1 billion in land and land development and lot acquisition, and we ended up spending less than $1 billion, and our goal for this year is the same, to spend somewhere between $500 million and $1 billion.

We're not really bringing on any new land parcels, and we really don't need to bring on any new lots anywhere simply because we have more than adequate lots to supply what our current building program looks like on a 12-month basis.

Yes, I think what Don was referring to earlier, David, was the impairments that we recorded that will adjust the lot cost basis on homes we will be closing going forward, but that's not necessarily on new land we are bringing into the Company.

And in addition to the land that we own we will continue to close selected lots on a rolling option contract and those contracts will have been renegotiated.

Sure.

Then I guess maybe the right say to say this, is between the impaired land you are bringing on now, versus the land that was unimpaired that you were bringing in before, do you have any idea what the difference -- like a percentage difference in terms of costs would be?

Not off the top of my head, David.

When we look at our lot costs as a percentage of our sales price, we haven't been seeing a big change.

So that's basically tracking with what our sales prices are doing.

Our sales prices have been declining and our lots as a percentage of our home is also very static, so basically it tells you we are bringing down those lot costs which we have on a third party developer lot purchase or a rolling option contract, we're decreasing those lot purchases, and then, obviously, the impairments and all of a sudden, also we're driving down the cost of construction, so --

Okay.

Thank you.

Your next question comes from Joel Locker with FBN Securities.

Hi, guys, just wanted to get a count of the 141,000 or so owned lots, how many of those are fully developed?

Today, roughly about 35% of our total lots owned are fully developed today.

And another factor along those lines is when we look at our projected closings for fiscal '09, substantially all of the lots that we need for those closings are fully developed.

That would be 49,000, just to verify, or so?

Yes.

And then your finished lot count I think at the end of the last quarter was around $65,000 to $75,000.

Is it still around there?

Or has that been brought down by the impairments?

I'm not sure we have given a finished lot count before, Joel.

No, I mean finished lot as in price per lot.

On the last conference call the cost was average around $65,000 to $70,000.

Yes, about 30% of our ASP, that would be about right.

And as I mentioned before that's pretty much still tracking with our ASP, so our lot costs will be dropping a little bit.

All right.

Thanks a lot.

Thank you.

Your next question comes from Larry Taylor with Credit Suisse.

Thanks very much.

I was wondering if you could comment on the direction of pricing and how you anticipate that unfolding both for yourselves and for the competition over the next six to 12 months?

Clearly in this market -- in this past quarter we met the market and it was not a very pretty meeting, and prices did decline in the quarter as we reported.

On a going-forward basis we are most concerned about the level of foreclosures entering the market.

And I think to the extent that those are significantly greater than what they are currently, then that's going to negatively impact our pricing moving forward.

Okay.

Thank you very much.

Yes.

Your next question comes from Susan Berliner with Bear Stearns.

Good morning, and Sam, best of luck to you.

Thanks, Susan.

I was just wondering if you could update us on your tangible net worth covenant?

Where you guys are on that?

Okay.

Our tangible net worth covenant is at $3.5 billion and as of March 31 we had a cushion of about $290 million.

So is there any thought, I guess, of going back to the banks now and I guess getting the deferred taxes added back in, or how are you looking at that in light of the market?

I think to answer your question, directly, yes.

Okay.

And I guess if I could just ask one more, with the cut in the dividend, I guess, what would it take to cut the dividend or get rid of the dividend going forward?

I would say to you that our operating losses would have to continue and increase.

The increasing rate relative to where they are today.

Okay.

Thank you.

Your next question comes from Jay McCanless with FTN Midwest.

Good morning, wanted to ask on your gross margin outlook that you are talking about low to mid-teens, how much of the recent price increases are factored into that?

And what do you see for building material price increases going forward?

The price increases are you talking -- you are confusing us, because we haven't had thanks chance to increase prices in thanks while, so our -- what are you referring to about price increases?

Well, in terms of lumber, shingles, we're seeing increases in drywall prices, just your cost of your materials that go into the home.

One of the thing we're very diligently doing right now is continuing to negotiate prices down, and while you may see published national prices moving up, we would generally have locked in prices with our suppliers for some period of time, so we that we're not subject to those price fluctuations in the short term.

Okay.

And then one other question, if the prices that you closed at in your different regions this quarter, assuming that the recent increases in the FHA, and the GSE loan limits don't go through -- don't get repassed, I guess you could call it, for '09 -- if you could just estimate how much of your closings would have been either FHA or conforming compliant?

It's not going to be significantly different than what we reported already.

We had only 2% jumbo, I believe, this quarter.

And I don't remember the exact number last quarter, it was no more than 4%.

So our pricing mix really hasn't changed because of the FHA limits.

