霍頓房屋 (DHI) 2011 Q4 法說會逐字稿

Good morning, and welcome to the DR Horton-America's Builder -- the largest builder in the United States -- fourth quarter and fiscal year 2011 earnings release conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr.

Don Tomnitz, President and CEO.

Thank you, sir.

You may begin.

Thank you and good morning.

Joining me this morning are Bill Wheat, Executive Vice President and CFO; Stacey Dwyer, Executive Vice President and Treasurer; and Mike Murray, Vice President and Controller.

As usual, before we get started, Stacey?

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

Although DR 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 DR Horton on the date of this conference call, and DR 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 DR Horton's annual report on Form 10-K, and our most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.

Don?

For the past several years, we have been focused on the basics of the Homebuilding Business with the singular goal of returning to profitability.

We supplemented our existing land positions with newer finished lot positions, which enhanced our gross margin.

We limited our investment in land and lot inventory, which benefited operational cash flow.

We adjusted our overhead structure, which reduced our SG&A expenses.

And we reduced our outstanding debt significantly, which improved our balance sheet leverage and resulted in less interest expense.

In fiscal 2011, we realized the benefits of these strategies and have achieved operational profitability, this time without a tax credit.

We closed 16,695 homes, eight fewer than two years ago in fiscal 2009.

However, our bottom line results were greatly improved versus fiscal 2009, as our pretax income increased $569 million.

$362 million of the increase was due to reductions in inventory impairment and land option cost write-offs.

And $35 million was due to reductions in mortgage recourse and reinsurance expenses in fiscal 2011 compared to 2009.

The remaining pretax income increase of $172 million reflects true operational improvement on essentially flat volume, a combination of reduced SG&A, improved gross margins, and less interest expense.

We would like to thank all of the DR Horton team members for helping us achieve profitability in fiscal year 2011, and most importantly, we look forward to another year of profitability in fiscal year 2012.

Bill?

Our Homebuilding operations generated pretax income of $27.4 million for the quarter, which included $12.8 million of inventory impairment and lot option charges.

Financial services pretax income for the quarter was $6.4 million, which included $3.9 million of recourse expense.

Our net income for the quarter was $35.7 million, or $0.11 per diluted share, compared to a net loss of $8.9 million, or $0.03 per diluted share in the prior year quarter.

For the fiscal year, our net income was $71.8 million, or $0.23 per diluted share.

Mike?

Fourth quarter home sales revenues increased 17% to $1.1 billion on 4,987 homes closed, from $921.1 million on 4,281 homes closed in the year-ago quarter.

Our average closing price for the quarter was flat compared to the prior year, and up 1% sequentially to $215,300.

Our home sales revenues for the fiscal year were $3.5 billion on 16,695 homes closed, down from $4.3 billion on 20,875 homes closed in fiscal 2010.

Our average closing price for the year was up 3% from the prior year, to $212,200.

Don?

Net sales orders for the fourth quarter were up 7% from last year to 4,241 homes on a 2% increase in active selling communities.

In the September quarter, our average sales price on net sales orders was up 6% compared to the prior year quarter, and flat sequentially at $218,700.

Our cancellation rate for the fourth quarter was 29%.

Net sales orders for fiscal 2011 were 17,421 homes, and our average sales price was up 3% from last year, to $214,000.

Our cancellation rate for the fiscal year was 27%.

Our sales backlog at September 30, 2011 increased 18% from the prior year, to 4,854 homes, or $1 billion -- a great start to achieving our goal of profitability in the first quarter of fiscal 2012.

Stacey?

Our gross profit margin on home sales revenue in the fourth quarter was 16.1%, down 90 basis points from the year-ago period, due to increased incentives and discounts and warranty costs, partially offset by a decrease in amortized interest.

Sequentially, incentives and discounts were flat.

However, our gross margin declined 40 basis points due to increased warranty costs, partially offset by a decrease in amortized interest.

Our gross profit margin on home sales revenue for fiscal 2011 was 16.1%, down 120 basis points from fiscal 2010, primarily due to increased incentives and discounts.

But our gross margin on home sales revenue has improved 300 basis points from fiscal 2009.

Mike?

Homebuilding SG&A expense for the quarter, which includes corporate overhead, was $124.2 million, or 11.6% of Homebuilding revenues; compared to 13.2% in the year-ago quarter.

For the fiscal year, Homebuilding SG&A totaled $480 million, down $43 million compared to fiscal 2010.

As a percentage of Homebuilding revenues, SG&A increased to 13.5% in fiscal 2011 compared to 12.1% in fiscal 2010, but improved 100 basis points compared to 14.5% in fiscal 2009.

Bill?

We are now seeing the benefits of our aggressive debt reduction over the past several years, as Homebuilding interest expense was down 44% from the year-ago quarter to $9.5 million, and our fourth quarter Homebuilding interest incurred decreased 18% to $29.7 million.

For the fiscal year, Homebuilding interest expense, directly and amortized to cost of sales, decreased 32% to $141.3 million from $208.4 million in fiscal 2010; and it has decreased 37% from fiscal 2009.

Fiscal 2011 Homebuilding interest incurred dropped 25% to $130.2 million compared to the prior year.

Stacey?

