霍頓房屋 (DHI) 2013 Q1 法說會逐字稿

Good morning, and welcome to the D.R. Horton America's Builder, the largest builder in the United States, first-quarter 2013 earnings 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. Donald Tomnitz, President and CEO for D.R. Horton.

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, Senior Vice President.

As usual, 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, which is filed with the Securities and Exchange Commission.

Don?

D.R. Horton is off to a great start in fiscal 2013.

This quarter, we saw a broad improvement in demand in most of our markets, which has given us the ability to raise prices in more of our communities.

Both the entry-level and move-up segments of our business are strong.

We are anticipating a good spring selling season, and have added homes in communities to capture this increasing demand.

We continue to find opportunities to expand our business in our existing markets, as well as new submarkets.

We've put a significant amount of capital to work this quarter by increasing our investments in homes under construction, finished lots, land, and land development.

D.R. Horton is in the best position it has ever been in its 35-year history.

Bill?

In the first quarter, our consolidated pre-tax income increased 270% to $107.9 million from $29.2 million in the year-ago quarter.

As a percentage of consolidated revenue, our pre-tax income margin was 8.5%, an increase of 530 basis points from 3.2% in the prior-year quarter, reflecting significant improvement in both our homebuilding and financial services operations.

Compared to the year-ago quarter, homebuilding pre-tax income increased to $90.2 million from $25 million, and financial services pre-tax income increased to $17.7 million from $4.2 million.

Our effective tax rate for the quarter was 38.5%, which resulted in income tax expense of $41.6 million in the current quarter compared to $1.5 million in the prior-year quarter.

Net income for the first quarter increased to $66.3 million, or $0.20 per diluted share, compared to $27.7 million, or $0.09 per diluted share in the year-ago quarter.

Our diluted share count this quarter included 38.6 million shares related to our convertible senior notes.

We expect these shares to be included in our diluted share count in most future quarters.

Stacey?

Our first-quarter home sales revenue increased 38% to $1.2 billion on 5,182 homes closed, up from $884.3 million on 4,118 homes closed in the year-ago quarter.

Home sales revenues increased by double-digit percentages in all of our operating regions.

Our average closing price for the quarter was $236,100, up 10% compared to the prior year, driven primarily by pricing power and a larger average home size.

Don?

The value of our net sales orders increased 60% from last year due to increased volume and home prices.

Our net sales orders increased 39% to 5,259 homes on a 9% increase in active selling communities.

Our average sales price on our net sales orders of $249,900 increased 15% compared to the year-ago quarter.

The average sales price of our net sales orders for the quarter increased by double-digit percentages in all of our operating regions.

The cancellation rate for the first quarter was 22% compared to 26% in the year-ago quarter.

The value of our backlog increased 80% from a year ago to $1.8 billion, with an average sales price per home of $240,400.

Homes in backlog increased 62% from the prior year to 7,317 homes.

Our increased backlog is providing greater visibility to our future revenues.

We expect that our backlog conversion rate will continue to revert closer to historical seasonal norms.

For the second quarter, we expect our conversion rate to be around 70%.

We have continued to see strong sales through January.

Mike?

Our gross profit margin on home sales revenue in the first quarter was 18.8%, up 200 basis points from the year-ago period.

170 basis points of the margin increase was due to improving market conditions resulting in reduced incentives and higher average selling prices in excess of cost increases.

40 basis points of the margin increase was due to lower amortized interest and property taxes.

These increases were partially offset by a 10-basis-point decrease from higher estimated cost for warranty and construction defect claims as a percentage of home sales revenue.

Our expectation for our second-quarter home sales gross margin is in the high-18% range, consistent with the first quarter.

Stacey?

Homebuilding SG&A expense for the quarter was $140.8 million compared to $119 million in the prior-year quarter.

As a percentage of homebuilding revenues, SG&A improved 200 basis points to 11.4% from 13.4%.

We are leveraging our fixed cost structure, while at the same time building our sales and production capabilities where necessary to meet increasing demand.

In the second quarter of 2013, we expect our SG&A, as a percentage of homebuilding revenues, to continue to improve on a year-over-year basis.

However, sequentially, the absolute dollars and percentage will likely be higher in the second quarter than the first quarter due to seasonal cost increases.

We expect our SG&A as a percentage of homebuilding revenues to be lower throughout fiscal 2013 as compared to fiscal 2012.

The improvements in our gross profit and SG&A percentages, and a decrease in our direct interest expense, expanded our homebuilding pre-tax margins to 7.3% in the current quarter, an increase of 450 basis points from 2.8% in the year-ago quarter.

Bill?

Financial services pre-tax income for the quarter was $17.7 million compared to $4.2 million in the year-ago quarter.

83% 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 59% of our home buyers this quarter, with virtually all loans meeting eligibility requirements for sale to Fannie Mae, Freddie Mac or Ginnie Mae.

FHA and VA loans accounted for 49% of our mortgage company's volume this quarter, down from 57% in the year-ago quarter.

Our mortgage company's new borrowers during the quarter had an average FICO score of 717, and an average loan-to-value ratio of 90%.

First-time home buyers represented 47% of the closings handled by our mortgage company this quarter, compared to 50% in the year-ago quarter.

Mike?

In September, our construction in progress and finished homes inventory increased by approximately $227 million.

Our homes in inventory at the end of December totaled 14,200 homes, up 1,200 homes from last quarter, and up 4,000 homes from a year ago.

As of December 31, 1,200 of our homes were models; 7,400 were speculative homes; and 2,400 of the specs were completed.

We have positioned ourselves to capture demand during the spring selling season, with robust housing inventory and increased community count.

We expect our average community count for the fiscal year to increase at least 10% year over year.

Don?

In our first fiscal quarter, we increased our investments in land, lots, and development inventory by $613 million, as we continue to find new communities and build our lot supply to meet increasing demand.

Our gross investments in land, lots, and development costs during the quarter totaled $912 million, of which $340 million was to purchase finished lots, $445 million was to purchase land, and $127 million was for land development costs.

The majority of the land and lots we purchased were in our South Central and Southeast regions.

We saw an increased number of land and lot investment opportunities this quarter from landowners who were willing to sell at attractive prices if we were able to close the transactions by December 31, 2012.