Okay.

Great.

Thank you.

Thank you.

Your next question comes from Scott Cavanagh with Merrill Lynch.

One quick housekeeping question.

Looking in your borrowing base, how much is actually available on your revolver?

Right now at the end of the quarter, we have approximately $1.3 billion available under our borrowing base arrangement.

Thank you very much.

Your next question comes from Alex Barron with Agency Trading.

Yes, good morning, how are you?

Good morning.

Good morning, Alex.

Don, I wanted to ask you, I guess have I noticed that a lot of builders have reduced their inventory practically to zero and are trying to move to build-to-order, and other builders, I guess, are still continuing to spec build and drop prices to try to, I guess, go through their inventory.

So I'm trying to figure out which of the two, I guess, are you guys pursuing?

Let me answer the question very succinctly for you.

We had excess inventory in a number of our markets at the end of Q1, so basically, we decided that we would clear that excess inventory, and on a going-forward basis what our game plan is is to keep a minimum number of specs in each one of our communities.

And, hence, you see our number of specs having declined significantly.

But we believe we need to have a limited number of specs in each community in order to satisfy relocation buyers, as well as realtors who sell a big percentage in our homes who are looking to put people in a home in 30 to 60 days.

Okay -- go ahead.

No, go ahead.

I was going to say with that said, at this point what are you seeing as kind of a worst competition?

What other builders are doing to survive, or what banks are doing to blow out their foreclosures?

Well, I don't think there are a significant amount of foreclosures that are being blown out by the banks today, although that could increase.

Where we find where we have a leg up with a number of our competitors in most of our markets is that a number of our competitors have had a zero spec policy, which has put them in a more difficult position in terms of satisfying relocation buyers and realtors.

And I think that Horton has always had and on a going forward basis will maintain a limited number of specs in each one of our communities, and keeping a limited number will give us more pricing power than at the end of the first quarter when we had excess number of specs in our communities.

We got our spec community count down at the right level, we believe, relative to current demand, and we ought to be able to derive a higher margin on those specs going forward.

Okay.

Just kind of on a separate topic, I know you guys have impaired more communities, and some of them are reimpairments, but I guess, what percentage of your total communities have been impaired to date, whether it's at least one time, or it doesn't matter how many times?

About 25% of our total communities have been impaired, Alex.

Your next question comes from Jane Haugh with Dwight Asset Management.

Hello, I just had a question about the balance sheet and your planned use of cash.

Can we expect do you to be in the market buying back more of your higher-cost debt, which seems to be cheaply priced at this point?

And just looking at leverage and what your philosophy is going forward with the use of your free cash flow?

We're focused right now on preserving our cash position and maintaining a lot of flexibility and liquidity.

We have $585 million in senior notes that come due next January and February.

So we're certainly going to be making sure that we have adequate cash to retire those notes.

Past that we will look opportunistically as we did this last quarter at some of our higher coupon debt.

Thank you very much.

Thank you.

Your next question comes from Eric Landry with Morningstar.

Good morning, Morningstar.

Thank you.

Good morning.

Good morning.

My question revolves kind of around inventory flow.

There are a number of competitors that will be building from fresh land here at some point in the not-so-distant future, while Horton has quite a long land position right now.

Is it a case where you would consider mothballing and living with lower asset turns in order to refresh land to be more competitive with some of these land-light competitors, or how are you looking at that?

I guess I would like to know who the land-light competitors are out there?

Less land heavy, how about that?

Who is less land heavy than we are?

NBC, KB Homes.

Okay, and I think both of those people had rather marginal sales last quarter also.

So I don't look upon them -- I'm looking at the top five or six builders as our major competitor.

Yes.

And I feel like we have got the maximum flexibility to continue to produce a home that's competitive in the marketplace, and I think to drill down and maybe answer your question more directly, we're going to build through our existing land supply and lot supply as we have done.

To the extent it needs to take impairments then we're going to impair it and move through it.

One of the things that Horton has consistently done, is we have not done any bulk sales.

As we have worked through our land and lot position it might be interesting for you to know that we are deriving 50% plus of our value of the -- original book value of that land by building and selling a home on it, as opposed to selling on the bulk sale.

So that's what our plan is.

If it needs to be impaired, we're going to impair it, and we'll continue to build through it.

And we get better return on our money that's in the ground by building a house on it than by selling it to an investor at a bulk sale.

And you have mentioned that you would like to lighten up on land sale.

Have you got any target as far as inventory turns going forward, if you had your druthers?

What we're really focused on because inventory turns are sort of a difficult situation to analyze, we have tried to help the investment community analyze that over the years, because we don't have any joint ventures and a whole host of other things that we've done, so when you look at inventory turns you have got to suck out that excess and do it on an apples-to-apples basis.