Financial Services' pretax income for the quarter was $6.4 million, compared to $4.8 million in the year-ago quarter.

86% of our Mortgage Company's loan originations during the quarter related to homes closed by our Homebuilding operations.

Our Mortgage Company handled the financing for 61% of our home buyers this quarter, with virtually all loans meeting eligibility requirements for sale to Fannie Mae, Freddie Mac, or Ginny Mae.

Government loans accounted for 60% of our Mortgage Company's volume this quarter, and our Mortgage Company's borrowers during the quarter had an average FICO score of 702, and an average loan to value of 92%.

Financial Services' pretax income for the year was $19.1 million, compared to $21.4 million in the prior year.

Don?

Our total inventory decreased by approximately $39 million during the quarter.

We reduced our homes in inventory by $57 million, and increased our investment in residential land and lots and land held for development by $18 million.

Our homes in inventory at the end of September totaled 10,500, down 900 homes from June.

As of September 30, 1,100 of our homes were models, 5,600 were speculative homes, and 2,800 of the specs were completed.

We continue to manage our total homes in inventory relative to our expectations of sales demand; and we offer spec homes primarily to accommodate our first time buyers, relocation buyers, and the real estate agent community.

Mike?

In our fourth fiscal quarter, our investments in land, lots and development costs totaled $209 million, primarily in finished lots, bringing our total spend for fiscal 2011 to $790 million.

Future investments in finished lots will remain largely dependent on our sales base and we expect our spending on land and development costs will continue to be at relatively low levels.

We are focused on managing our supply of owned, finished lots in line with our sales demand in a low-risk, capital-efficient manner.

At September 30, 2011 we owned approximately 86,000 lots, of which 22,500 are finished.

We controlled an additional 27,000 lots through option contracts with a net earnest money deposit balance for these lots of $14.6 million.

Bill?

In our fourth quarter impairment analysis, we determined that projects with a pre-impairment carrying value of $37.1 million were impaired, which resulted in $10.2 million of impairment charges, the majority of which were in Georgia and Arizona.

We refer to projects which we deem to have the highest risk for future impairments as our watch list.

Our watch list now totals $354 million, down from $377 million at June 30, 2011, with the largest concentrations in California, Illinois, and Arizona.

Our inventory impairment process in future quarters will incorporate any changes in market conditions and any adjustments we make in our Business.

Stacey?

Cash flow from operations for the September quarter totaled $90.2 million, primarily due to the decrease in homes in inventory.

Our fiscal 2011 cash flow from operations totaled $14.9 million.

We ended the year with $1 billion of Homebuilding unrestricted cash and marketable securities, even after reducing debt by $1.5 billion over the past two years.

During the quarter, we paid at maturity the remaining $106 million of our 7.875% note, and repurchased a total of $77.1 million of various issues of our outstanding senior notes.

Our remaining debt repurchase authorization at September 30, 2011 was $422.9 million.

The balance of our public notes outstanding at September 30 was $1.6 billion, with no maturities until May of 2013.

Bill?

At September 30, our Homebuilding leverage ratio, net of cash and marketable securities, was 18%, an increase of 190 basis points from a year ago.

However, gross Homebuilding leverage at September 30 improved 660 basis points to 37.7% from a year ago, due primarily to significant debt reductions.

Don?

Our financial performance this year demonstrates the progress our Company has made toward achieving consistent profitability, balance sheet strength, and market share gains.

Even though market conditions remain challenging, our goal in fiscal 2012 is to be profitable every quarter and for the full fiscal year.

Our September backlog is 18% higher than it was a year ago, which positions us for a strong start to fiscal 2012.

Our sales in October and November to date have been in line with our expectations.

And we look forward to another year of normal seasonality in fiscal 2012.

We will continue to provide new homes for both first-time and move-up buyers, control our construction costs, SG&A and inventory levels, and maintain our strong balance sheet and liquidity.

Again, we want to thank all of our DHI team members for their hard work this past year.

We are very proud of the results you continue to produce.

This concludes our prepared remarks.

We'll host any questions you may have.

(Operator Instructions).

Stephen East of Ticonderoga Securities.

DT, if you look at what was going on with your gross margin, I understand it was warranty.

If you look at your spec, did you have some spec impact on that gross margin decline also?

How should we think about the impact in 2012 on your gross margin with the specs?

I think really if you look at our gross margins, obviously in 2010 there was an investor tax credit or a federal tax credit which amounted to about $8,000, Steve.

If you look at what we did in the first part of fiscal year 2011, we are trying to maintain a similar volume in '11 that we experienced in '10.

One of the ways we are doing that is through incentives and discounts.

In essence we are trying to be the federal government, so to speak, to our buyers and we are trying to equate that $8,000, to a certain extent, to attract people in our doors.

Because there is really no reason post the tax credit for very many people to be coming in our models, and we are seeing reduced traffic levels.

I would say to you, on a go forward basis we're back to the government is not involved with the tax credits any longer.

We anticipate improving gross margins in fiscal year, '12 over fiscal year '11.

If you look at your 2012 op margin, you touched on some of that.

I am assuming you're expecting that to go up.

If you rank order between volume, price, gross margin, SG&A, how would you rank order the improvement drivers you would see in the op margin?