However, we expect our pace of land and lot purchases will moderate while development spending will increase over the next few quarters.

At December 31, 2012, we controlled approximately 177,000 lots, of which 118,000 are owned and 59,000 are option.

30,000 of our own lots and 30,000 of our option lots are finished.

The 60,000 total finished lots we controlled at quarter end are up 32% from a year ago.

Bill?

Our total available liquidity at December 31 was $1.1 billion, which included homebuilding unrestricted cash and marketable securities of $643 million, and available capacity on our revolving credit facility of $495 million.

The balance of our public notes outstanding at December 31 was $2.3 billion, and we had $100 million outstanding on our revolver at quarter end.

At December 31, our homebuilding leverage ratio, net of cash and marketable securities, was 33%, and our gross homebuilding leverage was 40.2%.

Don?

In closing, this first quarter was D.R. Horton's most profitable first quarter since 2007, with $107.9 million of pre-tax income.

All of our operating metrics improved on a year-over-year basis this quarter.

The value of our sales, closings, and backlog increased by 60%, 38%, and 80%, respectively.

Our pre-tax income increased 270%.

Our pre-tax income margin increased 530 basis points to 8.5%.

Our gross margin on home sales revenue increased 200 basis points.

Our SG&A as a percentage of homebuilding revenues improved 200 basis points.

Our land and lot position is the strongest in our 35-year history.

And most importantly, we are experiencing pricing power in many of our markets for the first time in six years.

Finally, D.R. and I would like to personally thank all of our D.R. Horton teammates for their hard work and accomplishments.

We are excited by the certainty of the start of this new upcycle, and by the opportunities we see in fiscal 2013, and most importantly, beyond.

Keep up the good work.

Always remember -- nothing happens until we make a sale, so let's go kick some tail this spring.

This concludes our prepared remarks.

Now we'll host any questions you may have.

Thank you.

We will now be conducting a question-and-answer session.

Due to time constraints, we ask that all questioners would limit themselves to one question and one follow-up question.

If you have any additional questions, you may requeue and those questions will be addressed, time permitting.

(Operator Instructions)

One moment please while we poll for questions.

Dan Oppenheim with Credit Suisse.

You've talked a lot in terms of positive commentary in terms of just the activity as of late.

In recent times, your land activity has been somewhat cautious in terms of looking for land that you work through in, say, 12 to 18 months.

How much more are you shifting the land strategy now since you are buying land that will last for longer and will involve a lot more development activity here?

Dan, we are continuing, as I said, to add both finished lots as well as raw land.

The underwriting criteria is still the same.

We are requiring return of cash on our land deals to be 24 months.

The way that we're adding our number of lots is we're just doing more deals but we are focused on trying to get our cash back on our land purchases within 24 months of the initial purchase.

Great.

Then in terms of the margins, just calling about -- how margins are likely to be flat sequentially.

You had also talked about how demand remains so strong.

Can you provide any color in terms of just the pricing strategy or the impact of cost increases in terms of materials and such and what's -- how you are looking at that?

We are clearly raising prices in each and every one of our communities on a house by house, and subdivision by subdivision basis.

I think we have a good focus right now because existing homes are in low supply and I think the quality of existing homes in the marketplace are not as good as what they once were, as well as the fact that our new home inventory is one of the lowest it's been in five or six years.

So I think that's a confluence of events, which is adding to our pricing power.

We do have costs which are going up in some of our markets and with some of our subcontractors.

But clearly, our pricing power is exceeding the cost increases that we have today.

Just to add a couple of specifics to that, Dan, in terms of our sales price per square foot on a year-over-year basis, that's up a little over 6%.

In terms of our total cost per home per square foot, that's up a little over 3% so that differential there is what's driving margin improvement.

Clearly, our goal is to continue to drive improved margins to the extent we continue to see positive pricing dynamics.

There certainly is potential our margins will continue to move upward.

We took a very big step up this quarter sequentially, certainly, and we expect we certainly have the ability to maintain that level.

Our goal is to improve it.

But in terms of guidance and what we can actually see in the next quarter or so, we're comfortable saying we can maintain where we are in the high 18%.

Ken Zener with KeyBanc Capital Markets.

Given your -- it's an extension of the land question right before, but as I look at your regional land positions, both in terms of your options and owned land position, as well as what you are talking about it terms of your [finish], it seems like you are not as well represented on the coastal areas.

How do you think your thought process might work in terms of shifting a conservative capital allocation to the high-cost markets, which I think are historically cyclical and can drive so much gross profit dollars?

Do you think you might be underrepresented in the West, let's say, as opposed to where you were in the last cycle because of your conservative land approach?

Clearly, in California, we are proceeding more cautiously in that market than we have in others.

Primarily, the thing that concerns us most about California is just the state of the California economy.

So as a result, we are looking -- continuing to look in California but I would say to you that we are approaching it on a cautious basis.

We want to make sure the demand's there.

I know that there are a number of immigrants who are still moving in to California.

That's a good thing.

So as a result, I think there's good demand in most of our markets there but it is not as widespread in California as it is in many of our other coastal markets.

If you look at the Carolinas as well as Florida, we have widespread representation in terms of all of the markets in that -- in those markets continuing to improve, whereas in California, it's on a more selective basis.

Understood.

Our largest operations are in our Southeast and South Central regions and a lot of those markets are coastal markets from the coast of Texas all the way around the Gulf Coast and including Florida.

Okay.

Good.

I appreciate that.

Then Stacey, if you could expand on your SG&A comments.

It seems to me given your backlog conversion, it seems like it's mostly a flat sequential quarter.

What costs are there?

If you're growing your [10] community count about 10%, are there incremental G&A costs related to those new communities or/and is it hard to find labor?

What are some of the challenges you are seeing as you guys are ramping up the business?

Thank you.

There are minimal incremental costs associated with opening a new community.

Generally, we are not doing the very, very large master planned communities which would have a lot more upfront costs and infrastructure.

But as we open for sales, we are going to need to hire a sales person as we begin construction.

We may be able to leverage a nearby superintendent but quite likely, we'll be hiring another superintendent.

So there's some level of overhead associated with that, but it is truly variable with the community count which we always view as a positive.

Just as a point of reference, from this time last year, we have increased our employee count by 700 employees, which is about a 22% increase.