Where we're trying to get to specifically, right now we're at a 5.2 year supply of land and lots and I'd much rather see that at the high 3 and low 4 level.

Okay.

In terms of year supply.

Thanks.

Yes.

Thanks, Eric.

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

First of all, Sam, I'm going to miss our chats.

Me too, Tim.

Good luck to you.

Thank you.

I got on a little late, and maybe if you covered this, I apologize, the first question is, I don't quite understand why you took $245 million of impairments in this first quarter and $834 million in the second quarter, three times as much.

The market didn't get that much worse.

Well, to answer your question directly, Tim, we moved through a lot more inventory in Q2 than we did in Q1.

We increased our sales significantly in Q2 over Q1.

We decreased our number of specs and we decreased our number of completed specs substantially.

As we did that we had to meet the market, and once we met the market we had to adjust our inventory, vis-a-vis impairments.

Secondly, on the deferred tax, taking the charges on the deferred taxes, I was talking to you guys three months ago and six months ago, and about this subject and you said you didn't have to do it because last year in fact you even paid income taxes.

Why all of a sudden in the second -- and I know you had the impairments, but why in the second quarter did you do it when you implied you really had a cushion for both the last two fiscal years?

It implies that you are going to lose a lot more money this year.

I think the big difference was, frankly, what we did in Q2, and that is by virtue of having dropped our sales prices in order to meet the market, it created additional losses and as a result that impaired that deferred tax asset.

Real simple answer.

And we do still have significant carrybacks available to us for '06 and '07, but we're to the point now where with the losses that we do have, we do feel like that the deferred tax assets we have created are in excess of what we have been able to realize in the short term.

The accounting rules won't let you necessarily count 20 years of future profits when you are in a loss position.

Especially if you have E&R.

E&R?

Never mind.

Lastly, I'm sorry to ask one more, but you talk about that land costs are right now at 30% of your average sales price.

I mean, you never wanted them to be over 25%.

You limit it to 25% normally.

Stacey, I don't think, said that.

Basically, as a percentage of the sales price of our house, our lot has always been somewhere right around 20% to 22% and it still is there.

What was the 30% number that Stacey gave out?

That was cost.

That was cost.

Oh, of cost.

Thank you.

Your next question comes from Randy Raisman with Durham.

Just a couple of quick questions on the land spend guidance of $500 million to $1 billion.

Can you break that out between how much is land development on land that you already own versus how much is new land that you guys are going to be taking down?

Yes, I can -- I can't break it down for you, but let me give you these numbers.

That $500 million to $1 billion will take care of new land acquisitions, any rolling option lot purchases, any earnest money that we put up, as well as any development costs that we will incur.

So I will tell you that the develop -- it's -- if you divided all of that up, and really put it in separate buckets, which we really don't have a feel for right now, it's going to around in there.

The land acquisition, any type of bulk land acquisition would be the smallest portion of that.

And past that it would go to development costs and rolling lot options, foreclosings in fiscal '08 or into '09.

Okay.

That was my question basically.

I don't understand why you would have to take down any lots essentially, right?

We have lots that we are purchasing from third-party developers where we are in subdivisions where we're selling home, so we'll continue to close those lots.

And, frankly, there are option contracts out there that are coming to the market where we are putting up our 3% to 5% earnest money against the purchase price to tie up those lots for closings in '09 simply because they are coming back to the market very attractively priced.

Is that the way to think about it where if you are building a community where it's built on land that you've been taking down on a rolling basis -- kind of once you start building and start taking land that you have to then continue taking down the land?

Or can you cut it off at anytime?

We can cut it off at anytime, and I down't know the exact number of the earnest money that we have written off, but we wrote off another $10 million worth of earnest money this quarter.

We would walk from the earnest money in a New York second if it didn't make sense.

And the other thing we can do is we can renegotiate the pricing on those finished lots as we're working through the option contract as well to meet the current market.

So most of our -- virtually every rolling option contract that we currently have on the books is one where we have renegotiated the lot price downward.

Either that or we renegotiated the takedown, whatever we needed to do it make it more palatable to meet our margin requirements.

Can you give us any color as to what those renegotiated prices look like, just ballpark, a very high level number?

It is going to vary so dramatically from one part of the country to the next as well as from one subdivision to another.

For example, in Houston we renegotiated a couple of lot contracts in Houston recently.

It's just going to vary.

It's such a wide range.

In some instances we are scrapping around for, on a $30,000 lot trying to get it reduced to $27,000 or $28,000, and we may have another lot where we've got them under contract where there's $75,000 and we're saying they are only worth $35,000 today.

And those are raw lots or those are finished lots?

Those are finished lots.