I'd say all of the above.

I don't mean to be a wise guy, which I have a tendency to be from time to time.

We're focusing on all aspects of the business.

Clearly we focus on our SG&A at this Company, as one of our strong suits.

In terms of our gross margins, one of the other things that we're doing is, if you notice our community count was only up about 2%.

We're in the process of culling underperforming subdivisions, especially in our operationally east region.

So, as a result, we would anticipate that our gross margins will be going up simply because of the fact that we're culling underperforming subdivisions.

As well as we continue to drive down our costs and work with our vendors as well as our subcontractors.

I know that they're trying to push cost increases.

We at the same time are pushing back, simply because of the fact that the business is not where it needs to be.

You mentioned October, November as expected.

What were your expectations?

We can't share our sales budgets with you.

We do expect to sell more units and close more units in fiscal year '12, than what we did in '11.

So, we're selling at a pace in the first two months that will help us achieve those higher sales and closing targets for fiscal year '12.

Stephen Kim of Barclays Capital.

First question, I had for you relates to the conforming loan limits.

Was curious if you could remind us what you think the impact would be if those limits were to come back up and why.

For us, Stephen, with the price point that we are focused on, we've seen very little impact from the loan limits lowering.

I don't believe it would have a significant impact for us if the loan limits go back up.

I would just, also, add is that we are participating with the leading builders of America this year.

Their indication is that what they see in Washington right now, most likely is going to affect second time -- or second homes more than anything.

We don't have a lot of second home buyers.

That comment you just made -- should we read anything into your involvement in that this year versus prior years?

We're just trying to be a part of the industry and be a team player.

Is that a change that you've made?

In the past, I can't recall, were you not part of that consortium?

We've always been a part of it.

But we're a bigger participant this year than we've been in the past year.

My next question is related to incentives again.

Could you give us a sense for how you modulate incentives?

Is there a Company-wide approach or rubric by which you modulate incentives?

Or is that something to which significant leeway is given to divisional managers?

I don't want to seem too unsophisticated here because that seems to be a sophisticated question.

I would say to you we ask our division presidents to hit their sales and closing targets and they control their level of incentives at the local level.

All the while trying to hit their bonus points in their bonus plan which is to achieve, for the large part, 20% gross margins and 10% SG&A.

Clearly, we're not hitting those targets yet but that's what they're getting paid to hit.

So, they're trying to balance their incentives and their discounts in the marketplace, hit their sales goals and closings goals and, also, hit their bonus plans.

It's all a balance.

Ken Zener of KeyBanc Capital Markets.

You talked about the 2% subdivision growth year-over-year.

Are you willing to give us a community count yet?

No.

So, with that in mind, you talked about culling.

If you're taking down your subdivisions, does that mean you expect a flat community count underlying your outlook right now, and it's simply that you're going to have better absorption within those communities?

Is that how you're thinking about it?

I don't think we're looking for flat.

It could be flat.

Our division presidents and our land acquisition people out there, trying to tie up and get under contract every deal that makes sense.

We process a lot of deals through here every day.

But the key is, the ones we're culling, before we cull them we're going back to the seller and asking for a lower price that makes our gross margins work.

If we're not getting those then we're going to cull them.

So, as a result, I don't think we'll be down but I don't think we'll be up dramatically.

I was going to say for reference this quarter, Ken, we were down 4% sequentially but you still saw our sales increase.

So, we're trying to make sure that we keep the most productive of the communities, even as we're choosing to let a few go.

The key to making money in this business is to get as high absorptions per community as we possibly can.

It's very interesting because it seems to me that you're culling communities that are largely option-based versus ones where you own the community outright.

That would be the assumption, correct?

It's hard to cull them when you own them.

You've got to work through them.

That was my logic.

You're right.

You're exactly right.

We have some we own that we would like to cull but we haven't figured out how to cull them yet.

Given that you've been very effectively blending in new lots to improve your margins with 22,500 finished today of your 86,000 owned, I assume roughly one-third of your communities are still mothballed.

Could you walk us through the longer-term implications of the flexibility we're seeing right now relative to your closings as contrasted to the legacy land which you can't cull, and obviously, is not at a rate that you want to sell out today.

Could you walk us through maybe how that will play out as you work into your legacy land?

Ironically, that question was asked during our Directors meeting over the last couple days.

We do have land that is mothballed, so to speak, that we believe are well-positioned pieces of property.

But clearly to make those deals work and to bring them out of mothball we have to have some appreciation in housing prices and, also, some appreciation in lot price that are available on the market today.

So, as a result I'd say over the next three to five years, we'll begin to work that down.

But I clearly expect at the end of five years that we could still have half as much of that land still mothballed because land prices still have to escalate some for us to bring those projects into production.

Nishu Sood of Deutsche Bank.

I wanted to ask my first question about your debt repurchases.

You folks have done a nice job of bringing your debt balances down, balancing that against the need to maintain your cash balances.

So, I wanted to think about going forward into the next year.

How much further will we go?

Obviously, your cash balance I think has come down to $724 million unrestricted plus the restricted amount.

The $400 million -- I think $25 million or so, you mentioned on the debt repurchase authorization you have.