That's in direct response to the increased demand we've seen for housing and the increase in communities that we've opened.

So there will be an increase in SG&A expenses going forward but we expect the revenue to fully and more than offset those expenses.

In terms of the comments, seasonally, second quarter versus first quarter, there are some seasonal costs that it -- are incurred ahead of the revenue.

In the second quarter, we typically will advertise a bit more in the spring season that when may turn into closings in the third quarter.

So we will see more advertising expense in the second quarter as well as payroll taxes and a few things like that, that increase when the calendar turns.

We typically will see a higher level of expense in the second quarter versus the first quarter seasonally.

Michael Roxland with Bank of America Merrill Lynch.

Congrats on a good quarter and year.

Thank you.

Can you just go into a little more detail in what you are seeing with respect to labor costs?

I know you've mentioned in the past you have a strong labor pool to work but with what we've been hearing is increasingly, about a lot of labor shortages in various markets across the US, so if you could go into a little bit of -- a little more color there.

Well, we are not actually experiencing the labor shortage that you are talking about.

One of the facts are clearly, we are the largest builder and we have a major position in most every one of our markets.

We have basically been the lifeline to most our subs over the last four or five years as we have gone through the downturn and kept many of those subcontractors in business during the lean times.

So as a result, we have a very loyal subcontractor base.

They're expanding their businesses as we expand.

As we expand in the new submarkets, we are taking most of our existing subs and they're supporting us in those new submarkets, even submarkets that are several hundred miles away from our main market.

So we are very, very fortunate with our subcontractor base and it's a very loyal base.

We're not experiencing shortage.

Got you.

Then just quickly, as you continue to focus on the move-up market, how should we be thinking about your land base and your approach to land acquisitions?

Should we expect that you'll be putting a richer mix on a similar land base because obviously, that would benefit margins or will you be sizing the homes to larger lots?

It will be a combination.

In many of our markets, with really the exclusion of California, we are zoned for a variety of floorplans.

As we see demand swing to more of the move-up buyer, we simply build more of the larger floorplans and put a higher level of amenities in those floorplans.

At the same time, we are also identifying through our land acquisition processes, communities that will specifically be designed for move-up buyers whether it's the location or the price point that we'd be targeting across the board.

So it will be a mix of increasing the home sizes in our existing communities as well as looking at different larger sizes of lots in new communities.

Actually we have a focus on a higher-end business line within D.R. Horton.

We are focusing on that business and growing that under a different name within D.R. Horton.

We are beginning to roll that out in major markets across the US.

Got you.

Good luck in the quarter.

Michael Rehaut with JPMorgan.

Nice quarter.

First question I had was on the 4Q orders themselves.

I think ahead of what we were looking for and I think what most were looking for.

When you look at the acceleration from 4Q which was around 24%, can you give us an idea if that was driven or just the year-over-year trends in general, however you want to characterize it, driven by community counts starting to turn positive year-over-year or was it all an acceleration in absorption pace?

Because I believe over the past few quarters, community count has been -- and correct me if I'm wrong here, maybe at best, up just a little bit or I think going past earlier into the past year, it was even down a little bit year over year.

I think, clearly, a lot of it had do with this community count but almost -- also most importantly, Mike, the fact that we were opening those communities that we had contracted for in the previous quarter or quarters.

Our people have done a great job region by region of acquiring new land positions and lot positions.

A lot of those lot positions, as we told you, were finished lots.

We invested $345 million last quarter in finished lots.

So as a result, it's just the fact that we've got more flags flying and they're finished lots and so they're coming to market a lot more quickly.

Just a couple of specifics.

Year over year, our average community count was up 9% and our total sales units were up 39%.

So it certainly is a piece of it is new communities but clearly our absorptions are increasing as well.

On a sequential basis from Q4 to Q1, our average community count is up 2%, so a slight improvement there.

So clearly any acceleration is largely being driven by improved absorptions across our communities.

No, without a doubt, but thanks for the detail.

The second question on pricing trends.

Don, you had mentioned in your opening remarks that you are raising prices in most communities.

I was just trying to get a sense of the -- people have ventured over the last quarter or two, saying we are raising prices in half our communities, 75%.

I was wondering if you can give us a sense of the broadness of that trend and also the degree of magnitude on average.

What would you say your nominal price is going up and also your -- how much your incentives are coming down?

Well, first of all, I would characterize it as we are raising prices in most of our communities out there.

That's a function, as I said earlier, of the low new home inventory, 4.5 months of new homes available, and also the low inventory of existing homes out there.

Like I said before and we have talked around here, the quality of those existing homes on the marketplace are low compared to what they were in the past.

So as a result, I think most people are being -- or a lot of people are being driven to new home purchases.

Any granularity on the degree of magnitude?

I'd just say most is more than many.

The amount of the increase?

Well, our overall ASP was up 10% on our closings, 15% on our sales, so clearly it's in the double-digit range right now in terms of the overall increase.

If we're increasing in the majority of our communities and most of our communities, then clearly, that's fairly a substantial increase in our sales prices.

Stacey mentioned before we had an increase in our revenue per square foot delivered of about 6% for the quarter.

Part of that is product mix shifting and geographic mix shifting but part of that is our price increases as well.

I think the key is we have pricing power out there today and the pricing power, I will go back to what's being driven is by the existing and the new home inventories being at five or six-year lows.

Adam Rudiger with Wells Fargo.

Sticking with that pricing power commentary and maybe thinking a little bit longer term.

I know there are some out there that believe the lack of available land and finished lots could be a bottleneck and could drive margins higher through the cycle than maybe you have seen previously.

So I was wondering what your thoughts on what -- maybe industry margins will look like as we march back to the magical 1.5 million starts number?

Well, first of all, we do not have an issue with finding land and lot deals.

We are a major player in most every one of our markets.

We're an early player in most every one of our markets and began buying lots before the other competitors did.

So as a result, people keep talking about the difficulty associated with doing new land deals and new lot deals.

We are simply not finding that.

We have a lot of deals coming through here in each and every division, in each and every market.

Clearly, we see some very good opportunities here in the near term over the next few quarters to be able to drive margins, to be able to drive pricing.

Where that goes longer term, we don't really have a view on that because I think there is a lot of question marks around where it could go.