It's been where a developer -- third-party developer has bought the land, improved the lots, put the streets, the water lines, the sewer lines and the storm drainage lines in and they are ready to have a home built on it.

Okay.

Great.

Thank you very much.

Yes, sir.

Your next question comes from [Bob Fells] with L&K Capital Management.

Did you say -- I think you referred to some SG&A reductions during the quarter.

Did you allude to what the run rate would be going into the next quarter?

No, we did not.

What we did say is our goal is to get our SG&A back down to a 10% of revenues level, and our goal is to try to get that done by the end of the fourth quarter of this fiscal year.

Okay.

And can you give us any indication of where it would be on a -- how much of it would be reduced on an absolute basis for Q3?

Not at this point, no.

Okay.

We just left our President's meeting.

They each have a goal, and we met with our regional Presidents twice, once on a Tuesday and once on a Thursday, so that they could have two days in between to figure out how they could get their SG&A down to 10% by fiscal year end '08.

Okay.

Did you say the can rate was lower this quarter than last quarter?

Yes, it's 33% this quarter, 44% last quarter.

And I'm curious about that number, because it's just -- observationally it seems like a real tightening on very high loan-to-value loans, and the banks just being selective about where they write mortgages, it came just in the last couple of months as opposed to the fall months.

I think really in the fall, we saw that begin to happen.

Jumbo loans in particular were really impacted in August, so we saw a spike in our cancellation rate in September, and then just throughout the fall, we saw a continued tightening loan programs that were there one day that weren't available the next day, and really into this quarter, we have seen that settle down a little bit.

The loan programs haven't changed as rapidly, the standards are much tighter, but they are consistently tighter.

Right.

And the impact of the raised jumbo loan levels, doesn't appear to be reaching the market.

What is your perspective on that?

For consulting loans?

I -- what do you mean by not reaching the market?

Loans that would take them out of jumbo back into conforming, looks like it hasn't hit the markets yet.

I -- I don't know how to answer that one broadly.

I would say within our communities,if there is a product that is available for an FHA loan, we have started to see some of those close or certainly be qualified for at the higher limits.

I think there was a delay in actually having the amount published on a county by county basis even after the rule went into effect, so that may be something that you see more impact on homes closed in the next quarters.

Your final question is a follow-up question from Michael Rehaut with JPMorgan.

Great.

Thanks, hi, guys.

Hi.

I was wondering if you could help me with getting some color on sales pace throughout the quarter, and how it varied in and around your sales events, and, after you kind of did the more aggressive sales events, were you hitting a sales pace with the new price that you are happy with, and, maybe you can give us a number in terms of what that is?

Two a month, three a month, four a month?

Clearly, in California, the market is really driven by event-type marketing.

I think that's also true in Las Vegas, and I think that's true in Florida.

Notwithstanding the fact that we may sell a lot homes at those types of events, I think our sales thereafter have a tendency to trend downward and they are not sustainable at those levels even though we've dropped our pricing during those special event-type transactions.

Clearly, when we set our pricing during those event transactions, there are a number of buyers -- a lot of buyers in the marketplace.

In fact, in California most of our sites have had camp-outs, and Don Horton and I were in one of our sites in the desert where we -- actually Don Horton convinced a lady who was grousing about not being able to buy a home from us, and he said get in your car and get in the camp-out line.

And so she pulled her car out of the parking lot and was number two in the camp-out line and she got the house at the price she wanted.

I think really, Michael, to answer your question, we're not seeing a lot of pricing power out there.

We're not seeing a lot of pricing stability right now.

I think each -- as I said in my conclusion, it's a day-to-day battle on a house-by-house battle, and a subdivision-by-subdivision, and a market-by-market basis, and there's yet to be any what I consider to be firm level of demand in any of these markets currently.

Okay.

Appreciate it.

Yes, sir.

We'll see you in a couple of weeks.

Ladies and gentlemen, I would like to turn the call back over to Mr.

Tomnitz for closing remarks.

We thank you for joining our Q2 conference call.

We had a lot of good points in our second quarter.

One of the things we would like to --several things I'd like to remind you of is we ended with a great cash position.

We had nothing outstanding under our revolving credit facility.

We believe we have the strongest balance sheet in the industry, with the highest shareholders equity in the industry, and no joint ventures.

We look forward to returning to operational profitability in Q3 and Q4 and driving down our SG&A to a level of 10% which we have historically run at.

And most importantly, I want to thank all of the D.R.

Horton employees.

We have done a great job.

We have a great battle ahead of us.

It's getting closer to the end of the battle, but we need to stick with it because, as you know out there, it's tough in the competitive environment, and we appreciate all you are doing for us.

Thank you.

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

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

You may now disconnect.