So, what's the constraints, the goal, what's the plan going forward here?

Yes, Nishu.

In terms of our cash balance, what we look at is our cash and our marketable securities and those two items combined are both unrestricted.

So, we're right at $1 billion there.

Our target cash and marketable securities balance at year end is $1 billion.

So, we are basically sitting at our target level.

With that, and with where our balance sheet is today, we would expect our debt repurchases to decline the pace versus what we saw this past year.

Our balance sheet is in good shape.

To the extent that we generate additional cash flow that's in excess of what we need to run the business, we could certainly devote some more of that to debt repurchases.

But we do expect the pace of debt repurchases to slow.

Second question, on the deferred tax asset.

So, you've got two profitable years under your belts here, and you've got another profitable year forecasted.

I know these standards aren't hard and set but by the three year rule, you seem to be all set.

So, when would that come back on balance sheet?

We're certainly heading in the right direction and we continue to evaluate it.

We do get to take into account some level of projections.

But the standard that we're applying is very clear in saying that any time you have a cumulative pre-tax loss in recent years, which we are using the three year average.

That is significant negative evidence that until you get past actually having that cumulative loss for a three year period, it's very difficult to relieve the valuation allowance.

So, just to give you a little bit of sense or where we are, our current cumulative three year pre-tax loss is $446 million.

That's largely the result of losses we incurred in fiscal 2009.

So, as we look forward, we would expect that by the end of fiscal 2012, we would expect and hope that we would be out of the cumulative loss position by the end of 2012.

Then, at that point depending on how things look, what positive evidence we had, we could see that reverse.

But just very directly, we do not expect the reversal to occur before the end of 2012.

Then, it could be a bit longer, depending on conditions on what positive evidence we have at that point.

So, the three year window that you folks are using it's a very conservative historic looking window.

It's consistent with the standard and it's consistent with the guidance that we're hearing from our public accounting firm.

Adam Rudiger of Wells Fargo Securities.

I was curious your feedback from your local sales managers, if you look at the buyers, if there's any pattern emerging or if you could categorize where the bulk of your buyers are coming from.

I'm just curious if it's first time buyers that are seeing rents rising and they want to move out because of that.

Or is it family issues and they're outgrowing their previous residence.

I'm just wondering what kind of trends you can categorize.

Probably all those college graduates who have moved home with their parents and their parents are trying to get them out of the house.

Frankly, if you'll recall, we mentioned we were focusing more on the move-up buyer.

The move-up buyer is becoming an increasing part of our business, as you can see.

We now have 53% of our buyers are first-time buyers, and that's down from 58% in 2010.

So, we clearly have built in both those segments.

During the 2000 and 2007 time frame, we were probably focused more 40% on the first-time buyer and the rest on the move-up buyer.

So, our plan that we implemented several quarters ago to focus more on that second-time buyer is being seen both in the percentages I just shared with you as well as our ASP moving up as it has.

I think it's an interesting point, though, Adam.

Because that's one of the things I know our salespeople emphasize with people coming in the door.

It's a very favorable time to lock in your monthly payment on your house.

Whereas, rents can rise as the market recovers and it's definitely something that we point out to our buyers.

As we shared with our Board yesterday, clearly the buyers are coming in and they're still looking for value.

They're buying slightly larger square footage but they're still looking for good value.

My second question was just on those communities that you said in the past you were trying to cull.

Is there a common theme?

Whether it be location, or down to the metro level, or product type, or when you bought the land, or optional land?

Is there any common theme to the one that's are underperforming?

I would say a number of those are more in the Carolinas.

We entered into some deals in the Carolinas early on that, we thought were well-priced lots.

As the demand in those markets has declined some, those lot prices were not as attractive as we thought.

But most of those are primarily in the Carolina area, some in the Georgia area.

That's the primary location.

Dan Oppenheim of Credit Suisse.

I was wondering, first, in terms of capital, you talked about the debt repurchases as being a real benefit.

Some of your peers have also looked at some of the stock repurchases as of late.

Have you considered that at all?

What are your thoughts there?

The first thing that we look at is our cash balances and our liquidity and making sure we have sufficient cash for our operations and then cushion, given that we do not have a bank facility.

So, we certainly do take a look at potential for stock repurchases but it's not as high a priority today.

We want to make sure that we are in good position to reinvest in our operations when we start seeing more favorable conditions out there.

So, stock is not necessarily a high priority.

Then, second question relates to some of the mothballed communities and such -- many could be mothballed still years from now.

Those are not fully marked.

How is it you're fully evaluating those right now?

Is it the cash you still need to put into those projects to bring those to market?

Or is it just the way the land is marked at this point?

A lot of those communities are those that would have a substantial development expenditure associated with them.

They may be fairly well located but not yet in the development corridor where those lots would be needed in the marketplace, and just doesn't justify the substantial amount of development spend we would have to put out there -- relative to other opportunities for that capital in the market.

Buying finished lots or more nearly completed parcels of land that are closer to being finished lots.

One of the things we continue to focus on as we approve deals on a day-to-day basis, on a individual deal by deal basis, is how quickly can we get a return on our cash.

As Mike indicated, the development deals, obviously, it's hard to get your cash back in one year from the date that you pull those out of mothball and start the development on them.