That's a lot of differences by geographies as well.

So you could see some strong margin appreciation in certain markets that may be more lot constrained whereas other markets wouldn't see that same level of margin appreciation.

We're going to walk before we run.

We are focusing on, obviously, our gross margins were 18.8% this past quarter, up 200 basis points.

We are working toward our goal, Company goal of trying to achieve 20% gross margins across the board.

So what would be your -- philosophically, what would be your approach, let's say, if you had the 20% or even a little higher gross margin markets you wanted and you had the cost structure you wanted so you were getting the margins you wanted, yet peers that maybe were a little more land constrained were trying to take pricing.

Would your -- do you think you would focus on stealing some share from them if you had those margins you liked, or would you follow with the price increases and slow down pace maybe?

Well, we're obviously have been and continue to be a market aggregator.

We will continue to be in the future by focusing on profitable market aggregation.

So it's going to be a balance.

We're looking at it on a subdivision by subdivision and our division presidents are looking at it on a house by house basis.

There are some homes, the larger homes we can raise prices on today easier than we can on the smaller homes.

There is better demand right now for the larger homes simply because people have low interest rates and they have attractive housing prices.

Most of the people in the marketplace today are trying to buy as much home as they possibly can.

So as a result, I believe we have much more -- we have better pricing power on our larger units than we do on our smaller units, but it's a balance on a subdivision by subdivision basis.

Some of our subdivisions, we're eliminating plans because they're too small of plans.

They're not an attractive gross margin on the house and one of the things that we have always focused on in this Company is not having a price leader in any one subdivision.

We go out and build, sell, close homes and make money on a house, we are trying to make the same gross margin on each and every house.

It may not be the same dollars obviously, but we're trying to make the same gross margin.

So we eliminate the lower gross margin houses as we proceed through a subdivision where we can.

Some states, like California, we have to build floorplans and plan one, two, three and four, and you have to build the number that you platted.

But in most of our communities and most of our divisions, we have the flexibility to change our plans and eliminate them and add them.

We like our competitive position today with our ability to find new communities with our adequate land position, our strong land position and pricing power in the market.

That gives us a lot of flexibilities in terms of being competitive in the marketplace.

Joel Locker with FBN Securities.

Nice quarter.

Thank you.

Just wanted to talk to you about on material costs, on when they hit, with lumber being a bit of a lag, if you are going to see more of a ramp on material costs that hit your COGS, say in the -- in your third quarter versus your second quarter.

Well, typically, what you would expect to see, especially on lumber is that lumber prices will rise throughout the spring selling season and into early summer as the demand increases and then you would see prices moderate.

So it's entirely possible that you could see slightly higher costs flowing through in the Q3 and Q4 closings than in current closings.

However, one of the things we try to do is lock in our prices for a longer period of time and use the volume that we have to negotiate favorable pricing with our supplier so we try to mitigate that cost at the same time.

And then in a rising price environment, we're optimistic that we can continue to raise prices to cover the cost increases.

There are other categories that there's talk of price increases.

Our goal is still to offset any price increases that we have to take with price decreases in other categories.

It's getting tougher to do that.

Some of the headliners in terms of price increases, we actually have price protection on the back-end so there may be a market price increase but we've locked our pricing through some of our national agreements.

Again, because of our volume nationwide with our national contracts that we have, we have some preferential pricing in that and that also helps us push back because of our volume with our different vendors and our suppliers to push back on price increases.

Can't always do that, but we are effective at it more times than you would think.

Right.

I was just thinking with lumber just jumping up in November and December versus the spring period, just made early move so I was wondering if that might hit your second quarter -- or your June quarter versus your March quarter, but --

We are very in touch with our lumber prices.

As I get e-mails from our national purchasing managers, we have, as Stacey said, been advising our division presence on a timely basis about locking their prices on their -- or their costs on their lumber and extending those price locks for a longer period of time.

I am not sure that we've mitigated every one of the price increases but I think we're doing a good job.

Great.

Last question on financial service revenue, it was around 3.4% of your home closing revenue versus a year-ago's 2.4%.

Where do you think that will be a -- what's a good run rate as -- if you look at it as a percentage of home sale revenue?

I know you sold a few mortgages that you had left over from the fourth quarter but just going forward, because it's up significantly year over year.

Clearly, it's a favorable market right now in terms of the gain on sale that's available in the market.

A lot of capital looking for mortgages.

So that's driving higher margins, higher revenues per loan.

You're seeing that across all of the marketplace.

One of the other drivers right now is as our increase and our average selling price goes up, the average dollar per loan is going up as well so that's helping drive that.

But clearly, the margins today are higher than historical averages.

Historically, you would probably see closer to the 2% range or the low 2% would be the long-term average and today, it's much higher than that.

We've got a good window right now and just based upon the FICO scores, the quality of the loans and the fact that the interest rates are low and the prepayment possibilities are low on these loans.

So as a result, the purchasers of those and investors on those mortgages really are buying mortgages at an opportune time with -- even though they're paying a higher yield, they're going to have a good yield on those mortgages going forward.

Joel, you make a good point.

Q1 is typically one of our lower homebuilding revenue quarters but it is typically one of our stronger financial services quarters because we are selling a lot of the loans that we originated in the September quarter.

So as we move into this next quarter, and homebuilding revenues pick up and we're selling loans that we originate this quarter, you may see that moderate a little bit.

David Goldberg with UBS.

My first question, I want to talk a little about growth.

I know you guys have touched on and Stacey mentioned some of the hiring you have done to support the growth as the markets rebounded, but I want to take a little bit bigger picture view on it.

What I want to talk about is controls as the market starts to get going again and things get better and better.

Really, the question has to do with how difficult it has been to find people to add on.

Presumably, people that got laid off over the five-year downturn have gone and found new jobs.

Are you finding it difficult to find good quality people to bring on board as the business grows?

What kind of training timeline do you need?

If you think about the various jobs that -- job functions that there are at Horton.

Well, actually, we're not having a difficult time finding good people.

One of the things that we have done a good job of, over the last three or four years, even in the downturn is, as an example, our division president and city manager training program where we are bringing people up through the ranks and having them mirror the division president or the city manager that they're working for.

D.R. and I specifically sit down and talk with those people a couple times a year to make sure their progress and how they're tracking.