Typically that's a two year return on cash.

Michael Rehaut of JPMorgan.

First question, on SG&A, came in a little bit higher than we had expected.

If you look sequentially, revenues were up about $100 million and SG&A was up about $10 million.

So, I was wondering if there was any year-end stuff in there.

In terms of the variable element of SG&A, any guidance going forward relative to a change in revenue would be helpful.

We've looked at our SG&A nine ways to Sunday.

We always says that's the first line item Don Horton looks at when he picks up his financials.

When we look at it sequentially, there were really two main factors that caused the sequential increase.

The first is, many of our comp plans are tied to profitability.

We had much stronger profitability in the fourth quarter than we did in the third quarter, or in the prior parts of the year.

So, our incentive comp was higher in the fourth quarter.

The other thing that was higher for us was some seasonality in our maintenance costs and utilities.

We had a very hot summer across many of our markets and we did see an increase in our utility costs.

As we look at the trend in our SG&A, though, the second half of the year compared to the first half of the year, our SG&A was actually down 2%.

But our closings were up 34%.

So, we have taken a lot of measures in the second half of the year compared to what we ran in the first half.

In the fourth quarter, our SG&A was up 2% year-over-year on a 17% increase in revenues.

So again, as we look at our core SG&A, extracting the variable piece, we think we're in a lot better position this year going into our first quarter than we were last year.

Before I hit on the second question, again the variable piece on that, is that a 4% to 5% number?

Or how should we think about that?

That's probably within the range.

Maybe 3% to 5%, just depending on the quarter.

Second question, you hit on Carolinas and Georgia.

I was hoping to maybe just get a regional overview of which areas you felt have done maybe a little better than expectations or on the stronger end of the spectrum.

Obviously, everything on a relative basis.

Conversely, which regions are still a little bit more challenged or higher incentives, et cetera.

I'd say, to give you a little bit of clarity on it, Florida to us is doing very well relative to what everyone else is doing, and people's expectations down there.

If you take a look at what we're doing in the Pensacola, Mobile, Alabama area, which is our northern Florida market, as well as in southeast, southwest Florida, the Miami, Fort Myers, Naples and Tampa market, we're doing very well in those markets.

Orlando is getting stronger for us and Jacksonville should get stronger for us.

The market that I'm most excited about in terms of improvement across the US right now, is certainly in Florida.

We have a lot of anticipation for fiscal year '12 in the Carolinas, especially in Myrtle Beach, Hilton Head, Charleston area.

Atlanta continues to do well for us.

The state of Texas is still a major producer for us, producing a lot of our pre-tax income.

Texas has been weaker for us this year than it was last year.

Largely a function is the fact that in 2010, when we had the tax credit, we really loaded up on specs because we thought we could sell a lot of specs in Texas due to the tax credit.

We sold and closed a lot of specs in 2010 in Texas.

So, they have had year-over-year difficult comps in Texas.

Even though they're down, they're still doing very, very well from a profitability perspective.

I look at Las Vegas and what Scott Stone has done for us in Las Vegas.

Even though we're earning back largely our impairment dollars out there, I don't think anyone in Las Vegas is doing the kind of job that we're doing in Las Vegas today.

California is still weak for us.

But it's getting better, but it's a slow market with a tough budget and a tough deficit with the state.

I think California will continue to be a weak market for us in the years ahead just because of what exists out there.

I would be really remiss if I didn't mention Matt Farris and the Pacific Northwest and Seattle, our top PTI performer in the Company this year.

Doing a great job for us in Seattle.

That's pretty much our markets.

One last one, if I could skip it in.

Warranty costs, do you think those should level out in '12 given that it was a little bit up sequentially 4Q?

Warranty's something that's very difficult to predict.

There always is a bit of volatility in there in terms of dealing with the tail of homes that we've delivered over the past seven to 10 years, relative to our low level of revenues today.

That's where you see a little bit of volatility in our margin there.

Certainly, it's something we pay a lot of attention to.

We're focused on operationally in dealing with that and taking care of our customers.

I can't necessarily give you any guidance on where we expect it to go but we certainly feel like we're reserved very well and we've got a handle on any warranty issues that we may be dealing with in our operations today.

I guess the last caller -- I don't want to leave them out because Terry Stanley, in central Texas, is doing a great job for us, and producing very good returns for us in central Texas.

David Goldberg of UBS.

First question, I want to follow up on the comments.

Bill, I know you mentioned before about having $1 billion of cash and targeting $1 billion of cash and marketable securities at the end of the year.

I think that's great to have such good liquidity but I'm wondering, how do you get to the $1 billion target?

How do you work towards that number?

What makes that the right amount of cash for your balance sheet?

The first thing we look at is what our working capital needs on a seasonal basis.

We will add homes to inventory during our second and third quarters of the fiscal year.

Our expectations for that need is $200 million to $300 million.

So, that's $200 million to $300 million of our need.

Then past that, typically in our capital structure we would have a bank facility in place that would perhaps be in the range of $500 million, which would allow us some flexibility in terms of efficiency with our cash.

We don't have that facility today.

So, essentially we're keeping some cash as cushion in replacement for what we would normally have available in a bank facility.