But the other issue is, is that because of who we are and the size of our Company and the financial stability and the strong balance sheet that we have, there are a lot of people who, even outside the industry, look at those type of metrics and they want to join a Company like D.R. Horton simply because it's a good place to work and it's a good, solid Company.

So as a result, we really don't have difficulty attracting people.

Most of our people we're bringing up, we're bringing up through the ranks.

We just expanded into several new markets.

We have taken players from existing markets that have been proven land acquisition people, sales managers and people of that sort and put them in city manager and division president positions.

So we have eyed this for a number of years.

We knew -- we kept our footprint.

We knew we were going to begin expanding at some point in time when the economy was cooperating with us.

So as a result, we're well-positioned internally to continue to grow largely internally.

That's very helpful color.

My follow-up question was, D.T., about your comments on the entry-level segment showing strength.

It feels like maybe that's a little bit different than we've heard even as we've got through the upturn and it feels that we've gotten some momentum here.

Can you talk about what do you think is driving the entry-level outside of maybe it's just -- there is no existing home inventory so if they want to buy it, it's got to be in the new home market.

But then also, as you look forward how does that change your land buying behavior in terms of where you are looking for lots?

As you move forward, is the geographic footprint of your land purchasing going to change?

I think that you're right in terms of where we are.

The -- excuse me.

David --

Excuse me, I lost my place.

(laughter) I had a good answer for you and I lost it.

David, the entry-level's always been a key part of our business.

Traditionally, we ran 35% to 40%; through the downturn, we moved up to 60%.

That's down through our mortgage company.

This quarter, we ran about 47% first time home buyers.

It really doesn't change our approach to land.

It's just a continued extension.

Our approach recently has changed more to where we're buying for the move-up buyer because we have seen that segment come back.

The biggest thing that we're hearing from people who are buying today is they're looking at the rent versus own equation.

In so many of our markets, you can get into homes, no tax effect whatsoever and have your payment for your house be less than your current apartment rent is.

So that's a significant dynamic.

We always come back to jobs, too.

While the job market is still not as dynamic as it was in the heyday, it's shown improvement on a year-over-year basis and that's showing up in our results as well.

That was the point I was trying to make was on the apartment issue out there, the reason that the new home buyers are so attracted to buying a new home is the apartment owners are raising rents dramatically.

So as a result, the cost benefit to own versus rent is very attractive to own today.

So as a result, you are finding a lot of those people, if they can get the down payment, as I say, beg, borrow or -- beg it, I guess (laughter).

I don't want to use the third adjective.

That could be inappropriate.

But bottom line is, those people are trying to get into a home and the other side of the issue is if they're trying to get that money from their parents.

I have a number of people who are helping their children get into homes because of the fact, helping them with the down payment, just simply because it's an attractive time to purchase.

I have a follow-up and I'll requeue.

Thank you very much.

Megan McGrath with MKM Partners.

Just as a quick follow-up on David's question.

Given your increase in spec in anticipation of the spring selling season, are you expecting that your mix to the first time buyer could increase as we move to the spring selling season?

Or are these different types of specs that you are targeting towards the move-up buyer?

It's spread across the spectrum.

It depends upon the subdivision.

It depends upon the city.

We are building specs at the entry-level all the way to the higher end.

But again, it's subdivision by subdivision based upon what the market is in that particular part of that division.

But we do believe with our specs and inventory at the beginning of the selling season, we are in a very strong position to be able to sell and capture the demand versus the competition in the existing market or other homebuilders who may not have as many homes in inventory.

Great.

Thanks.

Then just a follow-up on your land acquisitions.

I just wanted to specifically ask about Texas.

You talked about a lot of your land acquisitions being in the South and Southeast, I think you said.

We had heard through the grapevine that land prices in Houston and Dallas were reaching levels that they had seen at the peak.

I am not sure if you are seeing that and just wanted to hear some color specifically on what you are seeing in that market since you are so big there?

We are the largest builder in Texas.

So clearly, If you look at our various markets here, we're not seeing those kind of land prices.

The underwriting that we are doing still is generating us an excess of 20% gross margins.

We are achieving our return of capital on those land deals within 24 months and currently, we find the land market in Texas still attractive and we find the demand in Texas very strong.

So as well we continue to expand our existing number one position in Texas and we'll continue to do that.

Peak is a strong term to use for pricing of land in Texas.

It's -- we're much more topographically flat.

We just didn't see the run-up here.

(laughter)

Nishu Sood with Deutsche Bank.

Don, I wanted to go back to something really interesting you said earlier.

There is a widespread perception that there is a huge massive lot shortage out there.

You said you're not seeing that.

I think that a lot of that perception that there's a lot shortage came from during the downturn, whatever few buyers there were basically only wanted the most A-grade locations and obviously, by definition, there is going to be lot shortages in the most -- best locations.

So my question is, are we seeing, now with the housing recovery getting going here, an expansion of demand growing out again beyond just the A-grade locations.

Obviously, you guys being the biggest builder and having the broadest array of communities, are we seeing that spreading of demand to those outlying areas again?

I would say very marginally.

What we're focused on are still doing A deals and most of the deals we are doing are in A locations.

So as a result, we are just not seeing a lack of good deals in any of our markets.

It's not on the periphery.

We're -- it's the first area to slow.

There are attractive prices out there on the periphery but most of our markets we're still in A and B locations, clearly.

Got it.

So then clearly, you -- actually, let me ask something different.

During the downturn, you guys had constrained pretty significantly the deals you would pursue to limit risk, right?

You would pursue smaller deals, as small deals as possible.

I think you had even gotten into deals where you were 15, 20 lots, let's say, and then finished only.

Now, clearly, the deal sizes are getting larger and perhaps some more development work.

I was just trying to get a sense of -- I was just wondering if you could give us a sense of that transition.

How far it's gone and what your current typical deal looks like?

I would say our typical deal today is still probably somewhere around 100 lots.

They're in A and B locations.

We're able to continue to find those.

The larger deals, even though we're doing larger deals, we still are underwriting those to 20%-plus gross margin and a recapture of our initial land investment within two years.

So as a result, we believe that is a very, very conservative land policy.

On a go-forward basis, we think we have very little risk in our land strategy and our land portfolio by continuing to abide by those two key metrics -- 20%-plus gross margin and return of our capital in two years.

That's the characteristic of 99% of the deals coming through this Company right now.

Stephen East with ISI Group.

D.T., you have given a ton of great information on this call and really outlining where you are going.

I just want to clarify if I heard a few things here.

One, you are saying that price is much more of a driver than mix on your ASP and your move-up is seeing better gross margins than your entry-level so you are moving further that way.

Is that correct?

Well, let me clearly correct it if I said this but I know what I said.

(laughter)

Okay.

When we build an entry-level house or we build a move-up home, we are shooting for essentially the same margin, 20% as a percentage.

Now clearly, the dollars are different based upon the sales price.

But when we go out to build a home, we're looking for that 20% gross margin.

So we're still looking at -- the percentage of our move-up, of our homes that we have sold and closed in this quarter have moved up the scale.

So I think 47% of our closings this past quarter were first time and the rest of them were move-up buyers.

That's increased from -- the move-up buyers have increased by about 3 or 4 percentage points.

I think that goes back to what I said.

That is, our buyers are out there in the marketplace trying to buy as much home as they possibly can in a combination of size and dollars to take advantage of the low interest rates that's available in the marketplace today.

Okay.

All right.

Then if you're targeting 20% gross and given the pricing power that you've got, I assume that you all are bringing in more mothballed communities into the mix.

If you are, what type of margins are they generating relative to your new land deals?

Yes, we are selectively bringing in mothballed properties as, obviously, as the market begins to recover.

We still probably have several years, three or four years to work through mothballed assets but as the market improves, we are comfortable that we will work through the vast majority of those.

To answer your question directly on the mothballed communities, our underwriting guidelines on those are somewhere around 16% gross margins.

We'll bring those back in.

That's an acceptable margin to get the land asset off of our books and blend that in with our other margins.

So somewhere around -- my metric is 15%, 16%.

Okay.

All right.

That's helpful.

One last question.

You all talked a little bit about materials, the inflation.

Where are you seeing -- what categories are you seeing the biggest inflation, other than lumber?

We talked about lumber.

I think another of the headliners over the last year has been drywall.

There is talk of another price increase but it would be smaller than the one that was in place last year.

Beyond that, there is just different categories and it's going to be different in the different geographies.

Back to your point earlier, just -- when we bring something back from mothballed back into production, the key metric for us is not the 15% or 16%, but we want to absolutely be comfortable that we're not going to be looking at a future impairment when we bring that back into production.

So we're looking at the marketplace and seeing what the opportunity is to work our way through that on a timely basis.

(multiple speakers) how much cash will it take to develop it, naturally that's a big part of it.

Right.

I got you.

Okay, great quarter.

Stephen?

Yes.

One other thing on the cost side.

We are using our volume and making some bigger commitments to individual vendors to help control those pricing increases and mitigate them for us as much as we can.

Are you seeing, along those lines, too, on the labor side, I know you said you're not seeing it, are you seeing subs willing to hire effectively just more generally across the industry?

Absolutely.

That's what I was describing earlier.

Our subs that we are going out in the new submarkets with are hiring new people and creating new teams in order to satisfy our business.

So the beautiful thing about where we have been in our business and maintained our footprint and even our markets -- position in most of our markets, almost all of our markets, that is, is that our subs have been with us.

They're willing to grow and expand because they're comfortable that they can grow and expand with us profitably.

Steven Kim with Barclays.

Good quarter.

Thank you.

Quick -- the first question, most of my questions have been answered but over the last several years, I know that, D.T., you and D.R. have essentially split the country up in roughly half and have really had a very hands-on approach to managing your business.

That's, I think, been very much to the Company's benefit over the last several years, at least.

As we look forward to a hopefully expanding market for quite a number of years and you increasing your volume, at least at the industry rate if not more, can you give us a sense for how you envision, over the medium to longer term, handling the management on an operational basis?

Do you still envision it to be basically as you have it today?

Or do you anticipate bringing in another layer of management?

Well, I'd answer that question and first of all, say our regional presidents have been the main factor behind our success and our growth, notwithstanding the fact that D.R. and I are out there.

We really didn't split up the country but we go to different parts of the country, obviously, at different times.

But our role has largely been to review and approve what they have been doing, i.e., the regional presidents have been doing with their division presidents.

So to the extent that we need to bring in another layer, at one point in time, we had another layer and when we were going through 100,000 units and then we had a little hiccup.

We didn't need that layer of management.

So as we move forward, if we feel necessary to add another layer of management, certainly, we are open-minded to that.

But right now, I want to make sure that everyone understands our regional presidents have really led us to where we are today with a little guidance and a little help from D.R. and me.

So you haven't articulated, either internally or externally, what level of volume you think you can handle without adding back that layer of management.

Then if that's true, is there -- can you give us some general understanding?

Has the -- let's say the systems in place at the Company enabled you to be able to operate at a higher volume with a smaller corporate footprint?

Well, I'll let Bill Wheat answer that question from a corporate perspective because he is very much closer than I am.

But as an example, on a division basis, at the peak in our Southwest Florida division, I think we closed 800 homes and we had like 120 or 130 employees down there.

We are currently going to close somewhere close to that in next fiscal year.

We have substantially fewer employees than that, probably about half.

So I think what's happened is we have become a lot more efficient in the field but also at the corporate office, we have become a lot more efficient.

Really across the board, we do feel like we have gotten a lot more efficient.

We learned a lot of things through the downturn in terms of how we operate at our division level, our regional level, and our corporate level such that as we grow again, we probably will not have to have the same level of overhead or infrastructure.

Systems are a part of that.

We are on one operating system from a computer standpoint today.

We have deployed more technology into the field as well which allows people do more with less.

So there are a lot of things that contribute to that, that we do believe that down the line, will pay very good dividends for.

A lot of our operating systems that we're using today, we are developing in-house and we're not reliant upon someone else outside the Company to be able do that for us.

So again, we are in touch with our business from a corporate perspective better than we ever have been and developing things that actually fit our business and our Company as opposed to trying to find someone outside of our industry to supply us with those programs.

The bottom line is our industry is not big enough to attract a lot of software writers and so forth to develop programs that we need.