What that cushion provides us with is it provides us with opportunity capital to the extent that we see good opportunities in the business or we see improvements and we want to make further investments in our business.

But it also, provides us cushion against the down side.

If there were a major shock to the system, which we've certainly seen several of those over the past few years, that might cause disruption in the capital markets, and might keep us from being able to access the capital markets.

Or if it shocked consumer confidence and our potential home buyers and if we saw a drop in sales or an increase in our cancellation rates, that cash cushion provides us with insurance to be able to continue to operate, continue to operate without losing any sleep over our liquidity.

We want to sleep well at night, I assure you.

Just to make sure I understand.

The cushion should be above what the normal bank facility should be just in case there's a shock to the system?

Is that repeating that correctly?

That's fair.

We're very realistic and I would say we're still a bit cautious about the overall environment.

It is still a challenging homebuilding environment out there today and we feel like it's prudent to keep some level of cushion in this environment.

I'd say the flip side of that is we're also optimistic and we want to make sure that we have the capital to invest when we're ready to do that.

My follow-up question was just on the mortgage market.

I'm wondering if you guys are seeing any changes in underwriting standards, if you saw anything during the quarter, tightening, or loosening, especially relative to FHA loans and the way those were being underwritten by FHA approved lenders.

We're not seeing anything substantial in terms of changes in underwriting or loan availability really over the last six to nine months.

It continues to be a challenge and people still have to have good credit and have cash for the down payment.

But we're really not hearing about incremental tightening right now.

David, by the way, before you get off, I want to say, we've known one another for a long number of years.

We've talked to you a lot about DR Horton.

I've been disappointed over the years in the fact that I can't get through to you.

But somebody must have gotten through to you because I appreciate that you have us as one of your top picks.

I don't know whether that's you, Stacey, or Jessica or Bill or Mike, but it certainly wasn't me.

(laughter)

All of the above.

Bob Wetenhall of RBC Capital Markets.

This is Steven Bachman in for Bob.

Given your read-through in October and November, do you have any view on the pace of incentives in the next quarter?

You said it was flat sequentially.

You mentioned it was going to start decelerating.

I was wondering if you had any read-through for 1Q.

Be hard to say we had a whole lot on a read-through on the quarter yet considering we're not quite halfway there.

Especially in terms of closings and seeing incentive margins coming in.

But we're looking for it to be essentially flat with where we've been.

We've seen some stability the past few quarters at the incentive level.

We're hopeful and optimistic that it's going to continue.

In terms of, you mentioned the mix shift toward the move-up buyer from the first-time buyer and its impact on pricing.

Do you expect pricing to be up year-over-year in fiscal '12?

I do believe that our average sales price should increase slightly in '12 over '11, just based upon where our product offerings are today and where we're positioned today.

One last one.

Cancellation rate was 29% which was the highest of the year.

Was that a seasonal trend or is there another pattern emerging that you guys have noticed?

I think that really what you're seeing there is the impact of some of the market disruptions and the impact on consumer confidence, primarily in August where you first really started seeing the significant market fluctuations.

There's generally not a significant seasonality in our cancellation rate.

All that disruption for a few weeks and then basically we've come back to more expected levels on our can rates.

Another thing that drives our cancellation rate is our special sales that we will have in divisions across the country.

They generate a lot of sales and then they have higher cancellation rate on those sales when they have a sales event.

So, sometimes that also impacts our cancellation rate.

That's a fairly normal pattern.

We've seen that over the years and we bake that in when we plan events.

Jay McCanless, Guggenheim.

My first question, I believe you said the community count was up 2% year-over-year but your spec count was up about 8% year-over-year.

What's the current thought on specs?

Are you all going to be a little more aggressive this coming year or maybe dial those back as you go through the year?

We focus on specs very clearly around here all the time.

We do have two or three divisions that are running higher spec count than what I would like.

I notified those three divisions that they needed to get their spec percentage down, between now and the end of the year.

Main goal for that is in all of our divisions to have fewer specs in our first quarter than in the second quarter.

Because clearly at the end of the first quarter we're going to be starting quite a few spec units in order to meet the spring selling season, spring demand.

I would say a bit of the increase is because we have seen a bit better sales pace.

So, our expectations are that we will see a bit more demand in our Q1 this year versus Q1 last year.

Just one other stat.

While our overall spec number may be up, the quality, the mix of those specs is better now than it was a year ago.

One of the things we look at a lot, are our number of completed spec homes that are older than six months old.

Today we have 600 of those homes.

A year ago we had 800.

So, while our total number of completed specs are up, our aged specs are down.

So, the mix is better.

The backlog is up 18%, compared to the 8% increase in specs.

So, we like the mix of the inventory we have.

Then my other question, I wanted to ask the mortgage qualification question a different way.

Have you ever disclosed what the rejection rate at DHI Mortgage is?

I don't know if you would be willing to do that now, but I think that would be at least one barometer to say here's what's going on in the mortgage market.

We have not disclosed that, Jay, and I certainly don't have it in front of me right now.

It's not something that we've been prepared to discuss today.

Jade Rahmani of KBW.

I just wanted to ask again on the mortgage environment, have you seen any changes to the approval time line given all the re-fi activity that's been going on?

Secondly, has the larger banks exited the correspondent business?

Have you seen any change in appetite on those banks that do purchase your mortgages?

I'll start on the approval time line.

The approval process, I don't think we've seen it be impacted by re-fi necessarily.

It has expanded in terms of time line, if you compare it to last year or the year before, simply because of the level of documentation that continues to be required.

It's generally going to take a minimum 30 days from someone applying for a loan until they're fully approved.

With regard to the impact of certain large banks choosing not to be in the correspondent business, we have had conversations with additional banks.

There are certainly several banks that are still interested in being in the correspondent business and we expect our volume to shift to those banks.

There could be some short-term impact on the timing, and what the time it is from the time we originate a loan to when we sell it.

If volumes are a bit greater than their infrastructure will support.

But we don't expect there to be any long-term impact there.

Just again on the time line, what's the timing from approval to closing?

A part of that depends on the approval to closing, part of it depends on whether the house is complete.

If someone's coming in early in the build process it could be another month to two months before we close.

From the point of approval, though, to closing it could be a very short window, maybe three days to a week.

If the house is ready to go and the buyer is ready to move.

Alex Barron of Housing Research Center.

Don, I think you guys have done a great job over the last few years in all aspects.

My question to you, as we're moving into 2012, you guys sound pretty confident that you'll see an increase in volume.

I'm trying to just get a better feel for where that optimism is coming from.

Are you starting to see some of the people who defaulted early on in the cycle come back and start buying homes again?

Let me be clear.

We expect 2012 to be more profitable than 2011.

Our plan is that the sales and the closings could be flat but we expect them to be up.

But we believe that we can make more profit in '12, on a similar number of closings in '12 as we had in '11.

To the extent that there is more demand out there, then we would expect our sales and closings to increase.

But right now, we're just planning on being more profitable on a similar number of closings and sales.

To answer your question on the others, it's just a function, I believe, in each one of our markets, our city managers and our division presidents of trying to carve out more market share in each one of our communities.

We are also clearly trying to focus on -- we are focusing on -- how do we achieve more absorptions per community.

I don't see a lot on 2012, in an economic situation across the United States.

Bigger picture, I don't see much improving.

I don't see jobs improving significantly.

I don't see consumer confidence improving significantly.

So, our plan has been, how do we continue to get more out of what we have, continue to enter into new deals, as well as to take market share from other builders.

But I'm still not clear, what's going to change?

If you have a similar volume, where is the extra profitability going to come from?

Are your land costs going down?

Are your incentives going down?

What's giving you that optimism?

The primary driver, we believe, is our continued work on folding in new communities, that we have bought the land at today's prices, based on today's selling prices of homes, culling through underperforming communities, replacing them with better communities.

So, we expect that we should be able to push margins up through that process.

We're also leveraging our SG&A better.

As we look at where we're starting this year compared to where we started last year, we see some upside for us on SG&A.

Then, we've talked about our debt reduction.

We're going to have less interest flowing through our income statement.

Probably.

If we have huge volumes we may have more capitalized interest flowing through.

But as a percentage of revenue that should be a declining percent.

If I could ask another one.

The cash flow, this was the first year where the cash flow wasn't as strong as previous years, so what changed there?

Because I don't really see that you guys were buying more land or something.

We're essentially replacing what we're selling right now.

Our inventory balance is essentially flat on the balance sheet this year versus last year.

So, we're not generating cash by liquidating our balance sheet as we had in the past several years.

That's the primary difference.

Obviously, our profit isn't what it was last year.

So, we don't have cash flow from profit at the same level as last year either.

I think in each of '09 and '10 we had significant tax refunds, as well, Alex.

We didn't have a cash tax refund this year even though we had an adjustment to our tax accrual that was a tax benefit for income purposes this year.

We've been saying for quite some time our goal is to shift our cash flow generation from liquidating our balance sheet and getting tax refunds to turning to profitability.

That's our goal and that's where we would expect our cash flow to come from going forward.

Jordan Hymowitz of Philadelphia Financial.

I have a question, your deferred tax assets.

One of the banks, Pinnacle Bank, was the first company I've seen to actually reverse a tax asset this year, of any of you guys that had one.

That was after five quarters.

Is there some reason the banking space is different in reversing deferred tax asset than the homebuilding space?

We ask ourselves that question.

We're marking our assets to market, and they're not.

I don't know where the rules go from there.

It's a subjective determination.

Every company's different, the facts and circumstances.

You would have to look at the nature of their deferred tax assets as well as their outlook and ability to predict earnings going forward.

In our case right now, the standard would tell us that a cumulative loss in recent years, and a three year cumulative loss position that we're in today, is a significant amount of negative evidence.

That's very hard to overcome with any kind of positive evidence in our industry and our business, that would allow us to reach a conclusion that we don't need a valuation allowance.

But as we report, and through '12, as that significant evidence falls away, we'll be able to assess with maybe a lower burden of proof requirement than we currently have today -- we call it the significant negative evidence, the cumulative loss -- and we'll be evaluating our expectations for future profitability.

As well as when those deferred tax assets, temporary deductible differences, come back as tax deductions and against the earnings we expect to have.