To circle back to your comment on senior management at the regional level and then at the corporate level, the visibility of information on individual land deals on performance of projects to D.R. and D.T. to corporate management to region management, is far better, that visibility is far better today than it was six, seven years ago.

So the ability of our key managers to make decisions and view how our performance is, is far better than it was in the last cycle.

Best information in the history of the Company.

Yes, I think that's a very important point that -- and I think it also suggests that your ability to manage your SG&A control, which is something that you guys have always been leaders in the industry on, certainly be better this cycle than it was in the past cycle.

If I could dovetail on that, the second question that I had for you related to the potential to manage your hard costs and labor costs also better through the evolution of technology.

It seems pretty clear that you can be able to manage, maybe with less corporate staff, for a given amount of volume.

But one of the things that we have begun to hear from some of your peers has been that the improvements in systems has allowed, during the downturn, has allowed these companies to approach the way that they bid out projects and get quotes for labor and materials such that the overall costs per development is less than it might have otherwise been prior to the cycle, prior to this cycle.

I was curious if you could talk about that, whether you think there is any opportunity to use systems and changes in the way you do business to drive hard costs and labor costs down?

You touched on it earlier but it almost sounded like you were saying your subs are going to be reacting out of gratitude to you in keeping prices down.

Don't get confused.

It has to be a win-win for both of us.

I am sure they're very grateful for our relationship as we are -- our relationship with them.

But as an example, we used to have the subcontractors come in to our offices and sit down with our purchasing managers.

We would have 50 sets of plans and they would all pick up the plans and they'd go out and they would bid off the plans, on paper plans and bring the bids back in two or three weeks later.

Maybe they got it.

Maybe they didn't.

All of our -- most all of our plans today are available to our subcontractors online.

We disseminate the information to them online.

There are specific bid sheets that they can fill the data in as opposed to pencil-and-paper process.

So we've increased our efficiency, their efficiency; it's a lot more accurate system.

We know for sure all the items that are in the house whereas before, when we were doing take-offs, we -- it was more of a rounding error.

Today, we know every nail and every 2 by 4 that goes into each and every plan.

It's a lot easier to bid and control your costs that way.

As a reminder, ladies and gentlemen, due to time constraints, we ask that you limit yourselves to one question and one follow-up question.

Jade Rahmani with KBW.

I wanted to ask on the land you're acquiring, if you could provide a sense for the average size of the deal or the typical deal?

For example, the number of lots per community and whether that continues to increase.

I think last quarter, you suggested you were starting to see larger lot sales from banks and developers.

Yes and as I've mentioned before, the average size of our deal is somewhere around 100 lots and as opposed to before, it was probably 40, 50 lots during the peak of the downturn, if there is such a thing.

But in '08 and '09, we were hardly buying anything.

We started buying things in '09 and '10.

When we started buying, they were small deals.

Just a handful of lots here and there.

But as we have bigger demands in most of our markets, it's easier for us to get a subdivision with 100-plus lots in it.

We put a model in it.

We have a flag, and that flag is good for two years.

So that's what we're focusing on.

As a follow-up, do you have a sense for what percentage of your current land position was acquired post-2009?

Jade, if you look at our balance sheet, if you look at the land that's held for development, that's going to be the biggest portion of anything that we have owned through the downturn.

There is probably some small portion that we're currently working through in the other two categories, but most of what we're building today are 2009 purchases or later.

Buck Horne with Raymond James.

I wanted to get into some of the regional categories of the sales strength.

I was just wondering if there was any noticeable differentiation between markets where D.R. Horton doesn't face quite as much public builder competition.

I'm just focusing on the Southeast region, in particular, where you had some really strong gains.

So I'm wondering like in places like Alabama and northern Florida, were places where you got a lot of strength versus some of the other areas, maybe like Atlanta or Orlando or south Florida.

Just understanding if there's more significant capital barriers between the publics and privates that's playing out here.

The way I'd like to answer that question is that the state of Florida is a good market for us right now.

That's clearly in the Southeast.

Also in the Carolinas, those are good markets for us as opposed to markets where we don't have very much competition or very much public competition.

Virtually every one of our markets we get up everyday and we have a ton of competition from the publics and privates.

So I wouldn't say that we're capitalizing on any one market by the lack of competition.

Okay.

One more for you.

Thinking about mortgage industry here and the new rules and regulations that came out from the consumer financial protection bureau there.

Have you guys been able to absorb and process what the new rules will have on your mortgage operation, particularly thinking about 3% cap on points and fees.

Is that going to have any impact on the operation?

Does there come a point where you may consider actually selling your mortgage business?

What's the net effect of all these new rules on the industry and your customers?

Well, the most important thing is that the standard for qualifying mortgage turned out to not be much different than what the prevailing practices are in the market today.

So that's good news.

That provides some stability and some certainty around the mortgages for lenders out there.

Hopefully, that will encourage some additional market participation and bring some more capital into the mortgage market.

In terms of some of the other provisions of the law, specifically the 3% cap on fees, there's a -- we are still absorbing that.

We are still analyzing that.

There is a year that we have in front of us before we would have to implement any of those before they take effect.

So we'll be analyzing that over time.

At this point, we don't really have any comment or estimates as far as potential impact.

Right now, it is business as usual and we will work through those things over time.

Thanks guys.

Great quarter.

Alex Barron with the Housing Research Center.

Great job, guys.

Thank you, Alex.

It's good to hear from you again.

Yes, likewise.

I wanted to just ask a real quick question on the land.

You guys have answered most of my questions.

But most of the stuff you bought this quarter, is that stuff that will be put into use this year or is that more 2014 and beyond?

Primarily 2014, the raw land is.

Obviously, the finished lots that we bought will be put into play right away.

The raw land is in title though.

So we will begin working through the process of preparing for the land development part but as far as delivering homes on land purchased today, that would be 2014.

Okay.

Yes, because it was obviously a pretty significant purchase although it sounded like you guys said to expect some moderation in the future quarters.

Don't forget now, Alex, $345 million of that was finished lots though that we purchased of the money that we spent.

The other side of the coin is, is that we are seeing good demand in most of our markets.

So it's time to step up and take advantage of the many opportunities that we see in the marketplace today.

Now the fact that you bought a lot of stuff versus your option position didn't increase that much.