A big part of the positive evidence that we will be looking for is the level of profitability that we see and the consistency of that profitability.

As you look back at our just completed fiscal year, we lost money in the first two quarters, and then we made money in the next two quarters.

So, while we have a year of profitability, it's not at a substantial level and it was not consistent.

So, as we move into fiscal '12, if we can generate profitability during the slower seasons of the year, at a more substantial level, move into the second part of the year, grow our profitability and see more substantial profitability, that will be much stronger positive evidence that will support us reversing the valuation allowance that we do not have today.

Jack Micenko of SIG.

I wanted to ask an open-ended question on ASP.

Obviously, land mix, market conditions, a lot of stuff goes into that number.

But as you move maybe away from the entry level buyer, to some extent, how do you think about ASP trending over '12?

Can you break out what your trade-up product ASP is relative to more of an entry level product?

Talk maybe about how order ASP and sale ASP maybe begin to merge?

Or maybe not, I don't know.

Just an open-ended question on pricing.

I think it's very difficult to say what our ASP is on entry level versus move-up, simply because each one of our markets is so different.

There's a different cost basis, both from a hard cost perspective, as well as a lot cost, just SG&A and everything else.

That it's just too difficult for us to put a finger on it and say here's what the ASP should be for entry level and what it is for move-up.

A move-up house in one market is not a move-up house in another market.

Clearly California, an entry level house in California is definitely a move-up house in Texas or Florida.

It would be very difficult for us to answer that question.

Stephen East of Ticonderoga Securities.

Two questions, totally separate.

DT, when you talk about your land spend in 2012 not being significant or still curtailed, is that really because of where you all want to keep your balance sheet or is it more a function of what you're seeing out in the market?

Then the second, just an update on the putback issue.

I know you have talked about whether it makes sense to do global settlements, et cetera.

Just a little data dump on what you're seeing.

On land spend, we're still committed to our business model of being a land-light and a lot-light Company.

As I was mentioning earlier, our return on capital, when we do buy finished lots and we cash them out, or we buy a piece of land and we develop it, our hurdle rate right now is we want the cash back in 12 months.

We'll do deals that are 18 to 24 months, very few 24 month deals.

A few 18 month deals.

But bottom line is, until we get a clearer picture on where the overall economy is going, we have a very tight rein on our capital and our cash.

So, as a result, it's a business model that going forward we still are convinced that we just don't want to be in land for a period longer than two years.

So, we're basically focused on lot option deals and small development deals.

So, it sounds like, though, then you're seeing a rational market, just not maybe the duration and type that you want.

Do we see a rational market?

Probably not.

We see a number of deals out there that exceed our underwriting guidelines, or don't comply with our underwriting guidelines.

We tell our division presidents go back and rework the deal, here's the way we will approve the deal.

We miss some deals.

I'm going to go back to the old saying that someone mentioned to me on Wall Street years ago.

That is, land deals are like trains, if you miss one there's another one that's going to come along.

That's our attitude right now.

There's no reason to load up our balance sheet on new land and lot deals with an unclear picture on where the economy and where our business is going.

We think our business is improving, clearly, but not to the extent that we're going to take risk that we don't see would be rewarded in the marketplace.

Bill?

Stephen, in terms of the mortgage putback risk, we have pursued global settlements with some of our investors.

We have completed a couple of global settlements over the last year.

We are still in discussions with other investors regarding global settlements with them.

Those settlements that we have reached are reflected in the reduction that we've seen in our overall loan loss reserves over the past year or so.

Our reserve a year or so ago was around $40 million.

Today, it's at $33 million.

The other factor that's reflected in that reduction in the reserve is the fact that over the course of the year we have seen the level of putback requests decline somewhat over the last year.

So, we will continue to work with our investors, continue to deal with requests that come in.

Hopefully, we can achieve some additional settlements.

The level of requests are declining.

Is the payout ratio changing or where are you at on that?

The payout ratio is similar to where it has been in the past.

There's still a significant number of requests that are ultimately rejected because there's no proof of true underwriting issues.

Then, the loss rate on them are pretty similar to what we've seen in the past.

Michael Rehaut of JPMorgan Chase.

I just wanted to hit on the mortgage putback issue.

So, you were able to answer a lot of those questions.

Just to clarify, you said the level of putback requests have declined somewhat versus 2010.

We've seen in a couple of other builders that the putback requests in September moved up a notch, a material notch.

Are you saying that's not the case for yourselves?

Or was your statement more just broadly fiscal '11 versus fiscal '10?

No, we were specifically talking to the fourth quarter.

Our level of requests in the fourth quarter were lower than what we'd seen in either the second or third quarter.

Thank you.

There are no further questions at this time.

I'd like to hand the floor back over to Mr.

Don Tomnitz for any closing remarks.

Thank you.

Today is Veteran's Day and as a final thought on my part let me share a favorite prayer of one our realtors in the Dallas-Ft.

Worth area.

God, keep our service men and women safe whether they are serving at home or overseas.

Hold them in your loving hands and protect them as they protect us.

Please keep these service men currently serving and those who have gone before in your thoughts.

They are the reason for our many freedoms that we enjoy today.

Thanks and good day.

Thank you.

This concludes today's teleconference.