Does that mean that you're not finding a lot of people willing to option on the same terms as before or what was it more attractive about actually buying the lots?

Well, Alex, a lot of what we bought this quarter was in the option number last quarter.

Typically, the process is we'll contract it.

As soon as we've got something contracted, it goes into option number.

Then subsequent to that 60, 90 days later, it gets purchased.

So what you saw there is we did purchase a lot out of our options but then we replenished our option supply with new contracts so, no, we haven't really seen a slow down in terms of the number of new contracts we're seeing or our option deals.

Okay.

Then in regards to, you guys mentioned that you are seeing more demand coming from apartment renters because of the buy versus rent equation.

My question is, are you also seeing an increase in demand from these boomerang buyers, the people that have renting the foreclosed houses, basically the people that got foreclosed?

We have heard anecdotally of some of that activity, but I wouldn't say that it's not any large percentage of our business right now.

Back on your question on the land side of it, the deals that we -- the raw land that we are buying there, as I said before, those are 20%-plus gross margin deals.

The deals that we primarily had bought in the last quarter were A-plus locations, positioning us for 2014 and 2015.

Last one for Bill, if I could.

Any guidance on the remaining DTA reversal, Bill?

As of right now, we still have $41.9 million of evaluation allowance on our DTA.

That solely relates to our state deferred tax assets, driven by our NOL carryforwards.

There are a number of the states we operate in that have very short carryforward periods.

So we've estimated that we will not be able to earn enough income in those states to fully capture the full NOL.

So that was an estimate that we made in fiscal 2012.

We will continue to monitor that estimate based on the income levels that we generate here in fiscal 2013.

If there is a point where we continue to perform strongly, or our performance improves versus where we are today then there's a chance that we could bring some portion of that back.

We will not bring all of that back though.

There is some portion that we will not receive because of the short carryforward periods in some states.

Jack Micenko with SIG.

I was curious to -- with the outsized land investment in the quarter, if you thought of a percentage of that spend that was really tax driven given the pending tax law changes?

I couldn't give you a percentage.

There just a -- there were a number of deals that we closed in the last two or three days based upon the seller -- of the calendar year based upon the seller's desire to miss the tax increase.

I wouldn't call it a significant amount.

What really took place was, during the quarter, we found a number of good deals and larger deals than we had found in the past.

In order to capitalize on those to support the growth in our existing markets.

There were a number of deals that we were working that perhaps under normal circumstances might have closed later in 2013 that, due to the tax changes, the seller preferred or offered us the opportunity to close before 12/31 with a better price.

So There could -- there's probably some acceleration of deals we were working on as well.

Okay, great.

Then just another question.

A long shot but would you be willing to give us finished lots by region?

I don't have that in front of us here.

Okay.

I will assure you that each one of our regions based upon the demand we are seeing and profitability we are seeing in each region are adequately supplied to this point with finished lots.

Okay, great.

Then on the Southwest, I am guessing that the store count -- community count issue looked like the growth was flatter there.

We've heard, obviously, pretty strong commentary out of the Arizona market.

Any comment there?

Well, we are trying to replenish our lot supply, to be quite frank with you.

Phoenix turned around faster than we thought it was going to turn around, and we probably are scrambling a little bit more than we normally would in the Phoenix market to replenish our lot supply.

The same thing in the Albuquerque market.

Bob Wetenhall with RBC.

Nice quarter.

I was hoping you could provide a little commentary on the conversion rate going forward.

Backlog conversion rate?

You got it.

Well, I believe we were pretty clear when we said that we anticipate it to be somewhere around 70%.

That's back to a more normalized seasonal percentage.

If you look at it over the last few quarters Bob, it's consistently been slowing down.

So our traditional pattern is that we would convert somewhere in the mid-50% range in Q1 and Q2 so our actual results this quarter and our guidance for next quarter still have that elevated.

In the back half of the year, we would traditionally trend down to mid-60% range in Q3 and then be somewhere around 70% in Q4.

We will try to give you more visibility as we get closer, but right now we are watching how things settle out as well.

We don't have as many completed specs as a percentage of our inventory so we are not experiencing the same number of homes that can get under contract and then close in a really, really short time frame.

We are seeing an increase in our build-to-order jobs, which are great from a margin perspective but they do stay in backlog longer.

We just don't know exactly what the timing is going to be of when all those convert.

Fair enough.

That makes sense.

You guys had a big move in your ASP for new orders into like a $250,000 range.

Is that a good full-year number to use for modeling?

Is that big uptick sustainable?

All I can tell what you we are seeing, as I've said before on the call.

We are seeing buyers coming in trying to buy as large a house and the most house that they can qualify for given where the interest rates are and where the supply is going forward.

So I don't know if it's sustainable.

I actually think we might be able to increase it.

On the sales side.

On the sales side, exactly.

If you look at what we just closed, it was $236,000.

And in our backlog, it's right at $240,000.

In terms of using that for a revenue average price, that would probably be too aggressive.

I was just talking on the new orders, but that's good color.

That's what I was looking for.

A final question is, you guys are ramped for the spring selling season.

Obviously, there is some variable cost into the mix.

Do you think you can get full-year SG&A inside of $650 million?

First of all, we are ramped up right now for the spring selling season.

(laughter)

It all depends on volume levels.

We don't have an estimate or guidance on the dollar amount that we're going to spend because some of that's variable and it depends on where our sales go and where our volumes go.

Clearly, our long-term goal on SG&A is to drive it to 10% of homebuilding revenues.

That would be a big jump this year.

That's -- we're probably not going to get there but we do expect to still see substantial improvement in our SG&A percentage this year as we did in the first quarter.

Good.

All very helpful.

Good luck.

Thank you.

Mr. Tomnitz, we have no further questions at this time.

I'd now like to turn the floor back over to you for closing comments.

Thank you.

D.R. and I want to make sure that all of our DHI teammates out there are aware of just how proud we are of what you did this last quarter.

But most importantly, we want you to be aware that we're very, very proud of the accomplishments that we've made over the last four years.

This Company went from '07 through '10 and '11 and those were tough years.

For us to produce and for you to produce the kind of performance that you did in this first quarter is a magnificent accomplishment.

We thank you very much.

Now let's go out there and kick tail.

Ladies and gentlemen this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation, and have a wonderful day.